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Troubled contract mining division eats into Eqstra profit

Walter Hill

Walter Hill

Photo by Duane Daws

2nd September 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Eqstra’s Contract Mining and Plant Rental division served as a heavy drag on the company’s results for the year ended June 30, released on Tuesday.

Group revenue increased by 9.8%, to R10-billion, compared with the previous financial year, while operating profit dropped by 9.6%, to R938-million.

Headline earnings a share decreased by 26.3%, to 76.7c a share.

Eqstra’s interest-bearing borrowings increased by 5%, to R8-billion.

CEO Walter Hill said in Johannesburg that Eqstra’s Fleet Management and Logistics, and Industrial Equipment divisions demonstrated the resilience of their business models by increasing revenue and profitability, despite tough economic conditions. 

However, Contract Mining and Plant Rental delivered a disappointing performance, mainly as a result of three weeks of industry industrial action during August and September last year, abnormally high rainfall during February and March this year, closure costs and a general slowdown in mining and infrastructure activity in South Africa.

The combined impact of these events was estimated to be R225-million. 

The group's profit after taxation was further negatively impacted by the impairment of Eqstra's R63-million investment in Protech Khuthele, following the company’s voluntary liquidation order, noted Hill.

Eqstra’s Industrial Equipment division increased revenue by 12.1%, to R3-billion, with operating profit up 20.5%, to R311-million.

Hill said the division had been able to take proactive action against a slowing South African forklift market and scale back orders placed with the factory.

Sales in the total local forklift market were down 20% year-on-year at June 30.

The division’s ability to maintain a solid performance during this year was supported by the strategy to reduce its dependence on South African forklift sales to below 50%, said Hill.

The division re-signed the Toyota and BT distribution agreements for South Africa for a further three years.

The Heavy Equipment business benefitted from a solid performance from Konecranes and an improvement in the Terex Trucks business unit. 

The Fleet Management and Logistics division increased revenue by 18.4%, to R2.8-billion, with operating profit up 17.7%, to R366-million.

The division returned to normalised earnings after the closure of underperforming operations in 2013.

The division also became increasingly selective about its customer base.

Hill anticipated further efficiency improvement as a result of the implementation of an enterprise resource planning system, now estimated for 2015. Until the implementation of the system, the group would continue to carry excess overheads.

MINING DIVISION IN TURMOIL
The Contract Mining and Plant Rental division saw revenue for the year ended June 30 increase by 6.9%, to R4.5-billion. Operating profit, however, dropped by 49.5%, to R239-million.

Seventy per cent of the division’s revenue was generated by contract mining in South Africa.

The underperforming Wolwekrans and Nkomati Nickel contracts ended in January and June, respectively.

The division secured new contracts at the Aganang, Karowe and Rockwell operations towards the end of the financial year, adding commodity and geographic diversification.

Hill said the Eqstra board had approved reducing the division’s contribution to revenue to 30% of the business, down from the 43%, by growing the other divisions.

This decision was partly driven by ratings agency Standard & Poor’s downgrading Eqstra’s long-term credit rating in April to zaBBB+, based on its view that the group was exposed to a cyclical mining sector and labour instability, he noted.

Contract Mining and Plant Rental CEO Erich Clarke would depart the company on October 1, with Hill taking over until a suitable candidate had been found.

“We have the ability to turn the business around. We have to be fitter and tougher than the market,” said Hill.

He added that the division either had “to exit contract mining or perform”.

“We must be able to handle strikes and rain and still deliver consistently . . . and not get ourselves in contract losses.”

Looking ahead into the new financial year, Hill anticipated a weaker South African economy.

Earnings from leasing activities were expected to remain defensive. The company would also continue to diversify its products, clients and geographic base in all of its businesses.

The bad news for the Contract Mining and Plant Rental division was that global commodity prices were expected to remain under pressure.

The labour situation should be more stable, with a two-year wage agreement in place, said Hill.

Edited by Creamer Media Reporter

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