Group Five needs R3.6 billion to fund its working capital requirements this year if it is to survive in an industry that is still on its knees. Photo: Reuters

CAPE TOWN – Group Five needs R3.6 billion to fund its working capital requirements this year if it is to survive in an industry that is still on its knees.

Formerly one of South Africa's biggest construction groups, Group Five went into business rescue last week after a long-standing cash flow crisis, and it provided further details of its financial difficulties in a statement to stakeholders on Friday. 

It is the latest casualty of an ailing sector. “The South African construction industry has been in trouble for some time – in September 2017 confidence in the industry was at its lowest level since the third quarter in 2000,” Momentum Securities portfolio manager Serfaas Badenhorst commented.

Business rescue proceeds were initiated because construction industry conditions were worsening, a $106.5 million (R1.53 billion) contract guarantee became payable in November, while R350m of additional loan finance was unable to be secured. 

Notwithstanding these factors, the board believes “there is a reasonable prospect of rescuing the company…” a statement said. The R3.6bn was estimated to be enough to fund working capital requirements until December 2019 and included R230m to pay severance packages to an as-yet-undetermined number of employees, and the money required to make debt payments to lenders that had provided a R650m loan last April.

Operating subsidiary G5 Construction was estimated to have a cash flow shortfall of R2.39bn for 2019, this after suffering negative cash flows from operating activities of some R800m in 2018.

“Certain of G5 Construction’s projects were under-priced, which resulted in these projects being loss-making,” the directors said.

Some of the options the business rescue practitioners could consider to rescue the group included a temporary moratorium on credit payments, negotiating the sale of assets at prices better than a liquidation sale, a restructuring of debt and further engagement with stakeholders to retain the value in the group and its assets, the directors said.

Badenhorst said the biggest reasons for the problems in the industry were sluggish economic growth, uncertainty in government policy, an underperforming rand and a lack of infrastructure spending.

Another big listed construction group in financial difficulty is Esor Construction, which went into business rescue last year with R597m of liabilities. Its creditors this month voted to accept the business rescue plan, a statement said on Friday. Some analysts are predicting slightly better conditions in the sector this year. 

Dr Roelof Botha, an economist who compiles the Africat Construction Index, said last week that the generally low levels of activity in the sector might improve in the second half of 2019, especially as a result of the new approach towards economic policy, as characterised in the early stages of President Cyril Ramaphosa’s tenure.

But Badenhorst warned it would be a “long road to recovery” for many cash-strapped construction companies. 

The Master Builders Association North, with members in Gauteng, North West, Mpumalanga and Limpopo, said the government's lack of progress on the National Development Plan was “killing off the construction sector”. Several consecutive quarters of slow and even negative growth in the sector had created a “state of emergency’’ for large and small construction firms alike, said Musa Shangase, president of the association. 

He said Group Five’s business rescue proceedings had followed hard on the heels of a disappointing national Budget speech, which had offered little hope of significant infrastructure investment in the foreseeable future.

BUSINESS REPORT