ENGINEERING: Racec Gets Derailed
Recent Western Cape Business News
RACEC, the Cape-based rail and electrical engineering specialist, crashed into the red in the year to end September - the first time the group has reported a loss since undergoing a management buyout in 1988.
In a letter to shareholders, Racec chairman Mike Uys - who never minces his words - lamented: “Nothing in my time at Racec, since 1972, had prepared me for the rapidity with which a positive looking contracting scenario could turn around quite as dramatically as it did.”
The main cause of Racec’s loss - which topped R13 million at bottom line - was a substantial loss incurred on a rail project.
Uys says the cancellation of two contract awards valued at around R140 million quickly blew a gaping hole in what had seemed to be a strong order book. “As if that was not enough, a large fixed-price lump-sum rail contract, tendered on four years ago, went pear shaped and, despite our best efforts, resulted in a significant loss.”
These shock losses, unfortunately, come shortly after Racec secured a major empowerment deal with Solethu Investments.
A geographic breakdown of Racec’s performance shows the company managed to increase turnover in the Western Cape from R249 million in 2008 to R263 million at the end of September last year. But no significant business was written in Kwa-Zulu-Natal in the 2009 year, and there was a marked fall in revenues generated in Gauteng from R120 million in 2008 to R80 million in 2009.
Racec CEO Charles Harrod says the company’s rail division was impacted by a marked decrease in project spending in the public sector.
He says funding constraints affected the flow of contracts and that resource-related clients’ infrastructure investments were impacted by the commodity downturn. Revenue was down a whopping 38% to R106 million with bottom line sliding R6 million into the red (last year R29 million profits).
Harrod noted, though, that the rail division’s long-term annuity contracts performed well and showed a stable contribution to the bottom-line.
He says new contract awards during the year included several infrastructure projects associated with the preparations for the 2010 Soccer World Cup as well as a national contract to replace railway sleepers for Transnet.
More encouraging news is that Racec Rails newly established presence in Mozambique also concluded several contracts during the year.
Racec Electrification also took strain with a 13% increase in revenue to R239 million turned into a R3.5 million loss (last year a R25 million profit).
Harrod says heavy competitor activity - stemming from the market slowdown - put pressure on project margins.
There are a few bright spots, though.
Harrod says Racec Power - established to access the Eastern Cape market - reported pleasing results having secured electrification projects in low-cost housing as well as an Eskom transmission contract.
He says Greenbro, which was acquired in 2008, delivered a “stable performance” despite lower demand from the provincial government, commercial and property development sectors as well as its clients in Africa.
Northern Electric, also acquired in 2008, is proving to be an excellent addition to the group.
Harrod says although Northern’s core target markets in the commercial and industrial sectors were affected by the downturn, the company maintained its excellent profit record and has started seeing evidence of improved market conditions.
Despite the setbacks in financial 2009 Harrod is still confident the longer term the infrastructure investment outlook in Racec’s core target markets remains intact.
“There are also tangible indications that the market has started to turn, although the recovery is likely to take some time.”
The secured work on hand in both the rail and the electrification divisions already exceeded 70% of 2009 revenue.
Uys also discloses that rail contracts to the value of R419 million are pending award, and that Racec is the preferred bidder on two contracts to the value of R182 million. “Should even some of these flow through to contract awards, revenues toward year-end will take an upward leap.”
This is reassuring news, but the trick for Racec will be to rapidly re-build its trading margin. The 2009 margin dipped to 17%, well off the 21% recorded in the 2008 financial year.
In this regard Harrod stresses that the rail division has identified a good pipeline of opportunities within its existing client base - "suggesting that it is well positioned to reclaim historic performance levels".
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