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Send  Share  RSS  Twitter  09 Oct 2011

ENGINEERING: RACEC Back on Track

 



Recent Western Cape Business News

Cape Town-based publicly traded engineering company RACEC returned to its core business as a rail construction and maintenance contractor, an area in which it has operated successfully for more than 55 years.

RACEC refocused its business strategy to concentrate on its core business as a rail construction, electrification and maintenance contractor, an area in which it has been operating for 55 years with a proven track record.

RACEC Chief Executive Officer Gary Harrod said that the strategic focus was based on a number of sound operating and financial reasons. "RACEC Rail division has year-on-year delivered revenue growth in excess of 40% with its gross profit growing in excess of 200% over the last six years," says Harrod.

By comparison, RACEC Electrification, RACEC Power and Northern Electric have proven to be non-core loss making operations and shareholders are advised that RACEC has entered into agreements to sell the subsidiaries, RACEC Electrification Proprietary) Limited (including RACEC Power (Proprietary) Limited) and Northern Electric (Cape) (Proprietary) Limited. RACEC has also commenced and signed a Heads of Agreement to dispose of its non-core loss-making manufacturing operations, Greenbro (Proprietary) Limited and Greenglo (Proprietary) Limited, which was expected to take effect at the end of September.

Over the past six to nine months, RACEC has re-structured and right-sized its rail and support service operations, moved applicable resources to rail operations and will focus on acquiring and redirecting additional rail resources to build RACEC Rail's capacity.

"Basically, we have redirected management’s focus to concentrate primarily on our highly profitable core business of rail construction, electrification and maintenance, without any further unnecessary distraction on what were our non-core and loss-making operations," says Harrod.

"The Group will commence the 2012 financial year 100% focused on rail operations. We have already delivered successfully on contracts in other parts of Africa, and this African consolidation and further expansion is in line with our regional diversification strategy to get a balanced portfolio mix of regional and cross-border contracts."

RACEC will also look at further opportunities in the annuity driven mechanized maintenance market to further diversify its rail product mix.

RACEC feels this is necessary to avoid the losses RACEC Rail incurred in 2009. The marked decrease in local rail expenditure combined with a once-off contract loss made it vulnerable in 2009 said Harrod. "Plus, we had to deal with management focusing on what was essentially non-core businesses. Since then, however, RACEC Rail has had consistent growth and performance."

RACEC already has 80% of its 2011 total rail revenue secured for 2012, with a healthy identified potential order pipeline of R3-billion over the next three to four years. It anticipates many additional opportunities in the medium- to short-term.

Harrod admits there are challenges to getting the new strategy on track but that RACEC is prepared to tackle them. "Our biggest challenges will be that the opportunities available will be in excess of our current capacity. We need to control growth and build capacity to deliver on our future order book. If necessary, we may have to decline certain projects that do not meet our minimum profitability and risk requirements."

Other factors that need to be considered included funding requirements and the need to find reliable, competent and "like-cultured” partners or investors to deliver on the planned growth.

The JSE requires companies to publish a trading statement when it's reasonably certain that the financial results for the period to be reported on will differ by more than 20% from that of the previous corresponding period. Harrod says that the financial results for the year ended 30 September 2011 indicate that this might be the case but says additional information will be provided to shareholders as soon as management has a reasonable degree of certainty as to the range, within 20%, by which the earnings and headline earnings have decreased.

He remains optimistic despite the trading statement warning. "With the immediate high order book certainty, management is excited about being able to focus 100% on building further capacity for the massive potential of future rail opportunities and growth."



 
 
 
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