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Send  Share  RSS  Twitter  15 Nov 2011

ENGINEERING: Racec Cuts Its Electrical Cords


Recent Western Cape Business News

CAPE TOWN-based engineering specialist Racec is literally getting back on track with the sale of its electrical engineering operations.

Last month Racec announced the unexpected sale of its Cape Town-based electrical specialists, Greenbro and Northern Electrical. This is just three years after forking out R14.5 million to acquire these specialist companies in a bid to broaden the electrical services offering. The collective settlement for these operations may be closer to R20 million, considering that in 2009 Racec paid another R5 million to acquire the remaining 20% of Greenbro from John Greenless.

Still, the electrical interests, of late, have not been sparkling. In the half-year to end March Racec’s electrical division turned in a loss of R14.5 million from a much reduced revenue of R70 million. This stood in stark contrast to the stout R18 million profit earned off the R91 million turnover generated by the rail operations.

The poor interim performance by the electrical segment followed a full year loss of R1.26 million from revenue of R237 million in the year to 12 months to end September 2010.

In his interim commentary Racec CEO Gary Harrod noted ominously “Unfortunately, Racec’s electrical and manufacturing operations are continuing to operate in a hugely competitive environment as current supply continues to outstrip demand.”

But the official reason given for the sale is a re - focussing of strategy around the core rail engineering operations - which has been Racec’s main keep for around fifty years.

It seems the electrical side of the business - with lower margins and less consistent business flows - was proving a distraction with Racec now seemingly determined to build up the rail side (which has made some encouraging inroads into Africa) – even mentioning the possibility of acquisitions.

According to an official company statement, Racec “will commence the 2012 financial year 100% focused on rail operations (including rail electrification)…”

Aside from the disposing of the recently acquired Northern Electrical and Greenbro, Racec will also sell its non-core loss-making subsidiaries like Racec Electrification (including Racec Power).

As things stand Racec has expressed a willingness to dispose of the loss-making electrical services entities. Who exactly the buyer or buyers might be (perhaps a number of management buyouts?) is not clear at this point.

Of course, a more important consideration – especially for Racec shareholders – will be the price that these loss-making entities fetch. Obviously it’s not a great time to be selling these operations, which means Racec is likely to take a bath on the original investment values on Northern Electrical and Greenbro.

The 2010 annual report showed Greengro turning in a loss of R6.4 million, Greengro Geyers a loss of over R300 000 and Racec Power a loss of R1.6 million.

Only Northern Electrical managed to stay in the black, posting a profit of R2 million.

But the interim results to end March 2011 suggests things have taken a turn for the worse in the electrical segment – where reduced turnover levels suggest contract work is very scarce and trading margins all but fizzled out.

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