Stefanutti Stocks’ Financial Rollercoaster: Navigating Challenges and Restructuring for a Construction Comeback

  • Financial Performance: Stefanutti Stocks reports improved contract revenue and operating profit, but faces challenges, resulting in a loss in earnings.
  • Restructuring Plan: The company is actively pursuing a restructuring plan, seeking to sell non-core assets, streamline operations, and negotiate with lenders.
  • Kusile Power Project: Stefanutti Stocks continues efforts to resolve contractual claims and compensation events on the Kusile power project, anticipating a decision in 2024.
By Lethabo Ntsoane

Stefanutti Stocks Holdings Limited, a key player in the construction industry, has released its unaudited condensed consolidated results for the six months ended August 31, 2023. The financial snapshot reveals a mixed bag of challenges and improvements in the company’s performance compared to the same period last year.

Financial Metrics31 Aug 2023 (R’000)31 Aug 2022 (R’000)Change (%)
Contract Revenue (Continuing Operations)3,335,0072,870,570+16
Operating Profit Before Investment Income (Continuing Operations)68,75154,029+27
Loss for the Period (Continuing Operations)(5,722)(33,503)+83
Profit for the Period (Discontinued Operations)3,70142,752-91
(Loss)/Profit for the Period (Total Operations)(2,021)9,249-122
Earnings Per Share (Total Operations, cents)-1.215.53-122
Headline Earnings Per Share (Total Operations, cents)-22.41-25.02+10

Basis of Preparation and Accounting Policies

The unaudited results have been prepared following International Financial Reporting Standards (IFRS) and in compliance with the Listings Requirements of the JSE Limited and the South African Companies Act 71 of 2008. The accounting policies align with those used in the audited annual financial statements for the year ended February 28, 2023.

The fair value measurement for certain assets, including land and buildings, is categorized as Level 3, indicating the use of unobservable inputs. The company’s directors, led by Chief Financial Officer Y du Plessis, emphasize the consistency and transparency of the financial reporting framework.

Restructuring Plan Update

Stefanutti Stocks continues to navigate its restructuring plan, aiming for a turnaround and improved financial stability. The plan, approved by the company’s board of directors and lenders, encompasses various strategic initiatives:

  1. Sale of Non-Core Assets: Identifying and divesting non-core assets to streamline operations.
  2. Underutilized Plant and Equipment Sale: Disposing of assets that are not operating at full capacity.
  3. Identified Operations Sale: Focusing on profitable operations and shedding underperforming segments.
  4. Contractual Claims Resolution: Seeking a favorable outcome from processes related to contractual claims and compensation events on specific projects.
  5. Evaluation of Capital Structure: Considering potential equity-raising strategies to enhance the company’s financial structure.

The company is currently in discussions with lenders to extend the capital repayment profile of the loan, anticipating completion by June 2025. Delays, beyond the company’s control, related to contractual claims and compensation events on the Kusile power project and the disposal of SS–Construções (Moçambique) Limitada and Stefanutti Stocks Construction Limited, collectively referred to as SS Mozambique, have prompted the need for an extension.

Noteworthy financial details include the receipt of R106 million and R59 million from the termination arbitration award of the Mechanical project and the disposal of Al Tayer Stocks LLC, respectively. Additionally, R51 million and R43 million in capital repayments were made in May 2023 and October 2023, reducing the loan to R1,066 million. The final purchase consideration related to the disposal of Al Tayer Stocks LLC, approximately R29 million, is expected in due course.

Going Concern and Liquidity

The directors consider it appropriate to prepare the results on a going-concern basis, taking into account factors such as the current order book, imminent project awards, the availability of short-, medium-, and long-term projects, and ongoing support from lenders. The restructuring plan is seen as pivotal to Stefanutti Stocks’ future, and shareholders will be sought for certain aspects of the plan.

Despite total liabilities exceeding total assets as of August 31, 2023, the company believes it remains commercially solvent based on cash flow projections included in the restructuring plan and the continued support of lenders. However, uncertainties, including contingent liabilities noted in the group’s Consolidated Annual Financial Statements for the year ended February 28, 2023, raise concerns about the company’s ability to continue as a going concern.

Kusile Power Project Update

The company continues to pursue contractual claims and compensation events on the Kusile power project. Since August 2021, Stefanutti Stocks has secured payments totaling R116 million for measured work and after the Dispute Adjudication Board (DAB) rulings.

An “Interim Arrangement” between Stefanutti Stocks and Eskom, signed in February 2020, involves the appointment of independent experts to evaluate causes, duration, and quantification of delays for events up to December 2019. The Dispute Adjudication Board (DAB) and the parties have signed a memorandum of understanding (MOU), outlining the process for confirming entitlements and making interim decisions.

As of the announcement on September 12, 2023, consolidated and updated claims submitted to experts include a quantum claim of R1,344 million, a finance cost claim of R270 million, and interest calculated according to the DAB’s ruling. The total of all consolidated and updated claims submitted, excluding interest, amounts to R1,614 million. The company anticipates that the DAB will issue its binding decision during the first half of 2024.

Overview of Results

Certain underutilized plant and equipment, as well as SS Mozambique, have been earmarked for sale and reclassified under IFRS 5: Non-current Assets Held for Sale and Discontinued Operations. However, the disposal of these assets is taking longer than anticipated due to current market conditions.

Contract revenue and operating profit from continuing operations showed improvement, standing at R3.3 billion and R69 million, respectively. Nevertheless, earnings and headline earnings per share for total operations reported a loss, with -1.21 cents and -22.41 cents per share, respectively.

The group’s order book is currently at R6.5 billion, including R1.2 billion from work beyond South Africa’s borders.

Safety and Broad-Based Black Economic Empowerment (B-BBEE)

Stefanutti Stocks remains committed to health and safety, reporting a Lost Time Injury Frequency Rate (LTIFR) of 0.08 and a Recordable Case Rate (RCR) of 0.37 as of August 2023. The company is a level 1 B-BBEE contributor measured in terms of the Construction Sector scorecard with a Black Economic Interest score of 70.49%.

Industry Challenges and Dividend Declaration

The company acknowledges being negatively affected by disruptive and unlawful activities by certain communities and informal business forums in various areas of South Africa. Due to these challenges and the overall financial position, no dividend will be declared for the current reporting period.

Conclusion

Stefanutti Stocks’ unaudited condensed consolidated results reveal a complex financial landscape marked by improvements in certain operational aspects, ongoing restructuring efforts, and challenges related to project delays and market conditions. The company’s strategic initiatives, particularly the restructuring plan and resolution of claims on the Kusile power project, will play a crucial role in shaping its future. Shareholders and stakeholders are advised to consider the full announcement for a comprehensive understanding of the company’s financial position and its path forward. As uncertainties persist, the company emphasizes ongoing updates and transparency in communicating its progress.

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Lethabo Ntsoane

Lethabo Ntsoane holds a Bachelors Degree in Accounting from the University of South Africa. He is a Financial Product commentator at Rateweb. He is an expect financial product analyst with years of experience in reviewing products and offering commentary. Lethabo majors in financial news, reviews and financial tips. He can be contacted: Email: lethabo@rateweb.co.za Twitter: @NtsoaneLethabo