Mike Upton: CEO, Group Five - Commercial Property News

MONEYWEB: Mike Upton is with us. He's the chief executive of Group Five. David Shapiro said a little earlier, before you came into the studio, that this is his favourite construction share, Mike. And clearly, with the results that you've delivered today - revenues up 30%, headline earnings per share up nearly 50%, and then the dividend was increased by more than a quarter to 72c a share - he's going to keep being happy. Have you got this in your portfolio, Dave?

DAVID SHAPIRO: I have.

MONEYWEB: How big a stake do you have in this, of your total portfolio? What percentage?

DAVID SHAPIRO: About 6%.

MONEYWEB: So that's a big hold?

DAVID SHAPIRO: It is, yes.

MONEYWEB: And you were satisfied?

DAVID SHAPIRO: Oh yes. I'll add, I will add.

MONEYWEB: But it does seem, Mike, that you guys are a little bit ahead of the curve in certain respects. And maybe we can start off with the first of these, being in the quarrying side. You bought Quarry Cats; you've got another quarrying acquisition going at the moment. When did you start planning those type of acquisitions, because R750m is a lot of money.

MIKE UPTON: Good evening, Alec, and thanks for having me along. If we go back to about 2002, 2003, we had a good look at the business and also benchmarked ourselves around the world. Now, your construction groups don't always end up just laying bricks for the rest of their lives; they do invest obviously in their own supply chain, and they also invest in possibly counter-cyclical businesses. And that's exactly what Group Five has done. We've actually got our three legs of business - which is our Investments and Concessions, long-term revenues, equity play, fair value adjustments on the assets going forward - and that's now the Intertoll environment.

MONEYWEB: For toll roads?

MIKE UPTON: That's for toll roads. We would like to add more revenues in terms of more transport than there, possibly power. Obviously the private power market is actually booming now in the region.

MONEYWEB: Just slow down a little. Are you saying you would go into producing electricity?

MIKE UPTON: As we have done, obviously in our position at Group Five as a constructor partner in the power sector. And where we can, if there's a small equity sort of place for us around the table, we will gladly take that.

MONEYWEB: Would that be in hydro?

MIKE UPTON: That would be generally in hydrocarbon-burning power stations, which is really gas-fired power stations at the moment. As you know, Group Five was actually a partner in the consortiums which bid for the DME projects, and we are also positioning ourselves potentially for some of the work in Botswana. We have got [indistinct] opportunities in Nigeria and East Africa as well.

MONEYWEB: But you don't have any power projects just yet?

MIKE UPTON: We have a power project at the moment in Nigeria, which we actually are now finishing off, and it's the only IPP [independent power plant] which has actually met all its targets in that region.

MONEYWEB: How big is the plant?

MIKE UPTON: It's 180 megawatts, going to about 650 ... Global [indistinct] which is an international IPP operator, has actually bought that project because it's been successful. So it's an area which we've actually worked on. That's the Investment and Concession side of the business. It's moving into obviously the manufacture and materials side. We have cycled out of some non-core businesses it the past year, which is obviously DPI and Vaal, and we've replaced those with more synergistic organisations, which is obviously the acquisition of Quarry Cats and more recently of Sky Sands, which was announced and approved by the Competition Commission just after year-end. So that's been margin-enhancing for us. So that manufacturing materials cluster, as we call it, we see as a core part of our business going forward. It's been margin-enhancing, it's got long-term revenue streams, and certainly some of those assets have got lives which exceed sort of 20 years. So we think that that's the right place to be. I think, in terms obviously of where we are, that non-construction portion of our revenue which is at the moment about 20%, we would like to get up to around about a third.

MONEYWEB: Let's just go back a little bit to the concessions and the toll roads. Which toll roads in South Africa do you operate?

MIKE UPTON: We operate bits of the N2 and also N17, and so on.

MONEYWEB: Which ones are those? Where's the N2 - Jo'burg?

MIKE UPTON: The Grassmere one. So we are obviously looking to see what rolls out from Sanrail going forward. But it has been a bit disappointing in terms of the there being a lack of spend on local road infrastructure.

MONEYWEB: But aren't there a lot of toll roads coming into Gauteng, and particularly in Johannesburg?

MIKE UPTON: The R&Ds, and we will be bidding for some of those. But our most exciting involvement for Intertoll is actually Eastern Europe, where we are involved with Poland and Hungary. And there we have some big opportunities for quite rapid growth, with big partners, Bechtel, [indistinct] in that Eastern European region.

MONEYWEB: So is that going to be the focus of your international operations?

MIKE UPTON: That's going to be our focus, Eastern Europe, certainly.

MONEYWEB: On the construction side, Everite's contribution was virtually the same as it was in the previous financial year, which meant the group as a whole down from 23.5% to 14%. Is it still core to the operation?

MIKE UPTON: Well, it is core. It's obviously a major part of our business. It's also a big asset in terms of our asset base. But we have been saying for a while, it did reach its capacity in terms of volume - and in terms of margin, obviously, there are a lot of imports which are arriving from Brazil and India. The government has not forced through legislation on asbestos, so there is dumping here from Mozambique and from Zimbabwe. So I think in terms of what we have seen out of Everite, it's been flat revenue, which is really because it has reached capacity. And I think for the guys to achieve those margins in the market which we see now, they've done a good job, to be honest, I really do think so.

MONEYWEB: The real star performers, though, were in the civil engineering and building and housing. Building and housing was up just a little bit, but civil engineering going from R50m profit to R105m - now the number one profit contributor for the group. Are you seeing that as David Shapiro is, and in fact John Loos is, as something that's going to be booming for quite some years?

MIKE UPTON: Certainly civil engineering is where the infrastructure spend is going to happen. Obviously, in terms of airports and stadiums, infrastructure around the World Cup, which will be building and civil engineering play. But certainly, if you look at the big picture, for toll roads, which includes bridges and water systems, we need to build 18 dams in the country, we need to build about five or six new power stations which are base-load power stations, the Eskom stuff. So certainly civil engineering is going to go through a good few years of significant growth. That's what we see.

MONEYWEB: How are you managing to stay ahead of the other construction companies - in certain respects, as you mentioned earlier, the vertical integration? But people in the industry are talking about Group Five as being a place that's really happening.

MIKE UPTON: I think we saw the delivery model required for the infrastructure rollout in the next sort of decades perhaps a little differently to others. Some of our larger competitors have got in-house engineering companies. Group Five has chosen to execute bigger projects with partnerships, as opposed to actually investing in all of it ourselves. So we have obviously invested quite heavily in the engineering projects business, which obviously has become a partner to the resources sector, the oil and gas sector, and the power sector. We also see ourselves over border with the resource sector, with the small mining houses. Some of them are now not so small, and where they're looking for a complete package. I mean, if you go to the DRC and you are going to build a mine, you actually want a contractor by your side. And in some of these areas Group Five is the only large contractor in country which can execute all of the disciplines.

MONEYWEB: We did speak with John Loos earlier about the property-development side. In your group's results as well fairly disappointing - the contribution now is only 6.5%, over 10% last year, and a flat return. Perhaps you could explain to us what happened here?

MIKE UPTON: Well, property is also cyclical, and we have made some big investments in the year. So we see this as a sort of two-year cycle. We are well invested in about five or six new projects which will roll out in the next year-and-a-half or two years. But I think what we have said in our results presentation is that we are also taking a step back and saying, where are we best to put our investment going forward? And it may be to take this and look at much bigger opportunities, where we can obviously leverage more of the group's sort of total resource, as opposed to just being a pure property player. So it's really under review at the moment as to where best we can place our investment going forward.

MONEYWEB: Well, that would suggest to us that the property-development sector is not exactly a booming part of the economy right now, if you are reviewing it?

MIKE UPTON: I think certainly residential not, but the industrial and commercial is, going forward - certainly industrial, absolutely.

MONEYWEB: So on the residential side then, are you hitting into blockages of not being able to get service supplies?

MIKE UPTON: Yes, certainly the Midrand region and other bits where we are services has actually become a problem for investment.

MONEYWEB: Mike Upton, chief executive of Group Five. Well John Loos, I think you got your answer there as well. David Shapiro, you are very happy - here's a company that you said is your pick, and you can stick with it.

DAVID SHAPIRO: I think if you look at where it is, at a 20 multiple, which is high relative to history - but compare that with all the new companies coming on, which are significantly higher. Here you can hear, they've had history, you know the company, we know management. I think a very, very good strategy going forward. Still remains one of the favourites.

MONEYWEB: Did you have a look at the detail of it?

DAVID SHAPIRO: Yes, very nicely presented.

MONEYWEB: Quarry Cats produced R45m in the first year. Mike is that for a full year?

MIKE UPTON: It's for five months.

MONEYWEB: So the R750m that you paid for it doesn't look terribly expensive.

MIKE UPTON: We think we've got the best asset around, and we got in early. Everyone is now running around looking for quarries, but the best ones have been sold. And obviously now, guys are asking PEs of 20 for something that hasn't been going for more than a year. So it's become very expensive. But I think we got in at the right time, and we got one of the best assets.

MONEYWEB: Well, as you were saying earlier, you seem to be ahead of the game.

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