IT looks like Cape Town-based engineering group Racec’s ‘one-track mind’ is set to pay dividends in the medium term.

As reported in CBN recently Racec sold off its loss-making electrical engineering operations to focus exclusively on “the significant opportunities that exist in the rail construction and maintenance sector, both within South Africa and the rest of Africa…”

While significant opportunities may exist, it still looks like Racec might have to haul the hard yards on the rail side. The year to end September 2011 results (released in December) showed respectable profits of R23.5 million off turnover of R226 million.

But although turnover stretched from R157 million last year, the operating margins was squeezed markedly if one considers that profits last year were also around the R23 million mark despite the lower turnover.

Fortunately for Racec business is starting to chug along nicely for the new financial year. Racec CEO Gary Harrod says the rail division increased its local order book - specifically in the Northern Cape region. “We were re-awarded the universal sleeper replacement contract for Transnet. Our track record places us as a favoured construction contractor, thus much of the current work is new construction or the rehabilitation of existing works.”

Harrod explains that construction contracts can equate to good margins but warns that such contracts can come with a high risk.

“We plan to balance that by diversifying our rail construction offering to include maintenance annuity contracts in the mechanised rail business.”

He notes that Transnet appears to be welcoming a third player in that space. “We believe that with our expertise and the fact that we will be a black-owned rail focused business, we will be in a strong position to be that player.”

Racec’s current split on construction versus annuity contracts is 90/10, and the company plans to reach a 50/50 split over the next three to five years.

Harrod says Racec’s Rail order book is looking good, disclosing that more than 80% of the 2011 revenue was already secured for 2012. “While there are further opportunities available for the group, we are in the fortunate position of being able to select which contracts provide the best return.”

What Racec may also be able to bank on in future is meaningful returns from its forays into Africa. After a successful rail construction project in Sierra Leone, Racec has won further contracts in East Africa and is currently investigating opportunities in Mozambique, Ghana, Guinea, Kenya, Tanzania and Sudan.