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Sep 14, 2012

For the first time, contractor earns more abroad than at home

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Wilson Bayly Holmes Ovcon (WBHO) earned around 60% of its 2012 financial year revenue outside South Africa, says CEO Louwtjie Nel, up from 52% in the previous financial year, which was the first time in the 41-year history of the construction group that the bulk of its revenue was generated outside the country.

WBHO revenue for the year ended June 30 increased by 21.2%, from R14.8-billion in the previous year to R17.9-billion. Profit for the year dropped 9.6% to R713-million. The operating margin declined from 7.4% to 5.5%.

Nel regards the slow place of South African-related revenue growth as “disappointing, as this is home, and this is where we want to be, but we have to go where the work is”.

The company’s future South African earnings “will not be going much lower. We are pretty much in good balance now”.

However, Nel also notes that WBHO does not have a strategy to earn a certain percentage of its revenue in a certain geographic area – “our strategy is to find the best work we can”.

The current WBHO order book comprises 67% of foreign projects, with the balance of work located in South Africa. The order book for the group as at July 1 was R20.9-billion, compared with R16.2-billion as at July 1, 2011 – an increase of R4.6-billion.

“There is a big order book in Australia at the moment,” says Nel.

The negative effect of doing so much business in Australia, however, is that margins are tight there. Nel is hopeful of some improvement going forward.

With big mining groups also cutting down on capital expenditure as global financial jitters continue to spread, Nel admits that WBHO’s exposure to Australia is “a risk” for the company.

He points out, though, that the group is only “a small player” in Australia’s mining industry, involved largely in upgrade and maintenance projects.

“We just upgraded from our bakkie. We have a lot of potential. We are not an engineering, procurement and construction contractor in that field.”

Nel says he can imagine the Australian resources boom potentially cooling down, but that WBHO is confident of a “reasonable run” as it can still secure some market share from the “big guys”.

As for the local market, Nel believes that some segments have bottomed out, with a slight improvement in margins, but notes that it will “take a long time to really come back – in the short term, we don’t expect it to improve much”.

WBHO will “do well to stay in the 5% to 6% [margin] bracket”, he adds, especially as Australia has traditionally been “below 3%.”

Nel says the local construction industry has probably been somewhat “spoilt” by the boom in the run-up to the 2010 World Cup, with contractor margins after tax before this “always” between 3% and 4% – a level the market is again closing in on.

“There is potential in South Africa. We can see the work coming in from the private sector and a little bit on the South African National Roads Agency Limited (Sanral) and Transnet side.”

He adds that the private sector is “keeping most of the contractors alive at the moment”, with the industry still in a bit “of a survivalist mode”.

However, Nel notes that WBHO is also a bit “more bullish” on government spend than a year ago.

“We see two . . . three new tenders floating through our offices each week for roads, either provincial or for Sanral. “We have a lot of pipeline work on the go. If these renewable-energy projects go, it will make a huge difference.”

He says the potential work from Transnet also seems promising, but that this is still “a year away”.

Nel says he is hopeful of enough public-sector work coming to market so that “everyone could get a fair share”.

“I think we have to be patient and, in about a year to 18 months, we we will hopefully really see the work flow through and then we can get going again.”

Free State Roads Update A problem area for WBHO in the past financial year has been nonpayment on a Free State government roads project, which saw work suspended in October 2011.

However, Nel says WBHO has reached a settlement with the provincial government and that work on the project will restart once payment is received.

He says the company has reached a payment agreement “in writing” in a settlement process which has also involved the National Treasury. WBHO received “a small portion” of the payment owing to the company at the beginning of August.

Nel does not want to release the quantum of money WBHO is to be paid, saying only that he is confident the company will get 100% of the “finally negotiated sum”.

“We think we got a fair deal.”

As for another thorny issue, namely the South African Competition Commission’s investigation into collusion in the local construction industry, Nel says WBHO has provided for possible penalties in this long-running process, unlike last year, as it now “has a better idea what that provision should be”.

Nel says the group hopes for finality on the issue in the “next two to three months”.

He does not want to quantify the value of the provision as WBHO has not yet agreed on this with the Competition Commission, saying only that the group has provided for its “best estimate” of the settlement amount.

Edited by: Martin Zhuwakinyu
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