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WBHO believes SA’s construction cycle has bottomed

9th March 2018

By: Irma Venter

Creamer Media Senior Deputy Editor

     

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Despite the changing political landscape in South Africa, the construction industry, which has been in the doldrums over the last 24 months, will not immediately experience a change in fortunes, warns Wilson Bayly Holmes-Ovcon (WBHO) CEO Louwtjie Nel.

“Government has lots of obligations. We won’t see any big projects soon.”

However, an increase in fixed investment arising from renewed business and investor confidence, together with added public spending should the economy improve, could only serve to benefit the construction industry in the long run.

“We have confidence we have reached the bottom of the cycle,” says Nel.

WBHO’s interim results show that it continues to outperform the struggling South African construction industry.

The group reported a 67.6% increase in operating profit to R485-million for the six months ended December 31, compared with the same period in 2016.

Revenue improved by 17.3% to R18.1-billion and entailed 29% growth in Australia following the award of a number of large‐scale projects, 64% growth from the rest of Africa, owing to increased activity in Botswana, and progress on mining infrastructure projects in Ghana, Guinea and Burkina Faso, and a 6% decline in revenue from South Africa, partly owing to a retreating building market.

The increase in profit was associated with revenue growth in Australia and within the Roads and Earthworks business. This was, however, diluted by lower profitability from the Building and Civil Engineering division, as building revenues contracted and margins came under pressure.

The group margin declined from 3.1% to 2.8%.

The contribution to group revenue from Australia increased from 56% to 61%, with South Africa and the rest of Africa contributing 31% and 8% respectively, compared with 38% and 6% in the comparative period.

The profit contribution from Australia improved from 22% to 28%, with South Africa contributing 53% in profit and the rest of Africa 19%, compared with 61% and 17% respectively.

WBHO’s expansion into the UK has not yielded profit yet. Byrne Group, in which WBHO holds a 40% share, earned R1.1-billion in revenue for the period under review, but suffered a R68-million operating loss.

WBHO says the volume of work was insufficient to cover Byrne Group’s overhead costs, with this situation compounded by additional restructuring and retrenchment costs. The award of key projects should improve operating performance, but further restructuring costs were expected.

Nel says the group remained concerned about the effects of Brexit. However, the recent collapse of UK construction giant Carillion may afford smaller groups the opportunity to gain market share.

Revenue at the Building and Civil Engineering business declined by 9.6% to R3.9-billion. Operating profit declined from R217-million to R169-million.

WBHO says the impact of contracting building markets has become noticeable, after a number of years of consecutive growth. The contraction was felt most keenly in Gauteng, where revenue decreased by 19%, owing largely to minimal order intake from the retail sector, caused by an oversupply of shopping centres, the poor state of the economy and overindebted consumers.

Commercial office developments constituted the bulk of activity in the sector.

The building market will shrink, says Nel. “We’ll do well to maintain our business.”

Civil engineering markets remained depressed.

The Roads and Earthworks business saw a 33.6% increase in revenue to R2.8-billion, with operating profit up from R144-million to R190-million.

Locally, the road sector remained the dominant source of activity, providing 46% of South African revenue.

In Australia, revenue grew by 28.7% to R11.1-billion, with operating profit up from R101-million to R143-million.

The growth in Australia was underpinned by strong activity within the building businesses, as well as moderate growth within the infrastructure business.

The overall margin performance from Australia remained below expectations, however, owing to an underperforming building project in Sydney.

WBHO’s Construction Materials business experienced an 8.3% decline in revenue to R397-million, while operating profit increased marginally to R10-million. The group said trading conditions within the steel supply market remained difficult.

Order Book
The group’s order book as at December 31 increased by 17% to R52-billion, up from R45-billion at June 30, 2017.

The Building and Civil Engineering and Roads and Earthworks divisions’ order books were largely in line with the level
achieved as at June 30, 2017, while the Australian order book grew 23%, from R32-billion to R39-billion.

In the UK, Byrne Group secured an order book of £111-million.

The South African Roads Agency Limited’s (Sanral’s) proposed new procurement requirements, which stipulate 51% black ownership for prospective bidders, remain a concern for the large industry players, “particularly listed companies with limited influence over their shareholders”.

WBHO continues to engage with Sanral on the matter, says Nel.

He hopes Sanral will soften its stance, allowing WBHO and other construction companies a “period of time” to again meet the 51% requirement.

The end of an empowerment scheme at WBHO has seen the group drop back under the 51% mark.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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