It will be a challenging six months ahead as Wilson Bayly Holmes-Ovcon (WBHO) “navigates the consequences” of exiting the Australian construction market, says CEO Wolfgang Neff.
“We’ll be dealing with some pressure to manage our Australian exposure.”
However, Neff adds that the exit plan, supported by South African financial institutions, should result in little or no impact on the group’s remaining operations.
“The group has a solid foundation to move forward from, with a significantly reduced amount of risk to the profitable operations in the business.”
WBHO has been in Australia for more than 20 years through a majority shareholding in building company Probuild Construction, as well as a largely civils business, WBHO Infrastructure.
“We all know that WBHO has been underperforming in Australia for quite a few years – especially the last four years have been poor,” says Neff.
This period included A$223-million in losses at some notably poorly managed projects.
An earlier attempt to sell Probuild was scuppered by the Australian Foreign Investment Review Board in January 2021.
“The sale would have recapitalised our infrastructure business in Australia,” says Neff. “When the sale didn’t work out, we immediately implemented Plan B, which was aimed at downsizing and stabilising the business.
Unfortunately, our efforts to contain costs and restore profitability were negated by the impact of Covid-19 and the specific hardline regulations in Australia.”
These regulations included snap lockdowns, limited people movement and strict quarantine requirements, which resulted in further delays and unrecoverable costs, says Neff.
Within this period, the option to sell Probuild proved impossible, as potential buyers viewed the transaction as too risky, given the strict Covid environment, he adds.
No one could travel to Australia to perform due diligence, for example, this while losses at the Australian business continued to mount.
“Over time, the South Africa business provided R2-billion in cash funding and substantial parent guarantee support, which peaked at A$178-million in October last year, and is now at A$119-million,” says Neff.
“However, the renewal of guarantee facilities in the context of the historical losses we have incurred, as well as a weakened Australian balance sheet, proved to be very difficult.”
Added to this, the outlook for the Australian construction industry became quite bleak, owing to the Australian hardline approach to manage Covid.
“We saw much lower project availability, while the geopolitical tension between China and Australia also didn’t help. Rising inflation, as well as rising material and labour costs in a fixed-cost environment, also added to the pressure.
“Also noteworthy,” says Neff, “is that we have not been able to travel to Australia in the last two years – the owners of the business were not granted permission to travel to Australia for two years. The risk versus reward simply became untenable”.
This saw WBHO’s board withdraw financial support to the Australian business and, in doing so, cap the exposure of the group to the existing company guarantees.
This will result in the Australian operations being placed in administration, as they will be technically insolvent, says Neff.
“This will protect the profitability of the operations of the wider group and the interests of stakeholders going forward.”
Australia contributed about 60% of WBHO’s revenue since 2017, but hardly anything to operating profit, says Neff.
“The losses over the last three years and the current reporting period have eroded almost R3-billion in group earnings. The risk versus reward was simply out of kilter.”
Neff notes that the slow roll-out of infrastructure projects in South Africa, especially within the South African National Roads Agency Limited space, should be a cause for concern.
Also, of government’s 55 shovel-ready projects announced in 2020 as an effort to counteract Covid-19 and act as a flywheel for the construction industry, WBHO has shown an interest in 26.
However, only two of those 26 projects have been awarded to date.
“A further depressing statistic is that of all the work we priced for various State-owned entities in South Africa – to the value of R70-billion – only 14% has been awarded in terms of value, which makes it quite clear that government’s infrastructure roll-out is frustratingly slow,” says Neff.