Bulk of the industry’s future turnover to flow to black firms – WBHO

10th March 2017

By: Irma Venter

Creamer Media Senior Deputy Editor

     

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Amid a series of lossmaking results reported within the South African construction industry in February, building and civil engineering contractor Wilson Bayly Holmes-Ovcon (WBHO) delivered a bit of positive news to battered investors.

The group reported steady revenue for the six months ended December 31, of R15.4-billion, compared with R15.3-billion in the same period in 2015.

Revenue growth from the group’s building division offset lower revenue from the civil engineering, and roads and earthworks divisions.

Revenue from the civil engineering division declined, owing to strained order intake and persistently weak mining activity, as well as delays to various contract start dates.

The growth in revenue from the local building division, together with a heavier weighting of local work within the roads and earthworks division, resulted in a 16% increase in revenue derived from South Africa.

The lack of mining activity in the rest of Africa continued to impact on revenue streams from the region, decreasing by 42% over the comparable period.

Australian revenue in rands remained largely flat.

Operating profit before nontrading items decreased by 4.7% to R471-million from the R495-million recorded at December 31, 2015.

Operating profit in the building and civil engineering business increased from R186-million at December 31, 2015, to R217-million for the six months ended December 31, 2016. However, operating profit at roads and earthworks declined from R149-million to R144-million, with the Australian division dropping from R128-million operating profit to R101-million, partially owing to a lossmaking contract.

WBHO CEO Louwtjie Nel did not want to quantify this loss.

The overall margin for the group decreased from 3.2% at 31 December 31, 2015, to 3.1% in the current period.

Included in WBHO’s nontrading items in the six months under review is a charge of R170-million in terms of the settlement agreement reached last year between seven construction firms and the South African government, following a collusion investigation into the local construction sector.

In line with the settlement agreement, WBHO will make yearly contributions of R21.5-million over a 12-year period to a fund that will support developmental and educational programmes within the local construction sector.

The effect of the liability recognised in terms of the settlement agreement resulted in earnings per share from continuing operations decreasing by 39% from 647c per share at December 31, 2015, to 398c per share at December 31, 2016, and headline earnings per share decreasing by 38% to 398c per share, down from 645c per share.

Adjusting the group’s earnings for this one-off liability, earnings per share and headline earnings per share would have increased by around 10%.

The settlement agreement also stipulates that companies may elect to dispose of a significant portion of their businesses to empowerment groups, or to mentor existing black construction companies and grow their turnover to 25% of the individual listed company’s qualifying South African turnover over a seven-year period.

WBHO chose the second option and has identified three existing black construction companies to mentor and grow.

“This is massive transformation within the industry,” noted Louw.

“I think the majority of the industry’s turnover will now go into black hands. This is the biggest transformation any sector has had to date. Government is comfortable with it, and we are comfortable with it, and hopefully it can kickstart some infrastructure projects [the industry] has been promised for so long.”

Order Book Down 6%
WBHO’s total order book at December 31, 2016, decreased by 6% to R40.2-billion, compared with June 30, 2016.

The decrease comprises a 15% drop in the Australian order book and a 7% decline in the building and civil engineering order book, while the roads and earthworks order book improved by 92% to R5.8-billion.

While the Australian order book may have declined at the end of last year, the building business has secured close to R11-billion in new work since January 1, across the retail, commercial and residential markets.

Around 30% of the value of the order book was in South Africa at December 30, with 5% in the rest of Africa and 65% in Australia, compared with 25% in South Africa at June 30, 3% in the rest of Africa and 72% in Australia.

While Louw was not too optimistic about the South African economy, he said WBHO was “in a much more positive space than we were this time last year”.

“For the first time in five . . . six years, we have, over the last six months, seen revenue increase in our roads business. “We can’t see the economy turning or anything like that, but just in our space, in WBHO’s corner of the industry, we hope we have turned a corner.”

He expressed the hope that “Africa could come back now”, with the mining industry having held back on large greenfield projects – despite the uptick in commodity prices – instead opting to milk existing assets.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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