WBHO reports rebound in SA private sector investment

Grows its SA order book by 40% in year to end-June, but downscales its operations in Australia.

By Roy Cokayne | Moneyweb

JSE-listed construction and engineering group WBHO reported a rebound in private sector investment levels in South Africa and has grown its South Africa order book by 40% year on year in the year to end-June.

WBHO Group CEO Wolfgang Neff said the group’s South African order book grew to R11.85 billion at end-June from R8.48 billion in June 2020 because of increased activity in particular in the building division and a positive outlook for its roads and earthworks business.

However, WBHO’s overall order book declined by 21% to R27.89 billion from R35.36 billion as it scaled down its operations and activities in Australia.

Neff said the improvement in general building activity in South Africa was noticeable and supported by the reemergence of some larger-scale projects.

“Contributions from commercial office and mixed-use increased from 18% to 32% following new project awards, including the Department of Rural Development and Land Reform [office accommodation project] in Tshwane and the River Club Development in Cape Town,” he said.

WBHO in March this year reported the award of a R1.88 billion public private partnership (PPP) contract to build new offices for the Department of Rural Development and Land Reform on the site of the old Berea Park cricket and soccer stadium at the southern entrance to Pretoria’s central business district.

Neff said the Oceans Umhlanga Development, a key mega-project in KwaZulu-Natal, also recommenced during the year with additional phases being awarded.

He said the industrial and warehousing sector remains a strong source of new work and the group secured a R1.5 billion project for a Pick n Pay facility in Gauteng post the reporting period.

Neff said new roadwork projects and increased mining activity supported the South African order book and the pipeline from these sectors is healthy.

However, the order book in the rest of Africa was impacted by suspension and termination of projects in Mozambique, including the liquefied natural gas (LNG) project near Palma, with this project replaced by a new mining infrastructure project in Madagascar.

The $20 billion LNG project in Mozambique was suspended indefinitely in April this year following attacks on the town of Palma by Islamist insurgents. WBHO’s portion of the contract related to an early beach landing project.

Neff said there was a 14% growth in the value of the roads and earthworks order book, with the award of various large-scale projects by the SA National Road Agency (Sanral) in the year to end-June amounting to R1 billion and R600 million in awards subsequent to end-June.

“We are still awaiting the adjudication and ultimately the award on a number of huge projects, with R15 billion in new tenders expected to come out from Sanral in the next 12 months or so, while new work for Sasol, Eskom and renewable energy projects offer potential in the next 12 to 24 months,” he said.

Neff said the 55% decrease in the group’s Australian order book since its 2019 financial year demonstrates the reduced future exposure to the region.

He said WBHO’s strategy in Australia is to shrink the building business into the key states of Victoria and New South Wales, with no exposure to Western Australia and Queensland going forward, and to target less risky work while the infrastructure business will purely target construct-only roads projects and the general mining work it has done profitably in the past.

This follows two material loss-making contracts in Australia, the Western Roads Upgrade (WRU) project within WBHO’s Australian infrastructure business and the 443 Queen Street project within its Australian building business.

Neff said further provisions in the financial year to end-June 2021 for future expected costs were unfortunately required on the 443 Queen Street project but overall the Australian building business returned to profitability.

WBHO said it had to make onerous contract provisions amounting to R165 million in the year to end-June compared to R199 million in the previous year related to the 443 Queens Street project.

The group said there is no remaining provision for the WRU project after it made a R364 million provision for this project in the previous year.

WBHO on Friday reported a 11% decline in total revenue to R38.33 billion in the year to end-June from R43.08 billion in the previous year, which it attributed to lower activity levels within its Australian and UK operations.

WBHO financial director Charles Henwood said the group has a target of trying to grow revenue by 10% and believes WBHO will have to reassess that target in the short term after taking cognisance of the group’s strategy in Australia and the effect of Covid-19 on some of its markets.

WBHO achieved a turnaround to operating profit of R457.1 million from the R585.3 million operating loss in the previous year.

Neff said the performance by WBHO’s Australian operations “has once again been tarnished by further losses on the WRU and 443 Queen Street projects”.

Headline earnings per share increased by 167% to 620 cents from the loss of 923 cents per share in the previous year.

A dividend of 205 cents per share for the full year was declared. A dividend was not declared in the previous year.

Rowan Goeller, an analyst at Chronux Research, said the quantum of WBHO’s trouble in Australia is now small and it is significantly shrinking its Australian order book.

Goeller believes WBHO is doing the right thing by only taking on the best quality projects it can find in areas it understands very well.

“It reduces WBHO’s exposure to Australia, which order book wise is a low margin area of the world anyway,” he said.

Goeller said the pick-up in work in South Africa is interesting, with WBHO seeing good private sector work coming through in both the building and mining market.

“This is the right type of work for WBHO. It is their good high margin business plus you add a bit of Sanral work, where it looks like they are well positioned, and renewable energy work through Eskom to the REIPP [Renewable Energy Independent Power Producer] programme,” he said.

Goeller said WBHO is in decent shape despite the “hit” to the group’s overall cash flow because of the Australian business, which to some extent is impacting on its ability to take on new work.

“But in six months time the current issues in Australia will be largely gone,” he said.

Shares in WBHO rose 2.04% on Friday to close at R120.41.