Australia Again!!

Key message: The challenges of operating a construction company remotely are again apparent. WBHO failed one of the three Golden Rules of Construction – avoid new geographies, new disciplines and only use the A-team. The Infrastructure business (a new discipline) in Australia is proving too challenging and should be reviewed.

  • With revenue growth of 14%, further losses in Australia impacted profitability with an operating margin of only 1.2% (the comparable period had an operating margin of 0% following the initial loss accounted for in Australia).
  • HEPS grew 183% to 412c, but this was well below expectations after 2H FY19 delivered 787c. A dividend of 80c was declared, in line with lower profitability (dividend cover of 5.1 times).
  • Further losses on the WRU project in Australia are disappointing given WBHO’s reputation for being very conservative on loss recognition. This points to the general rule of construction that operating in a new discipline (assuming building in Australia is now a core strength) is difficult to manage – no matter how good you are.
  • Management have some hard decisions – the low risk business that is available in Australia that fits into the core strengths of that local team is smaller than the current business. The right decision will be to reign back tendering to only safe low-risk building projects.
  • The very low margins in the building market in Australia with the attendant subcontractor risks also mean that one bad project can derail an overall good performance (the low ratio may be lower but the profitability impact higher).
  • WBHO has also miscalculated risks (and the project scope in the WRU project!) in several infrastructure projects now and the writing has to be on the wall for this division.
  • Despite this disappointment, WBHO is one of the few remaining reliable contractors in South Africa and any market activity should be positive for them. Expected project awards in the next few months from the public sector could turn expectations around and growth off a low base is possible.
  • We retain our Outperform recommendation with a Target Price of R141.