Groundhog Day

Key message: Large loss-making projects have a habit of lingering. Another A$28m provision for WRU in Australia clouds a decent performance in the rest of the business.

  • WBHO released a Trading Update for 1H FY21. Disappointingly a further A$28m provision has been taken on the WRU project in Australia through problems with lead subcontractors on 2 of the 8 packages. The 8 projects are now physically complete, but the contractual handover date is at risk (accounted for in the provision).
  • Costs for the Probuild sale process and Covid lockdown related reduced profits to zero.
  • Margins in the South African divisions were relatively strong (Building & Civil Engineering stable at 3.6% and Roads & Earthworks up to 5.8%). Revenue was down YoY for both divisions.
  • Interest income was materially lower due to lower interest rates and cash balances (WRU funding requirements).
  • We believe the group tax rate will be approx. 75% as the Australian losses are ringfenced.
  • Guidance for EPS and HEPS is 25c and 67c, respectively. Removing the WRU loss would have generated EPS of approx. 600c.
  • Despite the WRU losses WBHO remains in a healthy cash position, with cash reserves of R5bn at 31 Dec 2020 (down from R7.6bn on 30 June 2020 but there was a R1.1bn WC boost to that number).
  • The further losses on WRU does highlight the challenges of managing large infrastructure projects in foreign jurisdictions – WBHO management have not been able to get a grip on the project. We do believe that this is atypical for WBHO and “normal operations” should resume shortly.
  • We adjust our numbers on the back of this Trading Update. Our FY21 HEPS is reduced to 694c (from 1292c). We reduce our Target Price to R123 (from R134).
  • Strip out WRU and WBHO is in good shape. Lessons learnt will mean a more conservative order book going forward. We retain an Overweight recommendation.

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