Key message: WBHO was able to absorb the WRU losses with minimal balance sheet stress. There are some encouraging order book signs in the local/rest of Africa and UK businesses.
- WBHO released 1H FY21 results. HEPS declined 80% to 81c as the WRU project incurred a further A$28m loss, together with Covid-19 impacts on the building business in Australia. Revenue and operating profit declined by 11% and 58% respectively. No dividend was declared.
- Excluding the WRU loss operating profit was roughly in line with the prior period (normalised operating margin 2.1%).
- The WRU project is physically complete and the final price agreed with the client. There is still a possibility of (limited) extra costs to reach commercial acceptance due to a complex handover process.
- There are encouraging signs in South Africa and Africa, with the mining sector starting to become more active. This has traditionally been a high margin sector for WBHO but has been through a number of lean years. The LNG project in Mozambique is providing a useful project pipeline.
- While the private sector (commercial and retail) is likely to be subdued for some time, public sector spend is showing signs of increasing (especially through the SOE’s).
- After the Probuild sale was disallowed by regulation, the Australian operations will have more regional focus (Victoria and NSW for Probuild, western Australia for Infrastructure). WBHO continues to actively de-risk and improve the quality of the order book, resulting in a managed order book decline.
- Activity levels in the UK have been through a lull, but a number of opportunities could find their way into the order book.
- We adjust our numbers on the back of this result. Our FY21 HEPS is reduced to 633c (from 694c) but we increase our FY22 HEPs marginally. We increase our Target Price to R145 based on FY22 earnings (from R123).
- WBHO remains a trusted contractor in local markets with few remaining large competitors. The WRU experience has resulted in a more conservative approach to risk (at the expense of revenue) but we view this as a positive. Only a small increase in large construction work in South Africa should mop up available capacity and result in the ability to increase margins. We retain an Overweight recommendation.