Key message: The cost of exiting Australia is high, but the balance sheet is still strong enough to support the remaining businesses.  

  • WBHO released 1H FY22 results. The results were overshadowed by the exit from the Australian operations as cash requirements started to create an ongoing drag. In making a clean break WBHO at least preserves the balance sheet to allow the remaining operations to maintain and grow.
  • The impact of the Australian exit on WBHO’s cash is as follows:
    • The Australian cash balance of R1.1bn as of December 2021 will fall to zero
    • The R1.3bn provision for parent company guarantees will further reduce cash assuming it is all called
    • There should be minimal further cash operational losses in 2H after financial assistance was stopped on 22 Feb 2022.
    • The overall impact will be a reduction of approx. R2.4bn before cash generation from continuing operations.
    • Cash on the balance sheet will reduce from the current R5.26bn to approx. R2.9bn.
  • The key issue for WBHO is the ability to continue to be able to raise guarantees in the remaining businesses and build the order book as activity levels recover.
  • WBHO does have the backing of local financial institutions and it does look like the plug has been pulled on Australia before the financial effects had any deleterious impact on the remaining operations.
  • We adjust our forecasts and valuation to account for the continuing operations. The outlook is positive in South Africa (roads projects imminent and private sector spending growing) and Africa (mining activity picking up), with the UK recovering from a Covid-impacted lull.
  • Australia has been a drag on earnings (and valuation) for a number of years, with continued uncertainty over the extent of potential liabilities. The exit does remove this uncertainty and allows WBHO to focus on its core SA contracting strength and ensuring the UK operations deliver profits.
  •  We adjust our Target Price to R114 (from R144) based on FY22 earnings, mainly due to the reduced cash balance.

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