Positive update gives WBHO investors something to smile about

Posted On Monday, 22 February 2016 08:50 Published by
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Construction investors, starved of good news, were impressed by Wilson Bayly Holmes-Ovcon’s trading statement.


Headline earnings per share (HEPS) for the interim period ended December 2015 will come in somewhere in the 622c to 649c range. That implies a 15%-20% rise. Enchanted, not least after the group’s poor fiscal 2015, investors rewarded it handsomely on the news – lifting its stock 8% to end just above R124 per share on the session following the update. Interim results are due on February 24.

Notwithstanding a R37.4 billion-strong order book, the titan, one of the contractors behind the Mall of Africa, in Midrand, flopped last year partly because of poor management problems it encountered in Australia, where it owns Probuild Construction.

Its other subsidiaries and associates are Edwin Construction, Insitu-Pipelines, Kalcon and Roadspan. WBHO’s return on capital employed plummeted and profit margins contracted markedly on the back of a surge in revenues. HEPS came in at1105c, a 13.5% plunge which in turn returned the stock to its losing days.

Argon head of equities Junaid Bray, who lauds WBHO’s for its “arguably best management team” among its local peers, links the growth signaled by the update to a turnaround in a loss-making unit Down Under. “During the prior period up to December 2014, Australian profits were wiped out by loss-making contracts in [that country’s] civils division, so profits are basically reverting to 2013 levels.

While WBHO’s order book has been growing slightly, the higher margin roads & earthworks division continues to decline due to depressed mining markets and the resultant mining capex cuts.”

Choosing to focus on the bright side, but without downplaying the Australian malaise, WBHO CEO Louwtjie Nel described 2015 as “another year of sound achievement” amid persistent tough economic conditions and subdued activity in the mining sector. The climate prompted the fir to “right-size” certain businesses and shift focus to “key areas offering opportunities”.

The group, which has become a renowned player in the hinterland, has entered almost a dozen African countries including Zambia and Mozambique, where it built the Ressano Garcia power station. Growth from other African countries, adding a hefty 30% to group profits to Australia’s 25%, as Bray notes, is solid.

While WBHO – which built Moses Mabhida, Peter Mokaba and Cape Town stadia pre-2010 – rebounds, Calgro M3, a low-cost housing specialist, is shooting up the pecking order. It vaulted more than a third on the JSE to trade just above R18/share now (or R2.3 billion in market cap). That was in a space of 12 months – a period when many in the construction, and other industries, middled at best.

The much larger, and entrenched WBHO, has seesawed but also rebounded to exactly where it was 12 months ago. That returns the titan’s market cap to R7.8 billion but price:earnings ratio sits at a relatively higher 11 (to Calgro’s14).The question is whether WBHO’s price tag is justifiable and, regardless of the answer to that, sustainable.

Bray cites the group’s margins that “are relatively more stable” than those of its peers for starters. The difference lies in the fact that, comparatively, WBHO derives a higher proportion of earnings from its building division. Buildings are generally lower margin but less risky, asserts Argon’s head of equities. “This also explains why peers trade at lower multiples due to a higher contribution from more risky contracts.”

Zero-sum game notwithstanding, it fared better than Group Five, a joint venture partner in the R2.2 billion Mall of Africa project, and other rivals. Group Five has lost a quarter of its value during this period, with its market cap shrinking to R2.2 billion while M&R’s value has halved in the past 12 months.

None of this compares with Aveng, which lunged from HEPS to headline loss per share last year, which has erased a hefty 80% to fetch a lousy 325c/share now, is a fraction of what it was worth last February.

The latter’s market cap is now R1.3 billion to M&R’s equally unbelievable R4.4 billion, as punters cut their losses and exit. The Big Five, which includes Basil Read, is valued a combined R16.5 billion on the JSE today – markedly lower than the R41 billion the quintet boasted in 2010 (WBHO is the only one that’s grown during this period). That was amid government’s multibillion rand infrastructure bonanza but before construction firms were exposed for decades-long collusion, a scandal that still haunts their reputations.

The stock market isn’t the only place where the group, under the guidance of Nel, a WBHO lifer and engineer who assumed the hot seat in 2008, distinguishes itself. It has also grown its net assets at a faster pace than Aveng and Group Five, notes PSG Wealth Chief Investment Officer Adriaan Pask in The Investor. Separately, the Michael Wylie-chaired firm, whose board includes CFO Charles Henwood and Nonhlanhla Mjoli-Mncube, an independent, is rated a progressive Level 2 for its empowerment efforts.

Studying the horizon, Oxford Business Group says public spending on construction activity is seen increasing. But, right there is another point of discussion for large firms in the Big Five league. “(A) tightly competitive procurement environment is prompting larger JSE-listed construction and engineering groups to shift away from government contracts,” the business group asserts, adding that market leaders are considering more selectively bidding for public works projects.

While referring to what he felt was unwarranted pessimism towards the contractors, Pask also cites attractive valuations of these counters. “Earnings have shown a downward trend for a number of years and are currently at, or close to, all-time lows. The industry’s prospects remain largely reliant on government and mining infrastructure spending. Despite the South African government’s large infrastructure plans, we expect the rate of delivery to be low,” he writes.

In addition to the iconic Mall of Africa, an Atterbury project, there is ongoing construction at various locations at home especially in Gauteng. These include the 90000m² seven-storey mixed use Menlyn Maine Central Square, a R950 million project in Tshwane. Newtown Junction, another mixed use project which includes 40000m² retail space, was completed in 2014.

According to WBHO, recent awards of major projects include commercial offices in Sandton, KwaZulu Natal’s Ballito shopping centre and additional phases at the V&A Waterfront. Convinced of “a strong horizon” to 2017, the firm feels that activity levels and margins are likely to be sustained in the near term.

Beyond the Limpopo, opportunities are being explored in Namibia. Further, the building and civil engineering division is “the preferred contractor” for two retail developments in Mozambique, and Ghana where WBHO constructed the West Hills and Junction malls and handed them over during fiscal 2015.

The construction at the Achimota Retail Centre – on a prime 4ha site in Accra – is also complete. The 15000m² Achimota, Atterbury latest shopping centre development in the West African state (and valued at US$60 million), opened to much fanfare and warm reception in October.

There is no doubt that South Africa's retail arena is over-supplied. Of course, it’s unclear how the country - given its mix of low buying power and a largely tertiary economy – can achieve growth often seen to the north of the Limpopo. That part of Africa promises handsome rewards to companies, from across the spectrum, who spread their wings there. WBHO fits the bill. So, while the present looks iffy for the construction behemoth, its future prospects seem promising.

Still, homework and caution are always advisable, Bray explains, noting that WBHO faces “the usual contracting risks” and currency issues because it straddles different geographies. “More than that, it seems the building market could be frothy given the buoyant shopping centre and office building activity in Sandton and Cape Town, as well as residential towers in Australia.

A slowdown in building activity poses a risk to WBHO,” he says cautioning against venturing into new markets or outside key areas. “WBHO has tried to expand in civils in Australia, which has not been successful.”


Last modified on Monday, 22 February 2016 14:55

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