Construction blue chip WBHO is coming out of its profit trough, attracting smart money

Investors really liked WBHO’s 2013 financial year results. Its share price picked up 4% after chairman Mike Wylie outlined how

Mike Wylie: WBHO profits have bottomed - back to normal margins would add R250m to headline earnings.
Mike Wylie: WBHO profits have bottomed – back to normal margins would add R250m to headline earnings.

the fall in profit margins are now in a trough from which a significant recovery is likely. He said it’s been “a long, long time” since the group’s attributable profits were just 2.9% of turnover. With a 32% surge in turnover to a new base, just getting the margins back to the 4% of 2012 would add R250m to headline earnings – taking the HEPS number to 1600c a share and, at its current share price of R147, on a price:earnings ratio of nine times. Very appealing for the long-term investor.

WBHO’s profit for the 2013 year was hit by R91m that needed to be paid to the Competition Commission, telling us that the eventual fine was higher than had been expected and previously provided for in results. A R145m writeoff in Australia also hit hard as group generates half its revenues there but, this year, only one fifth the profit.

The group has R3.3bn cash in the bank but with the promise of the SA Government’s R4trn infrastructure programme finally kicking in, Wylie says WBHO has no intention of declaring any Special Dividends – it will need the cash to fund expected growth. . Information he disclosed in our interview on CNBC Power Lunch was what any potential investor would have been looking for. Not surprise to have seen the share price react. Or to hear my old friend David Shapiro say last night that if you were investing in the JSE’s construction sector then WBHO is the one to be with. – AH 

To watch the full interview on CNBC Africa, click here.

ALEC HOGG: Wilson Bayly Holmes Ovcon, or better known as WBHO reported a slight decline in headline earnings per share for the year to end June. The construction group saw revenue jumping by almost a third to R23bn. Joining us now to unpack the numbers is Chairman Mike Wylie. Mike, those numbers in themselves I suppose are a big story – big revenue growth – but a profit decline. Your profit margins, depending on where you want to look, were either down by one full percentage point, or in fact even more at the operating level. From an outsider’s perspective it would say you got a lot more business but it wasn’t really that profitable.

MIKE WYLIE: Alec, ja. It’s been an interesting year. To have that sort of growth, and then make basically the same amount of profit, but I suppose one can look at it as a year of consolidation. We have come through tough times working on much lower margins, and we’ve also had a few problem contracts. We’re happy to have come out virtually square on last year, but that increase in turnover gives us a good base to move forward from.

ALEC HOGG: Bottom line: your profit margin, the money you put into the bank or put into shareholders’ attributable profits was 2.9%. That doesn’t leave much margin for error.

MIKE WYLIE: Hopefully there’s only upside.

ALEC HOGG: When was the last were you here – at 2.9%?

MIKE WYLIE: A long time ago. I think it’s because revenue has grown. It’s a great company – to have that sort of revenue when you’re not really pushing it. We haven’t been pushing revenue, we’re looking for quality of earnings. To have the growth of 33% and its still looking positive for this coming year. So it really does show that the fundamentals and a good management team in place. We’ve just got to improve those quality of earnings and that really, in construction, means just don’t make mistakes. Don’t have bad contracts and really concentrate and make sure the guys can cope with what they’ve got.

ALEC HOGG: While we’re talking about the returns it doesn’t look that clever, having a business where you’re only making R2.90 out of every R100 worth of business that you’re achieving, but the returns on equity aren’t bad. Are you still at 16.5%?


ALEC HOGG: Compared with – what – 20% last year? Is that likely to be a level that in the long term you’ll be able to generate?

MIKE WYLIE: I think we will. Our target is 20% so it’s disappointing to be down at 16%. We normally are higher than that and I think if we hadn’t have had these few bad contracts, we would have been close.

ALEC HOGG: And those were bad contracts primarily in Australia, which is now half your business.

MIKE WYLIE: Ja. But I think Australia’s got a lot of upside. It’s a tough market over there, obviously with the strong Australian Dollar and the economy under quite a bit of pressure, but we’re well-placed. We’re up to $1.2 billion. We also had about a 50% growth in turnover there and that included a lot of restructuring. We’re pretty happy with the management teams that are now in place. These teams can really take it forward the next 13 years. We’ve been there 13 years already – basically from nothing. So Australia’s a tough market, but it’s really good to be there with the way our Rand is going.

ALEC HOGG: Interesting; you say 13 years. I was reading over the weekend that Anglo America has been in South America for 40 years. South African companies certainly have expanded quite well.


ALEC HOGG: In these results though, you have an additional provisioning of R91m. In other words, you thought the Competition Commission was going to fine you X, but in fact it turned out to be X plus R91M. What happened there?

MIKE WYLIE: We did our best you know – what we thought was a fair fine to pay – on the numbers we saw and all the criteria that they used for the fine. We didn’t see eye to eye at the end on the criteria used, and therefore the percentages which they got to. We eventually ended up at 3.9% of our turnover. We thought it should be about 3% or less than 3%, so that was very disappointing. But we had to settle – get this behind us. We didn’t want to disagree. At the end of the day we did make some mistakes and we must move on.

ALEC HOGG: Roger Jardine from Aveng – now just to put people into perspective the big three in South Africa are Murray & Roberts, Aveng and yourselves – he came onto our show. He sat in that chair the day that he resigned and he said that once he’d discovered what was going on in the construction industry – having been there for a few weeks – he wanted to leave but he thought he would see things out. You’ve been a veteran for more than 30 years in your company. How do you react to that kind of a comment?

MIKE WYLIE: Look, I suppose he’s talking from an Aveng point of view, but from WBHO and what I see – and I don’t want to be in denial about anything – really we gave the Commission everything. They didn’t have to ask for a thing. Everything was put on a platter. We uncovered it all. That was the deal we had with them. And out of thousands of bids that we looked through, we found six contracts over ten years from eight independent tendering divisions around the country. That’s a minute portion of our turnover. It’s a minute portion of our revenue so I think that this whole thing is not in perspective. With that in mind, I do think this construction industry is a great industry. It’s a very competitive industry. There’s no foreign contractors that can compete here. We’ve got such a lot to offer and really, we’ve just got to hopefully try and put this whole thing in perspective and help the government build the country and alleviate poverty. That’s what we’re here for.

ALEC HOGG:  So you’re not expecting that Roger Jardine’s departure is going to spark a whole lot more resignations?

MIKE WYLIE: No, I don’t think so.

ALEC HOGG: Certainly not from you and your group?

MIKE WYLIE: No, our guys are strong.

ALEC HOGG: Just getting back to Australia: it does now generate half your revenue but only a fifth of your profits.


ALEC HOGG: Is that something that you can change in future?

MIKE WYLIE: Yes. We’ve restructured there this year. As I say, we’ve been there for 13 years and came from nothing – getting it up to $1.2 billion. When you’ve had that sort of growth, in that time, you really do need to relook the whole thing, which we did. We spent about two years in this restructuring. We’ve got great teams, well-positioned in all the different places. So I just hope that the Australian economy can give us the work we need because it is under pressure. But we’re really happy that we are a Tier 1 contractor, which is going to open a lot of doors for us.

ALEC HOGG: What I’m getting at is that you’ve got nearly R3.5bn in cash reserves.


ALEC HOGG: Where would the best place be for that? There’s been a lot of argument about lazy balance sheets, how much cash you should keep on your balance sheet, etc. Clearly you haven’t declared a Special Dividend, so you’re not looking to give that back to shareholders at this point in time. Where would you put it?

MIKE WYLIE: We’ve got about R4bn worth of guarantees out there. A lot of those guarantees are supported by cash. There’s a lot of working capital in Africa – all over the place, so when you’re doing R23bn  (turnover) you really do need quite a lot of working capital, so  you’d have to be on the conservative side. The banks like us to be on the conservative side. So I think as long as we’re getting that return of equity, and we don’t let that drop anywhere lower than it is, we can have another three good years, that may be the time to talk about  buying some of our shares back. I don’t think there are many management teams out there that are going to do better than ours.

ALEC HOGG: So you don’t feel you’ve got any laziness in your balance sheet?

MIKE WYLIE: No. We’re happy with it. It may be slightly lazy, but we prefer it that way.

ALEC HOGG: Mike, if you did have R10bn that fell into your lap, where would you put it? Not in your personal lap, but in WBHO’s lap. Would you go into Africa?

MIKE WYLIE: You know, it’s a pity Africa’s come off the boil. I mean everybody knows that now. A lot of our order books have dropped because of Africa. It’s a difficult one. I just think we need to just consolidate for the next three years and really work on improving, so I don’t know what we would do with another R10bn. We don’t want to go and buy anyone. We’ve grown such a lot. I think we’ll be at R30bn turnover in a few years’ time, so we just need to keep our feet on the ground and run this business really well and improve the quality of earnings.

ALEC HOGG: The market liked your results today. Share price is up 2.7% as we speak right now. Is this a performance that obviously next year you’d hope to improve on? Operating profit – down. Headline earnings – down slightly. Dividend only up below inflation.

MIKE WYLIE: Ja. The company’s in good shape. The management team is good. The balance sheet is strong. We had good cash flows again this year and the pipeline is good for work, so our order book is really well. With that healthy pipeline, even though there’s a concern of government spending not going as fast as it should, we have a lot of other positives throughout the business. So I think we should be improving from this point. We’re quietly optimistic.

ALEC HOGG: And you certainly don’t have another R91m that you’re going to have to write off in the year to come because of the Competition Commission. Thank you. That was Mike Wylie, the Chairman of WBHO.

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