Straight talking Mike Wylie: WBHO dividend cut was the right thing to do

Mike Wylie, Chairman of WBHO joined Alec and Gugu in the CNBC studio to unpack the company’s interim results, where they went wrong and why dividend cuts were the right way to approach otherwise ‘ordinary’ results.

Watch the full interview on CNBC Africa here

It’s good to have you with us today. 

Thanks Gugu.

It’s funny, as Alec and I speaking at the beginning of the show, together with Sasha, and even now, he’s tipped you off that the numbers were described as ordinary.  What’s your response to this?

Yes, our headline earnings are down 18 percent.  That is pretty ordinary.

Cutting your dividend, when last did that happen?

Never.

So what’s going on Mike?

We’ve always had quite an aggressive dividend policy, of about three times cover.

No, a R1.10 dividend at R5.40 earnings, I thought when you covered this dividend so heavily; it saved you in times like this. 

We just felt that times are tough out there.  The outlook is very uncertain for the construction sector.  With this drop in profit, we felt we should drop the dividend similarly.  Look, it is only an interim dividend and hopefully we can recover, if we feel confident to recover.  We’ve always tried to be very honest with our investors and if you keep the dividends, the same it means you are pretty confident that this hiccup of 18 percent that we’ve had is going to be fully recovered and off we go.  But I think in the market that exists at the moment (for the construction sector) it is tough and I think it is to recognise that.

Nearly five times covered dividend is a luxury in an environment where shareholders are wanting more income, so there has to be more to it. You remember the days when a dividend cut would send the share prices spiraling downwards. It was almost seen as a lack of confidence in the business. You must have really thought about this long and hard at your board meeting. 

Yes, we did and it was a big discussion but, as I say, first of all…we also need a lot of working capital. The company is getting close to R30bn turnover and we need to look after our cash.  We feel we’re going to use it well and I think that being an interim dividend, this was the most sensible thing to do. Maybe not a popular thing to do, in terms of the investors, but I think it is the right thing to do.

So when we come to the year-end, are you signaling to us that you’re going to be cutting your final dividend as well? That times are that tough in this industry.

If it is confirmed that they are as tough as we think it is now, we’ll do that.

Is it Australia where the problems are coming in? 

Look, Australia as you see there, we didn’t make any money this last six months, in Australia, which was very disappointing.  It was due to just quite a small part of the business.  It’s the infrastructure-mining sector in Western Australia and also the roadwork in Queensland, both of which have almost come to a halt.   We are having to restructure that civil business but it only represents about five percent of our turnover in Australia, so the rest of the business is doing well.  Just that amount, we would have done better in Australia than the last six months, had it not been for this civil restructuring.  That’s unfortunate that we had a few bad jobs and the restructuring costing us money.  We just want to be conservative and I do hope that we are back on track and we’ll see about the dividend at the end of the year.

Is renewable energy the new, sweet spot?

Not for a construction company like us. It is certainly an element of it and it is a part that we are participating in.  We’ve just finished the 85-megawatt solar plant in Kathu and we’re busy with Ressano Garcia, which is a 100-megawatt gas.  We see Eskom now paying attention to gas production.  We are very well situated up in Northern Mozambique but renewable energy, as per say, it’s a lot of EPC work and a lot of skills that we don’t necessarily have, as a construction company.  We certainly have enough skills to partner with people, which we’re doing, and we hope it is going to…it certainly more profitable than just the run-of-mill construction work, but it is more risky.  We’ll balance that out.

Mike, just from a broader perspective, you employ a lot of really clever people and yet you make a lower return than the guy selling cabbages; especially in Australia, where you made no returns.  What gives? Is it just a bad industry or are you just at a bad time in the cycle?

You’ve followed for many years and it’s been a great industry for WBHO. We’ve grown our market cap, I think we’ve got the second highest market cap, and I think we’re around R8bn now.  We were about R1bn ten years ago, so we’ve really grown that market cap and I think we’re just going through a phase now, where things are difficult.  In construction, it’s the summation of many contracts.  We get contracts, we go out there, and each contract has its budget.  You try and make the revenue and the profit from each one.  You add it all up at the end of the day and that’s the result.  If you have a few bad ones, that’s the challenge, and we have had a few mistakes, as you know, in the past few years, and we’ve got to cut those mistakes out.  Yes, it does need very clever people.  It needs people with feet on the ground.  It needs really good people and we’ve got to do better than we’re doing now.

What about the relationship with the Government? We did have the Competition Commission that investigated on the one hand. On the other hand, you have Government promising to go into infrastructure, but there’s a bit of cynicism around that.  

Obviously, the National Development Plan, the foundation of it is infrastructure development and, therefore our relationship with Government and trust is key to that.  We’ve been having a lot of talks.  The competition stuff ended a long time ago now, seven or eight years ago, and it was around cover pricing and we don’t believe it was around price inflation.  It was more about cover pricing, for whichever reasons, but any way that’s a debate.  The thing is that we need now to do this and recover that and we really are trying.  We have meetings with them through our South African Federation Forum of Civil Engineering.

What’s happened to trust?  Are you able to sit around a table, with a Government Minister, and share stories that you would, if you trust somebody, or is there still this distance?

I think, certainly from our point of view, we really want to do that but there is a bit of a lack of communication now.  We are going to try and really push that this year and try and create those forums to go and talk and discuss, and that would maybe help rebuild the trust, which has to take place.

Your outlook then, when do you expect things to turnaround in the cycle? 

That’s difficult to say.  It really is difficult to say.  We need Government to start spending and money looks like it’s a problem.  We need the iron ore prices and all those things to go up.  It doesn’t look as if they are going up, so I think we’re in for a year – I don’t think much is going to happen in a year.  We’ve just got to box smartly.  We’ve got to be lean and mean.  WBHO has got very good structures and very good people, and I think we are well positioned to whether the storm, but when it’s actually going to turn, I think in 2016, hopefully.

Are you going to have any part of the infrastructure spend on power? We know that Eskom is a sore point for everybody in South Africa, at the moment.

Well, we have, as I’ve said, we’ve just finished the solar plants, so in the renewable, we definitely will and in gas now, Eskom is now looking there.

And in nuclear? 

Nuclear, when it comes, certainly.  They would need all the skills that we’ve got, and many others as well, to build that but I think that’s quite a long way off and it is just so expensive.  We’re just busy finishing off Kusile Power Station now and we are just about there, with our civil works of Kusile.  We are on the last bit of work on unit six, so from a civil point of view, that’s gone very well and hopefully, Kusile will come in a bit earlier than what they’re saying.

Well that will be a turn up for the books, given how long Medupi has been up. 

Yes.

Mike, just to close off with, this has never happened to you before. You’ve been running this business for many, many years.  You’ve never had to cut your dividend before. How are you going to turn this around?  This is traumatic for you, no doubt, so what happens next?

Yes, no look, we’re just taking a hard look at every aspect of the business.  We are making the necessary changes that have to be made and we’ve just got to stop making these few mistakes that we’ve made, on the various contracts.  I hope that by the full year results, we’ll be able to bring something more positive, but until we feel positive, we really don’t want to tell the investors something that we don’t really feel, so that is why we thought that dividend cut was the right thing to do.  It was tough but right.

Tough but right, straight talker there, Mike. it was such a pleasure having you in today. 

Mike Wylie, Chairman of WBHO. 

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