WBHO warning to Woolies: Oz market super efficient, highly competitive
Despite the spotty record, Australia has once again become a favoured destination for SA corporates looking to reduce their reliance on their struggling home base. Most notably Woolworths whose R20bn acquisition of David Jones has been sold to the local investment community as a turnaround just waiting to happen. Maybe. But this interview with Wilson Bayly Holmes executive chairman Mike Wylie reinforces the view of sceptics like myself that any benefits will be hard fought and slow in coming. WBHO has been in Australia for 15 years and Wylie visits regularly. Although the Australian operation generates higher turnover than the group gets in its home base, profit margins are under half. A timely warning for the Woolworths optimists. Whose excitement seems to be boundless right now. – AH
ALEC HOGG: Construction and civil engineering group, Wilson Bayly Holmes reported full year results today with an eight-point-four percent increase in its revenues. Company Executive Chairman, Mike Wylie is with us to unpack the results, Executive Chairman or Non-Executive Chairman?
MICHAEL WYLIE: Executive.
ALEC HOGG: Executive – are they still running the place?
MICHAEL WYLIE: Only just.
ALEC HOGG: Mike, it was interesting looking at this. In the news, lately, we have seen Woolworths going into Australia with David Jones. You've been in Australia a while and you seem to have taken your time to make proper money there. Before we talk about Wilson Bayly, when you look at Woollies going in there, do you think, 'poor guys you're going to have a tough ride' or do you think they're doing the right thing?
MICHAEL WYLIE: We build most of those centres, and that is pushing our order book. I think you see our order book is up to about 16-billion in Australia, which is a big increase. And it is actually, driven by a lot of retail work – big shopping centres where, obviously, David Jones is going to be growing. It is nice for us to be building those centres, knowing that a South African company is going to be taking a big part in them. But Australia is tough and I would think that Woolworths knows, very well, how tough it is. Those guys are smart, and you can see from our margins. We've clawed our way up to two per cent. Now that is not great.
ALEC HOGG: Two per cent! We were talking earlier with Sasha – so for every $100 of business you do there you get two-dollars operating profit.
MICHAEL WYLIE: Yes. But its big turnovers and they are now coming up towards being about a third of our operating profit, which is good, even though the turnover is now greater than 50 per cent of WBHO.
ALEC HOGG: With the turnover great, does that mean you are physically?
MICHAEL WYLIE: No, there's a ratio of, I would say, three to one. So it is three times more expensive to build there than in South Africa.
ALEC HOGG: Why?
MICHAEL WYLIE: Labour costs are very high and, in South Africa, our construction industry is extremely, cost competitive . Spo the numbers are two to three times more. We also build a lot of apartments in Melbourne and the equivalent apartment here, in Sandton is about four times more expensive.
ALEC HOGG: But your margins, thankfully for shareholders, are better in South Africa than Australia.
MICHAEL WYLIE: Yes, they are. Oviously, their idea is to get those margins up.
ALEC HOGG: In Australia?
MICHAEL WYLIE: In Australia, yes. So, half-a-percent by half-a-percent – that's a the challenge. Also, building a strong balance sheet there has taken,15 years of work, to get up to this turnover. But we're now one of the bigger contractors in Melbourne and we've got a base all over Australia, in all the centres, civil and building. I think we can only do what the economy allows us to do in the supply and demand for services there.
ALEC HOGG: But that economy is stronger than this one.
MICHAEL WYLIE: Oh, yes, much stronger. Even with the cost of their labour – it is really hurting them because a lot of factories are closing down and going off to the East. But they are such an efficient country and they are just in the right in the world…so close to Asia.
ALEC HOGG: Are the Asians investing there?
MICHAEL WYLIE: Yes.
ALEC HOGG: Is that where part of your business is coming from, you mentioned apartments.
MICHAEL WYLIE: Yes, Asians are buying apartments, and that fuels universities and shopping centres, and everything. A lot of people are immigrating there. They are immigrating with their family's wealth, so they are really in a good place in Australia. But it is very competitive, which is also very good.
ALEC HOGG: Yes, only two per cent margins in this time. Is that a Wilson Bayly thing or is that an Australian thing?
MICHAEL WYLIE: It's a company called Pro-Build, and we own 80 per cent of it.
ALEC HOGG: But is it an Australian thing? In other words, are construction margins in Australia lower than they are in South Africa, generally?
MICHAEL WYLIE: Yes, would think so.
ALEC HOGG: So it is cheaper to build here but it is lower profit there?
MICHAEL WYLIE: Yes, and I think if you look at Layton's and these big companies they are struggling because it is a very, tough margin out there.
ALEC HOGG: And about the South African markets, the operations here? I walk into the Rosebank Mall often, and see your guys working.
MICHAEL WYLIE: It's looking good, isn't it? It's improving hey?
ALEC HOGG: What are the other big projects that you're busy with?
MICHAEL WYLIE: We are doing that whole Alice Lane Precinct, which is about R1bn. We're doing Precincts in Menlyn and then in Cape Town and Durban, so there's a lot of work going on. I think our turnover in the building side topped R7bn this financial year, which we are very pleased about.
ALEC HOGG: Is that your highest?
MICHAEL WYLIE: Yes, that's the highest. Our Roads and Earthworks business topped R5bn. Margins are slightly higher in Roads and Earthworks because it's a bit more risky and we're obviously quite good at managing those risks.
ALEC HOGG: Where's the market, at the moment? We were again, talking to Sasha earlier, he said when you are in a cyclical industry, as construction obviously is, and you've got to time your purchases into the stock at the right time. Now, your stocks have come down a long way from the peak of a year or so ago.
MICHAEL WYLIE: Yes.
ALEC HOGG: Where's the cycle now?
MICHAEL WYLIE: We would just like to see South Africa succeeding and within improving GDFI, Gross Domestic Fixed Investment …because it is a very, low level now.
ALEC HOGG: [Inaudible: 05:51] at a trough in the cycle?
MICHAEL WYLIE: Yes, you know Government work now accounts for about 10 per cent of our total turnover and about 20 per cent of our South African turnover. We would like to see South African turnover up at about 40 to 50 per cent, but it has gradually gone down. We do believe, and, talking to politicians and business people, they do say, that this infrastructure spend will happen. We hear big numbers.
ALEC HOGG: But we've been hearing that for years now. What's happened?
MICHAEL WYLIE: Yes, I don't know but you can talk about capacity and all those sort of things and just having the money, in the first place. We've learnt that we can never rely on everything. We just have to stay flexible and were the work is we'll go. If we have to go to Ghana then we'll go to Ghana. In Ghana, we are building five shopping centres – so suddenly Ghana has gone into this retail frenzy and we're there. Before that, in Ghana, it was gold mines and we were there. Mozambique is doing very well now, with all the coal and the gas up North…so we're there. We will just go wherever we have to go and we can't really rely on somebody saying, 'in the next three years so much money is going to get spent on X' because maybe it does and maybe it doesn't.
ALEC HOGG: So when you look at business, you look at the African Continent and obviously, in Australia as well. Not just South Africa anymore?
MICHAEL WYLIE: Absolutely.
ALEC HOGG: How has that changed over the years?
MICHAEL WYLIE: Yes, look our market share in Africa. Well, not our market share but the amount of revenue we do in Africa. It has actually decreased because it all came off. It was really going well, now it's come off because a lot of the mines are on hold and they are not expanding but we think that will come back again. We've got a nice footprint, so South Africa is a bit static. South Africa is increasing but, because of this private sector work, there's a lot of work going on. Possibly, we've got more market share in that as well. Then of course, Australia just does surprise us. With the iron-ore prices and that whole market of the mines dropping, we hear about the cost of the dollar preventing pharmaceuticals and the motor industry being competitive in Australia – but it still carries on. It's a good country, so we'll just move where we have to, Alec.
ALEC HOGG: And your shareholders will no doubt stay with you, as we heard a little bit earlier. Mike Wylie is the Executive Chairman of WBHO.