A problematic Australian contract and a payment in accordance with a settlement agreement between government and the local construction sector following an investigation into collusion have seen profits slip at JSE-listed construction group Wilson Bayly Holmes-Ovcon (WBHO).

The group earlier this month reported 4.1% growth in revenue for the financial year ended June 30, to R31.9-billion, compared with the previous financial year.

The operating margin contracted from 3.3% to 3.1%.

Operating profit before nontrading items reached R986-million, compared with R1-billion in the prior year.

Included in nontrading items was a payment of R170-million to be made to the Tirisano Trust over a period of 12 years, arising from the settlement agreement signed with government in October last year.

Despite challenges in the local market, WBHO noted that strong growth from the group’s local building divisions and an improved performance from the roads and earthworks division increased the contribution from South Africa toward group revenue from 32% to 36%.

“Overall, however, on balance, the South African market is quite flat,” said WBHO CEO Louwtjie Nel. “The only way to grow in South Africa is to grow market share.”

Revenue from the rest of Africa declined by 33%, owing primarily to lower activity in Mozambique and Botswana, while revenue of R18.6-billion from Australia, which comprised 58% of group revenue, was largely in line with the comparative period.

Revenue from construction materials of R893-million was also essentially flat.

Increased profitability in the roads and earthworks division countered lower profitability in Australia, which was impacted on by a lossmaking project in Queensland.

The Coorparoo project is a mixed-use residential and retail development
that includes three apartment buildings, a retail precinct and a ten-theatre cinema complex.

Delays in securing subcontractor packages for this project resulted in unanticipated price increases.

Two of the three apartment towers have been completed, with completion of the final tower forecast for October.

WBHO in June entered the UK construction market through the acquisition of a 40% interest in the Byrne group, a frame contractor based in London.

Nel said WBHO had been seeking growth opportunities in new markets for some time.

“We have been looking at the UK for the last 12 to 18 months. There is strong demand for residential and commercial developments.”

Nel said the UK construction environment was similar to that of Australia, with the main contractor fulfilling a construction management role and the different project packages being let to subcontractors.

As such, the UK was identified as offering the most potential at acceptable levels of risk, even though the group also looked at Eastern Europe.

The Byrne group, through Byrne Bros, specialises in concrete sub- and superstructure packages, while new build refurbishment and fit-out projects are delivered through Ellmer Construction.

The group has worked on iconic structures such as the Shard, in London.

Byrne suffered three lossmaking projects in recent times, which had weakened its balance sheet, noted Nel.

WBHO’s investment would now recapitalise the group. However, he warned, it would take around 12 months for “the group to get going again”.

The year also saw WBHO acquire a controlling interest in Grindrod Rail for a consideration of R63-million.

The group has been rebranded as iKusasa Rail.

Nel said the acquisition provided the group with opportunities in the rail maintenance sector in South Africa, as well as in the construction of some mining-linked rail projects in the rest of Africa.

The group’s total order book stood at R45-billion as at June 30, up 5% from the previous year.

A 17% decrease in the building and civil engineering order book was offset by a 103% increase in higher-margin work from the roads and earthworks division.

WBHO noted that the order intake for local building work “continues to diminish as the softening of the retail and commercial office sectors becomes more entrenched”.

The Australian order book remained largely flat.