WBHO’s Australian roads project goes down under
The construction group’s earnings could fall by between 80% and 100% after underestimating costs at its Australian roads project
Wilson Bayly Holmes-Ovcon (WBHO), the local construction industry’s beacon of hope, dropped a bombshell on Tuesday with the announcement that its second half of 2018 earnings could fall to zero because of losses in an Australian roads project.
The announcement comes two weeks before the group releases its results for the six months to December.
In a statement to shareholders, WBHO — by some measure one of the better performing construction companies — said its performance in the interim period took a knock from the OSAR Western Roads infrastructure project in Melbourne, Australia.
The A$1.8bn project entails eight high-priority road upgrades, road widenings, and intersection upgrades. WBHO is responsible for the project’s construction works. The project also includes the upgrade and duplication of six suburban arterial roads and the construction of two interchanges.
“The completion of contract anticipated loss is due to the interpretation of the technical specifications within the contract bid design, resulting in the underestimation of the physical construction works required under the design and construct contract,” the construction and engineering group said.
It said its earnings per share and headline earnings per share (HEPS) were likely to fall by between 80% and 100%. This sent the firm’s stock falling 12.5% to R115.50 on Tuesday. On Wednesday it was down a further 2.24% to R112.91.
The shock announcement is in contrast to the normally flawless execution and delivery of WBHO’s major projects outside the country. In the face of dim prospects in the domestic market, local construction companies have sought opportunities in new markets.
With the latest setback, WBHO joins fellow construction companies Group Five and Basil Read, which have had their fingers burnt in foreign contracts. Group Five has paid a total of $106.5m in fines to former client Cenpower Generation in relation to the Kpone power project in Ghana. In 2018, Basil Read was kicked out of a contract to build the St Helena International Airport on the island of St Helena.
While the woes of its financially distressed peers have been in the open for a while, WBHO is a torch-bearer for the local industry because its foray into offshore markets has been successful. The company has entrenched itself in the Australian market, where it is one of the largest contractors.
In the 2018 financial year, WBHO generated R21.9bn revenue in Australia, while operating profit from that market was R278m. Revenue from Africa and UK operations was R13.1bn and R3.7bn, respectively.
In recent years, the Australian market has benefited from booming residential housing and buoyant public investment in infrastructure. Not surprisingly, WBHO’s Australian order book has been increasing exponentially. In the year to June 2017, it increased by 70%; it was up 66% in the year ended June 2018.
First National Bank Wealth and Investments’ Wayne McCurrie says WBHO, whose total order book stood at R49.2bn at the end of June 2018, has no one but itself to blame for the Australian setback. The Australian operations accounted for R32.5bn of the order book.
“Building and construction is complicated. [WBHO] basically underestimated the costs of the project. They did not cost correctly. There were no other external factors in the matter. It was their fault,” he said, describing the saga as an “own goal”.
McCurrie said WBHO’s failure to pick up a technical requirement in the contract should bother the company’s shareholders.
Sasfin Wealth deputy chair David Shapiro said, “In Australia and Botswana, where WBHO was making good earnings, [the announcement was] a big surprise for a business that has always stood above its peers. We need a formal response as to what went wrong.”