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WBHO expects massive earnings slump, gets unsolicited bid for Probuild

Bid could ‘unlock nice value and be a graceful exit out of Australia’ – analyst.
The group expects to announce its latest annual financial results on September 1. Image: Moneyweb

Wilson Bayly Holmes Ovcon (WBHO) has received an unsolicited, non-binding and conditional bid from a major international construction and civil services company to acquire the JSE-listed construction group’s 88% interest in Probuild, its Australian building business.

The offer, if successful, could possibly lead to WBHO exiting the Australian market.

WBHO indicated earlier this year that its future strategy for Australia is being reviewed.

This announcement coincided with WBHO’s trading update on Wednesday, wherein it advises shareholders that it expects to report a loss in the year to end-June.

Big drop

Earnings per share is expected to be 1 409 cents lower than the 939 cents in the year to June 2019 and headline earnings a share 1 398 cents lower than the 932 cents reported.

The operating profit of WBHO’s building and civil engineering business is expected to be at least 50% lower than the previous year, its roads and earthworks business at least 40% down, its Australian business at least 200% worse and its construction material business to incur an operating loss. The operating profit of its UK business is expected to be at least 5% higher.

With governments around the world having announced widespread measures to contain the spread of the Covid-19 pandemic, and due to the group’s geographic diversity, these measures have affected operations within each country to varying degrees and severity at different times, WBHO said.

The group expects to announce its latest annual financial results on September 1.

Shares in WBHO rose 2.1% on Wednesday to close at R102.

Problematic projects

WBHO’s review of its Australian business follows the group’s infrastructure business bleeding money on a road contract and Probuild experiencing losses on a building project.

WBHO made an unprecedented Au$50 million loss provision in the six months to December 2018 for anticipated costs to complete the Western Roads Upgrade (WRU) in Australia and a further provision of Au$20 million for the completion of this project in the six months to December 2019.

The group confirmed on Wednesday that the completion of the WRU project has encountered further delays and expects increased costs to complete it, as a result of delayed design completion, the discovery of unknown services, unidentified contaminated soils and the performance and profiteering of utility owners as well as their subcontractors.

The project comprises eight packages for the widening and upgrading of various roads and intersections in the western suburbs of Melbourne.

WBHO said completion of Project 2 of the WRU contract is expected in January 2021.

In March this year the group said it had also made an Au$12 million provision for expected future losses on Probuild’s 443 Queen Street project in Brisbane.

WBHO said on Wednesday that the 443 Queen Street project has encountered further letting losses in placing subcontractors and the expected completion of the project has been extended by a further two months to the end of October 2021.

The group said it continues to assess all potential options for the Australian businesses to ensure completion of these contracts and the future operation of these businesses, and referred to the announcement about the unsolicited bid for Probuild.

Australian future

WBHO company secretary Shereen Vally-Kara confirmed on Wednesday the unsolicited offer is for Probuild only and does not include the group’s Australian infrastructure business.

WBHO entered the Australian market in 2001 after acquiring an initial 40% interest in Probuild Constructions, which it subsequently increased to 88%, with WBHO Infrastructure formed following the consolidation of WBHO Civil and Probuild Civil.

WBHO said on Wednesday the operating loss in Australia will be at least 200% worse than the comparative period, due to the effect of Covid-19 and further material provisions for the costs to complete these two projects.

“The Australia operations will require funding to avoid breaching certain covenants within the Australian local guarantee facility and to support liquidity levels for the completion of [these two] … onerous contracts,” it said.

WBHO stressed the indicative proposal for Probuild is subject to a number of conditions, including the satisfactory completion of a due diligence and entry into a mutually-agreed share sale agreement, adding that there is no certainty that a binding proposal will be forthcoming or what the final terms of such a proposal might be.

“WBHO is currently in discussions with the third party in relation to the indicative proposal. The company’s objective is to maximise value for its shareholders and as such the WBHO board is carefully assessing recent approaches.

“Alongside current discussions related to the indicative proposal, WBHO has conducted, and is continuing to assess, all potential options for Probuild to ensure that shareholder value is maximised.

“Notwithstanding current uncertainty in relation to Covid-19, WBHO remains optimistic about the long-term fundamentals of Probuild and its longer-term growth prospects in the Australian market,” it said.

WBHO reported an Australian order book of R23.29 billion at end-April 2020, which accounts for 57% of the group’s total order book of R40.55 billion at the same date.

No-brainer decision?

David Fraser, executive chair of Peregrine Capital, said WBHO’s trading update and the third provision it’s making on the WRU project is disappointing.

Fraser said the unsolicited bid “could potentially be a graceful exit” of WBHO from Australia.

WBHO confirmed that, from time to time, it receives unsolicited approaches for Probuild, ranging from strategic alliances and partnerships to acquisition interest in the business.

“This includes a number of recent approaches,” it said.

Fraser said he is guessing that the fact WBHO made an announcement about the unsolicited bid means it does not involve an unreasonable valuation for Probuild.

“It sounds like they are seriously engaging it and the bid could be exciting. It could unlock nice value and could be a graceful exit out of Australia.

“If the price equates good value, they will be silly not to look at it,” he said.


WBHO share price over the past five years




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