WBHO: ‘Secrecy’ around holding company guarantees exposure to Australia irks analysts

Group has effectively withdrawn from Australia and abandoned its assets in that country.
Loss-making roads projets in Australia have cost the group heavily. Image: AdobeStock

The lack of full disclosure about the financial impact on the South African holding company of JSE-listed construction and engineering group WBHO about its decision to discontinue its financial support of its investments in Australia has been criticised by analysts.

The decision by WBHO effectively means it has withdrawn from Australia and abandoned its assets in that country.

WBHO announced its decision to discontinue financial assistance to its Australian businesses last week.

The group has held its investment in Australia for more than 20 years through a majority shareholding in building company Probuild Construction (Aust) Pty Ltd and predominantly civils business WBHO Infrastructure Pty Ltd.

Lack of disclosure ‘disappointing’

Peregrine Capital executive chair David Fraser said on Tuesday it is a very disappointing train of events, particularly for a company with WBHO’s pedigree and which “in the old days” only made a provision once if they had a problem contract.

Fraser said the group came back about four times with extra provisions each time for the Western Roads Upgrade (WRU) project.

He said it is also incredibly disappointing there has not been any disclosure by WBHO on the size of the guarantees issued to the Australian venture by the South African holding company.

“We don’t actually know how much this exit could cost them. They have not disclosed the size of the guarantee and can therefore only assume it’s unlimited,” said Fraser.

He added that WBHO has put Probuild into liquidation but that does not absolve it from a holding company guarantee.

“In my universe it [WBHO] is almost uninvestable right now until I know what it’s going to cost them to get out of Australia.

“It’s material information. I want it for the market so we can then start making assumptions.

“That is the disappointment because I still think WBHO has an incredibly good South African business that is really well poised at the moment.”

SA business ‘should be insulated’

Rowan Goeller, an analyst at Chronux Research, said in theory WBHO is only exposed to the parent company guarantees and not the guarantees Probuild has provided because those guarantees are off the WBHO Australia balance sheet.

Goeller believes most creditors have recourse to the Probuild balance sheet, which means the South African business “should be insulated from anyone coming after the money, whether it be sub-contractors or clients calling their guarantees and lenders coming for those guarantees”.

“There is a R680 million parent company guarantee that WBHO disclosed at the end of their last financial year,” said Goeller.

“I’m not sure if that applies all to Australia but one can maybe put a line under the extent of their exposure plus they have quite a bit of cash in Australia which is not going to be recovered.

“The last number was AU$166 million in cash. That is not coming back to South Africa,” he said.

WBHO executive chair Louwtjie Nel admitted last week the group has experienced severe challenges in its Australian businesses over the past decade.

Significant negative impact

“Over the last four years WBHOA’s profitability has been significantly negatively impacted by an increase in loss-making projects, in particular, the Western Road Upgrade in Melbourne, Victoria and 443 Queen Street in Brisbane, Queensland, resulting in WBHOA requiring substantial recapitalisation,” said Nel.

“In making the decision to discontinue financial assistance to WBHOA, the WBHO board has carefully considered the consequences for all the group’s stakeholders, bearing in mind the level of risk exposure if WBHO continued to financially support the Australian business.

“The losses to date in Australia and the costs of the administration process and honouring existing obligations will have a significant effect on the group’s financial performance and position, but WBHO remains liquid, resilient and sustainable for the long term.

“This has been a difficult decision to make but preventing further losses will have a positive effect on the financial position of the group going forward, which is beneficial for WBHO’s stakeholders.”

Nel stressed that it will be “business as usual” for the group’s African and UK operations.

He said WBHO in 2020 engaged in negotiations to sell Probuild to a third party, adding the profit on the sale would have recapitalised WBHO Australia and mean it could continue as a going concern.

However, approval from the Australian Foreign Investment Board was not obtained.

Other disposal options were unsuccessful due to concerns the potential buyers had about the impact of the strict regulatory approach to Covid, he said.

Goeller said WBHO had “pulled the plug” on its Australian businesses to protect local shareholders.

“It’s probably the right thing to do but it’s quite a big painful exercise. Probuild is in administration in Australia and that business, unless somebody comes and saves it, will be shut and a lot of people won’t get paid,” he said.

Australia ‘hostile’ to contractors

Goeller added that Australia is such a hostile environment to contractors that there was no point in WBHO South Africa using its balance sheet to support its Australian businesses, particularly when the outlook in Australia is not exciting enough to justify taking more pain in the hope the businesses will recover in future years.

WBHO reported in February 2019 making an unprecedented AU$50 million loss provision in the six months to December 2018 on the WRU project, which was followed by a further provision of AU$20 million for the completion of this project in the six months to December 2019.

It made a R364 million provision for this project in the year to June 2020, apart from disclosing a number of transfers over the years to Australia from its South African operations.

The group last year disclosed it had made a loss of AU$160 million on this project.

It initially reported that it was considering a number of options to recoup the losses on the contract, adding that three big international design engineering companies were on the project and potential claims against professional designers will be finalised for submission in due course.

However, Goeller believes WBHO has “walked away 100%” from Australia and any claim now is effectively for the administrators of the various companies in Australia to try and chase and recover.

Fraser said he has a lot of respect for WBHO in South Africa because they deliver a great project and have done so for many years.

But he said the withdrawal from Australia is a catastrophic event for the group and he does not know how bad it was because the size of the guarantees has not been disclosed.

Fraser said the prospects in South Africa for WBHO are “pretty good” and believes the group still has a good South African business.

Read: R1.88bn government office accommodation project goes to WBHO

“But I don’t know how much of their capital they are going to have to ship offshore to get out of the Australian operation,” he said.

Fraser said it is clear that mining companies have definitely underinvested in the last few years and the capital expenditure budgets of these companies going forward are significantly higher than they have been for the last two or three years.

“They just have to find someone to do the work,” he said.

Fraser believes that investors will be able to do okay if they pick investments in the construction sector at the right time in the cycle, such as in the run up to the 2010 Fifa World Cup.

But Fraser said construction companies take on too much risk, do not get paid for this risk, and if there is precision execution they make a reasonable margin – but if not, “there is a lot of downside”.

Shares in WBHO rose 0.75% on Monday to close at R83.50.

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