INTEGRATED REPORT 2015

Performance / Reviews







MESSAGE FROM THE CHAIRMAN

“A positive for the year is that we have maintained our Level 2 BBBEE status. We continue to identify, train and grow black talent and it is satisfying to see how our efforts in enterprise development are paying off as the number of ‘black’ contractors tendering continues to increase.”

Amid poor economic conditions, I am pleased to report that our revenue has grown to R29,5 billion and that all divisions, with one exception, have performed well. Overall, revenue increased by 15%, which was underpinned by growth of 23% from Australia and 21% from the rest of Africa and moderate growth of 3% achieved by our local South African businesses. This is a commendable performance in the current climate and reflects how adaptable and resilient we are as a group.

Economic conditions
The construction environment remains a tale of two stories: strong in building markets, while weak in civil and infrastructure, both in South Africa and Australia. The building markets, in South Africa and Australia, continued to offer good opportunities and we have capitalised on these in recent years, delivering a number of iconic buildings. The demand for accommodation in Melbourne and Sydney has translated into many high-rise towers, as well as shopping centres. We are completing over 2 000 apartments each year in Melbourne alone, which is an impressive feat. Probuild has cemented its designation as a “Tier one” building contractor in Australia and its building divisions have seen a sharp growth of 42%.

The subdued resources sector has continued to have an impact on Civil engineering and mining-related infrastructure work in South Africa, the rest of Africa and Australia, and our order books in all of these divisions have declined. The African-based businesses did, however, achieve good results this year, but the civil businesses in Australia were disappointing. In South Africa, we remain concerned over the public sector funding of future infrastructure. An exception is road infrastructure, where there have been an acceptable number of tenders.

Construction in South Africa and the National Development Plan
Construction of infrastructure is vital to South Africa. One of the reasons the rating agencies have not downgraded South Africa further to junk status (Brazil has been and the talk in financial circles is that we are next) is that analysts believe the National Development Plan (NDP) will put the country on the road to growth, employment and prosperity. Infrastructure construction is the foundation of the NDP and it is puzzling that the government should continue to mistrust the construction industry, promoting the inaccurate and biased flow of information from the Competition Commission (CC). I would like to highlight some of the issues:
  • We agreed to participate in the “Invitation to the Construction Industry” with the CC, where we gave all cover pricing information voluntarily, with the understanding that we would pay a fine and the matter would be put behind us so that the industry would be set on a new trajectory. With the Construction Industry Development Board (CIDB) now involved (unnecessarily so, because its Code of Conduct allows for this matter to be dealt with by the CC), it appears that the intent of the ‘Invitation’ has been forgotten.
  • For most of the companies, cover pricing occurred (because of tendering and operational capacity) in an insignificant number of instances when compared to the numbers of tenders submitted over the period of the investigation – less than 1%. Tenders are transparent, detailed and checked by the quantity surveyor of the client and other professional advisers, which prohibits inflated pricing.
  • This industry has always produced infrastructure at extremely good value, much cheaper than anywhere else in the world. Not just 20 or 30% cheaper, but, in many instances, less than half the price. What would infrastructure cost if we had the luxury of international parity pricing? Stats SA reports that we are the lowest margin industry in South Africa.
  • The industry did not allocate the stadiums nor agree a mark-up. This is something only the Competition Commission maintains. Without some interaction between contractors, the stadiums would not have been completed on time, if at all. Our stadiums were far cheaper than any other built in the world. The combined cost of Greenpoint, Durban and Soccer City was the same as Wembley, with similar seating (and Durban has a bigger arch). The Brazil World Cup stadia were also far more expensive.
  • The construction market share in South Africa has changed dramatically since 2000 when WBHO was a quarter of the size of Grinaker, Murray and Roberts and LTA. Today, we are the largest, even after two of them have merged. Such changes in market share can only occur in a very competitive environment, certainly not in a collusive one.
  • There were other major projects at that time, such as the Medupi and Kusile Power stations, the King Shaka and OR Tambo airports and many others, and no cover pricing, nor any type of collusion took place.

What we did was wrong. We have apologised, but it was certainly not “entrenched” and “ubiquitous” (to quote the CC). We have offered government additional funds to accelerate our industry transformation and development and, as have other South African industries involved in collusion, paid our fine. As was the intention of the “Invitation”, it is surely time to put this behind us and move forward, partnering with government to achieve service delivery and the goals of the NDP.

 

South Africa: A great construction industry
South Africa is fortunate to have an efficient and effective construction industry, which is the result of intelligent, coordinated and efficient systems between clients, contractors, subcontractors, suppliers and consultants, with everyone working together in the best interests of the project to achieve quality and value for money. This “tried and tested” process is the backbone of the successful rollout of infrastructure, which sets South Africa apart from the rest of Africa. As an industry, we employ tens of thousands of people and pay billions of Rands to SARS.

Unfortunately, sometimes there are those who stray from tried and tested systems with disastrous consequences. For reasons of inexperience, inadequate skills, politics or self-enrichment agendas, tender rules and systems are ignored, quality standards are compromised, resulting in long delays and money wasted due to overpayment. This is when the construction of a project can become a nightmare. Unfortunately, examples of this are occurring more often, even on high profile projects.

WBHO executes over R2,5 billion of construction worth every month. With very few exceptions, this work is all completed within budget (unless overruns are agreed with the client), on time and to a world class quality standard. I am in awe of what we achieve and, at the same time, puzzled that it is not appreciated. This applies not just to WBHO, but to all the construction companies in our sector. The British Government, for instance, chose Basil Read out of all of the international contractors at its disposal and entrusted them with the building of its airport on the remote island of St. Helena. It was finished on time, with final commissioning now taking place.

Transformation
The positive for the year is that we have maintained our Level 2 status on the revised BBBEE codes. Employment equity remains our biggest challenge in this regard and we continue to identify, train and grow black talent. Head hunting does not help matters but at least we are putting management skills back into the economy. It is satisfying to see how both our efforts in enterprise development, and those of other companies, are paying off. Tender results for projects around the country show that the number of ‘black’ contractors tendering has increased over the past few years. In our engagements with the Professional Capacitation and Development Mentoring Initiative (PCDMI) in Limpopo province, we have been pleasantly surprised by the level of experience and maturity of their engineers. Transformation denialism is therefore also puzzling.

Governance and risk management
From a governance perspective, it is pleasing to be able to report that our enhanced remuneration policies received the full support of our shareholders during the year and we believe that the thresholds, targets and KPIs we have introduced offer sufficient incentive to our senior management and are fair to our shareholders at the same time.

We have also made good progress in terms of enhancing our risk management during the period under review and risk management processes have been reviewed and simplified in order to act as a valuable management tool, as well as providing the Board with the necessary comfort that the group has assumed an acceptable level of risk in delivering its strategic objectives.

Seamless transition
During the past few years, 10 of our key directors, each with about 30 years of service, have retired. Yet WBHO has not missed a beat. This is evidence that the succession planning that is part of our culture is effective and achieves the goal of seamless transition.

Outlook
The continued strength of our order book, our professional, experienced management teams, and the quality of our people on the ground, gives me confidence that we will continue to steer WBHO through these tumultuous economic conditions.

Finally, I would like to thank our Board for their continued wisdom and support.



Mike Wylie

Chairman







MESSAGE FROM THE CEO

“We have focused our attention on our procurement processes over the last 18 months and made a substantial effort to improve the quality of our order book. As a result, I am pleased to note that we have drastically reduced the number of under-performing contracts during the year.”

It has been another year of sound achievement against a backdrop of persistently tough economic conditions and subdued activity in the mining sector. The strong growth of all our Building divisions and the solid performance from our Roads and earthworks division locally were the main highlights of our year and it is particularly pleasing to see that we have managed to generate cash in this environment. The completion of the main civil works at Kusile power station was also a major achievement. The only lowlight of the year was the disappointing performance of our civil businesses in Australia, which severely impacted our overall profitability. In the current environment, we have had to make some tough decisions, right-sizing certain businesses and shifting our focus to those key areas offering opportunities in the prevailing markets. We have made steady progress in terms of the unbundling process of Capital Africa Steel, having disposed of the quarry business during the year, and the two remaining operations continue to trade profitably.

Flexibility and diversification
Due to limited opportunities within the mining sector and a competitive road market, one of our key strategic adjustments from the perspective of the Roads and earthworks division, was to migrate from executing fewer large-scale projects to delivering Scorecard... smaller projects profitably. This required us to refine our business model, cost structures and approach when bidding and executing these types of projects. I am pleased to be able to report that we have achieved this migration satisfactorily and, in addition, that the division grew by 6% this year. While the overall exposure of the group to other African markets has not increased significantly due to lower revenue from the Roads and earthworks division in the region, the diversification of the Building and civil engineering division into the rest of Africa has progressed well, having achieved strong growth in both Ghana and Mozambique.

In Australia, our Building division in Victoria had a very successful year and delivered another commendable performance, while the divisions in the remaining states performed broadly in line with expectations. In respect of our Civil engineering divisions, having foreseen that reliance on our traditional mining and road markets would not be sustainable in the current climate, we decided to refocus on public sector infrastructure projects in the metropolitan cities and appointed a new managing director to drive this strategy. The prevailing conditions in our current markets, together with some poor project selection and execution, resulted in four loss-making contracts in the current year, which have had a significant impact on our profitability. The repositioning of the civil businesses is complete, nonetheless, and we have started the bidding process on selected projects in our new target markets.

Reputation and relationships
Our Building divisions in South Africa and Australia have both grown this year, which, I believe, reflects our growing market share, not necessarily an increase in the work available. We have only been able to achieve this growth because we have maintained our reputation for quality and consistency, which has translated into repeat clients. Our strong performance in these areas, delivering around 200 projects during the year, reflects our ability to move the resources that are continuously becoming available between projects and divisions smoothly, ensuring that the correct team for the unique needs of each project is in place right from the start.

Procurement and performance excellence
We have focused our attention on our procurement processes over the last 18 months and made a substantial effort to improve the quality of our order book. Project selection at the outset is critical to ensuring we deliver successfully and consistently and we have strengthened our tender controls and risk governance processes, both in South Africa and Australia, ensuring that projects are rigorously evaluated prior to bidding. As a result, I am pleased to note that we have drastically reduced the number of under-performing contracts during the year.

Safety and environmental management
In terms of our safety performance, it is gratifying to report that the improvement in our safety practices persisted this year and our overall LTIFR of 0,78 — down from 0,94 in FY14 — suggests to me that the attitude and behaviour of employees continues to be ever Scorecard... safety-conscious.

Managing costs
With margin pressure evident, cost containment has been a priority this year. Not only did we embark on a process of right-sizing our civil businesses, both locally and in Australia, but we have also extensively scrutinised our overhead structures across the group and implemented measures to curtail costs. Our overhead cost as a percentage of revenue is at record lows.

Difficult decisions
Due to its cyclical nature, one of the hardest tasks in the construction industry is the continuous alignment of the capacity of the business with the prevailing conditions. One of our strengths is how we manage to keep our core teams together and work hard to “never let a good guy go”. Right-sizing is inherent to our industry, however, and, when forced to do it, we are fully cognisant of the impact it has on our people and focus on ensuring it is done in as sensitive, ethical and fair a manner as possible. Regrettably, shrinking markets amid the current economic conditions have forced us to reduce our overall capacity within specific divisions and businesses during the year.

Outlook and prospects

For our Building divisions in South Africa and Australia, the short-term outlook remains promising. The order books of these divisions contain strong horizons through to 2017 and around 80% of our expected work for next year has already been secured.

Trading conditions are still difficult for both the Roads and earthworks and Civil engineering divisions, but there are a number of opportunities within the market and, should these materialise as expected, our short-term performance could prove satisfactory. It is clear though, that activity levels have plateaued and in the short to medium term any growth is likely to remain challenging.

In our industry, it is always difficult to see too far into the future, but having retained a presence in key strategic sectors and geographies, we are well placed to take advantage of the commodity-related economic cycle when it turns. We also see the energy sector as a key long-term market and an area with future growth opportunities. Having successfully delivered projects in the coal, gas and solar power segments of this sector, we have gained the necessary experience, credibility and knowledge to create value for our clients. To focus on these opportunities, we have further strengthened the capacity of our Projects team during the year.

Appreciation

I would like to express my heartfelt thanks to all our employees who have, once again, demonstrated their loyalty and commitment to WBHO in a challenging environment. To our clients and other stakeholders we, as WBHO, are grateful for your continued support and value your faith in our ability and we look forward to partnering with you into the future.

Louwtjie Nel


Chief Executive Officer

OPERATIONAL REVIEW

Performance
Revenue from continuing operations increased by 15% from R25,7 billion to R29,5 billion for the year ended 30 June 2015. Growth of 23% from Australia and 21% from the rest of Africa underpinned this performance, however moderate growth of 3% was also achieved by our local South African businesses.

The 23% decrease in operating profit before non-trading items from R1 billion to R793 million is primarily due to the margin of 0,1% (2014: 2%) achieved in Australia for the year, resulting in a decrease in the overall margin from 4% to 2,7%. Four loss-making projects within the Australian civil businesses of the group, combined with poor trading conditions in general, were the main contributors behind this disappointing performance. While the operating profit in respect of the African-based businesses of the group improved marginally from R779 million to R783 million, margins in both South Africa (FY15: 4,3% vs FY14 4,8%) and the rest of Africa (FY15: 9% vs FY14: 9,4%) marginally decreased as a result of the heavier weighting of work-on-hand toward building and roadwork.

A number of initiatives were implemented or continued during the year in pursuit of delivering the strategic objectives of the group:

Procurement and execution excellence
Following the challenging market conditions experienced previously within building markets and currently within civil markets, the group has experienced various under-performing contracts, defined as those projects which do not achieve tendered margins. These contracts impact financial performance as well as having the potential to harm client relationships and the overall reputation of the group. The reasons for such under-performance can generally be attributable to the quality of the bid submitted, the operational management of the project itself or both.

A review of the procurement processes of the group, both locally as well as in Australia, was undertaken and a number of controls either introduced or strengthened. These included: stringent project evaluation early on, rejecting marginal and undesirable projects; strict enforcement of the authority level matrix governing the projects values that various internal decision-makers are authorised to approve; particular focus on contractual conditions outside of the norm; thorough reviews of project risk assessments and any related mitigating factors, price adjustments or qualifications; and lastly, careful resource allocation to ensure that sufficient management and operational teams are available at the outset of a project.

From an execution perspective, further entrenchment of, and adherence to, the quality processes and policies of the group was instilled. Quality is monitored through site audits, measurement of the cost of re-work and waste as well as obtaining feedback from clients and consultants through surveys and management interaction. Pleasingly, the cost of re-work and waste decreased by 63% compared to the previous year and client satisfaction remained close to the group’s target of 90%. The group retained its ISO 9001 certification during the year. These combined initiatives resulted in no under-performing projects being secured during the current year.

Capacity and talent management
Given the high levels of work-on-hand within the Building divisions of the group, particularly in Australia, capacity management has been a key priority. In addition to careful resource allocation at tender stage, targeted recruitment has been necessary to sustain activity levels. Conversely, declining order books within our civil engineering divisions required a reduction in capacity. Further details are included within the accompanying individual divisional reports. This year the group invested R48,5 million (2014: R40,5 million) in our employees’ career progression through various training and skills development initiatives across all skill levels.

Safety and environmental management
Safety management remains under continuous focus within the group. The “Visible Field Leadership” pilot programme introduced in the Roads and earthworks division in FY14 has proven successful and will be extended to other divisions in the year ahead. The initiative entails on-site peer reviews of projects by senior site management and demonstrates visible accountability and a proactive attitude from the top down in respect of safety management and awareness. Our safety awareness campaign, which has been in place for some time, quickly distributes information across divisions regarding safety incidents occurring on our sites as well as the industry at large. In so doing, awareness is raised as to the root causes of incidents and recommendations and instructions in respect of remedies are communicated to prevent similar incidents occurring on other sites. The improved medical fitness programme that was introduced in FY14 is now firmly in place and enables the group to proactively identify and manage unfit or unwell employees as well as ensuring all employees and subcontractors are medically examined on a regular basis. The successful outcome of these initiatives is evident in the improved safety statistics achieved this year where the lost-time injury frequency rate (LTIFR) in respect of the African based operations improved from 0,84 to 0,75 and the LTIFR in respect of our Australian operations improved from 1,6 to 0,97, resulting in an overall improvement in the group LTIFR from 0,94 to 0,78.

Through our ISO 14001 certified environmental management system, we monitor, measure and report upon the environmental impact of the group as well as ensuring compliance with all relevant laws and regulations. Environmental risks currently receiving focused attention include water pollution, waste management and erosion and encroachment. No reportable environmental incidents occurred during the year.

Transformation and localisation
The Department of Trade and Industry (DTi) has set a deadline of 30 October 2015 to table new Construction Sector Codes, although in terms of the current gazette the Construction Sector Codes are applicable until 2016. Having recently conducted our empowerment audit, our status as a Level 2 contributor will be retained until October 2016. WBHO remains at the forefront of negotiating the new Construction Sector Codes as the convener of the Established Sector membership organisations, and is fully committed to the process.

Employment equity remains one of the local construction industry’s most significant challenges. With a shortage of engineering skills in general, qualified and talented black individuals are in particular demand and the constant loss of black employees as they approach senior management positions is of great concern, albeit testament to the training received at WBHO. Through open dialogue, clear career development plans and comprehensive skills development, WBHO strives to create attractive opportunities with the aim of retaining our talent more permanently.

Localisation is also becoming far more prevalent in our neighbouring African countries. Governments limit the number of work permits available to expatriate employees in order to promote employment of locally available skill sets. WBHO embraces the employment, training and development of local residents. We have enjoyed specific success in Zambia, where just four years after maintaining a permanent presence in the country, we have developed our local teams to the extent that only 8% of the workforce are expatriates. The group also employs a large number of local employees in Mozambique and subcontractors in Ghana.

Further details in respect of our safety, environmental and quality management as well as additional information in respect of our progress in terms of transformation and social economic development are available online at www.wbho.co.za/investors, as part of the supplementary information to the integrated report.

Performance
The growth of 5,5% achieved in the current year was mostly derived from strong growth in the rest of Africa from both the Building and Civil engineering divisions. Revenue from the rest of Africa increased to 17% (FY14: 9%) of overall revenue as the division persists with its long-term strategic objective of higher exposure to these markets. The high activity levels achieved by the local building divisions in FY14 were sustained throughout FY15, where we continue to improve market share on the strength of our proven track record for delivery and strong client relationships. In all, 88% of building work this year related to the private sector, of which 78% was negotiated on the basis of our brand and reputation.

Operating profit increased by 7,0%, with margins increasing slightly from 4,7% to 4,8% due to the increased component of higher margin African and civil engineering projects.

Capital expenditure increased by 40% to R75 million in line with increased activity levels.

In Ghana, the completion of the West Hills and Junction malls together with ongoing construction at the Achimota mall, awarded toward the end of FY14, resulted in 31% growth over the prior year. In Mozambique, the construction at Ressano Garcia, the gas-fired power station, in conjunction with the Projects and Roads and earthworks divisions of the group, along with various smaller-scale industrial projects in Zambia, resulted in the good growth from the African Civil engineering divisions.

In Gauteng, having successfully delivered a number of shopping centres in the first six months of the year, focus has shifted onto the execution of a number of large-scale projects now under construction. These include new phases at both Menlyn Maine and Alice Lane in Tshwane and Sandton respectively, serviced accommodation for the Department of Statistics, secured through the Projects division of the group, and new offices for Discovery and Price Waterhouse Coopers. Construction at the Mall of Africa shopping centre, located at Waterfall, is ongoing and due for completion in the first half of FY16.

In the coastal regions, lower revenue from the Western Cape, following the completion of the Kathu photovoltaic solar farm in the Northern Cape, was offset by growth from KZN and a vastly improved performance from the Eastern Cape. In the Western Cape, activity at the V&A Waterfront in Cape Town included ongoing construction of the Museum of Contemporary African Art with an accompanying boutique hotel above, a new multi-storey parkade and new commercial offices and residential apartments, while in the city centre construction of the structure for a new private hospital is approaching completion. In KZN, development at the Umhlanga Ridge consisted of a number of commercial offices while the public hospital in Empageni is almost complete. In the Eastern Cape, two large warehouses at the Coega development zone were completed, which, together with further construction at the Greenacres shopping centre, formed the bulk of the workload for the division in FY15.

Construction of the main civil works at the Kusile power station is finally complete and the re-access works has now commenced behind the mechanical and electrical contractors. An agreement has been reached with Eskom in respect of the variations and outstanding claims relating to the project. During the year, the division also completed construction of the ancillary mining infrastructure for the coal processing and handling plant at Glencore’s Tweefontein mine, as well as a new malting plant for SAB.

In terms of capacity management, the building divisions have employed 16 new engineers to support increased activity levels, while the low volume of work-on-hand within the Civil engineering division and the release of a significant number of resources from Kusile necessitated the right-sizing of the overall capacity of the division which has been reduced by 24%. R17,5 million (2014: R14 million) was invested in training and skills development programmes during the course of the year.

The safety performance of the division declined marginally, with the LTIFR increasing from 0,88 to 0,98. While the safety statistics relating to WBHO employees actually improved, the deterioration in the overall LTIFR was due to an increase in the number of accidents relating to subcontractors. Subcontractor employees are included in all WBHO on-site safety processes, which include compulsory attendance at safety risk assessments and toolbox talks. Site management work closely with our subcontractors in order to educate and improve their own safety management and the safety files of all subcontractors are reviewed prior to appointment on each project.

Performance
The 5,6% growth achieved by the division is highly commendable given the weak trading conditions across global civil markets. The South African business units performed strongly, delivering growth of 23% and reflects the successful redirection of resources employed to mitigate reduced activity levels in the rest of Africa and the mining sector in general.

Operating profit decreased by 8,3% from R414 million in FY14 to R380 million in the current year, despite the growth in revenue. The resulting decrease in margin from 8,3% to 7,2% is a result of the current mix of work, which includes increased exposure toward lower margin roadwork and reduced activity levels in the rest of Africa.

Capital expenditure increased by 23% to R188 million. As part of the current conservative policy toward capital expenditure, the useful lives of plant have been extended over recent years. The increase in capital expediture is due to a larger number of plant items requiring replacement in the current year as the fleet has not been expanded.

A significant portion of the roadwork under construction this year consisted of three bus-rapid transport projects in Gauteng and KZN. Located within the city centres of Sandton, Durban and Pinetown, these projects are extremely intricate, where the relocation of existing underground services and access to adjoining properties have presented a number of challenges. The provincial road market tapered off sharply during the year, and procurement of replacement work in the second half of the year was a key concern for Edwin Construction, which is heavily reliant on this sector. A number of projects have been secured, however, following provincial budget allocations in March of this year. Roadspan’s surfacing teams have performed well locally, as well as partnering with the Mozambican teams in respect of the EN4 rehabilitation for TRAC.

Energy related infrastructure projects also formed a sizable volume of work executed this year, comprising the construction of a coal stock yard and ash dam at the Kusile power station and an additional ash dam at the Komati power station.

One thousand rural houses are currently under construction in KZN and the division has now delivered a total of 11 500 homes for rural communities, of which we are especially proud.

Within the Southern African Development Community (SADC), the bulk of the remaining mining projects of the division were successfully completed during the year, with very little replacement work derived from this sector.

Activity in Botswana dropped off significantly in FY15 following the completion of the problematic North South Carrier Pipeline and very few available mining opportunities. Conversely, activity levels in Mozambique improved over the period, where the division secured a number of mining and roadwork contracts.

In West Africa, the reduced activity levels, associated with the smaller scale projects being secured, improved over the prior year, however, the division is yet to secure an anchor project in the region in the current climate.

The LTIFR of the division decreased from 0,74 to 0,36 this year and this is largely attributable to the Visible Field Leadership initiative introduced in FY14.

Performance

In aggregate, the group achieved strong growth of 23% in Australia, which comprised 42% growth from the Building divisions and a 29% decline in revenue from the civil businesses.

Operating profit, which decreased from R250 million in FY14 to just R11 million this year, was severely impacted by four loss-making contracts within the civil businesses and the subdued trading conditions prevalent in civil markets. The overall margin achieved dropped to 0,1% (2014: 2%) as a result.

Capital expenditure in Australia relates primarily to the civil businesses and, in light of the prevailing market conditions, was heavily curtailed from R127 million in FY14 to R45 million in FY15.

The Australian Building divisions began the year with a sizeable amount of work-on-hand following significant growth in the order book over the course of FY14. Although growth was generated across most of the states, it was centred in Victoria where a number of residential towers, retail shopping centres and commercial offices, including a 92 level apartment tower (our highest yet) and the Eastlands shopping centre, underpinned an extremely strong result from this region. The Brisbane business is now well established and profitable and the main focus has been on delivery of the two major projects secured last year, namely the Toowoomba shopping centre for an existing client and the Iglu student accomodation project in the Brisbane CBD. Moderate growth was achieved in Sydney, as the group seeks further exposure to this improving market and as Scorecard... projects are delivered, client relationships and brand awareness continue to be strengthened. Revenue from Monaco Hickey was again lower in FY15 and in response to the subdued conditions in the healthcare and pharmaceutical market, management have expanded the target markets of the company to include smaller scale commercial projects in order to improve activity levels. Activity in Western Australia also decreased during the year as the impact of reduced mining activity continues to be felt.

In response to the lack of opportunities in their traditional markets, the civil businesses have looked to other sectors as a source of projects. Gaining entry to new markets takes time, however, and activity levels were not sustained as revenue for the year decreased significantly. Reduced activity levels and fewer available opportunities increase pressure to secure work, which can result in poor project selection when evaluating potential bids. This, together with an element of poor project execution, played a role in the losses incurred on projects this year. Of these projects, three were completed in the second half of the year, with the remaining project due for completion in October 2015. Steady progress has also been made in resolving the claims relating to these projects, all of which have been finalised at the date of this report, with no further losses incurred.

The contrasting market conditions within the building and civil engineering markets have meant capacity management has been a priority for the Australian management team this year. In addition to bolstering existing teams within the Building division, new teams have also been created to support the recent entry into new markets. With many new team members, initiatives to communicate and share the values and culture of Probuild have also been implemented. Both WBHO Civil and Probuild Civil were down-sized during the course of the year in accordance with anticipated activity levels within their markets, and subsequently rebranded as WBHO Infrastructure.

The safety performance in Australia continues to improve each year and the LTIFR of 0,97 (2014: 1,6) achieved is below the target of 1,0 set at the outset of the year.

Performance

Revenue from continuing operations (Reinforced Mesh Solutions (RMS) and 3Q Concrete) improved significantly over the prior period. The growth of 21% achieved is attributable to an increase in the number of urban building projects secured, despite a general increase in competition within the market. While operating profitability showed some improvement as well, margins remained low.

Locally procured steel has, and continues to face strong competition from cheaper Chinese imports which impacted margins within RMS. The decrease in the price of locally produced steel over the past twelve months has done little to combat this, although the imposition of a proposed 10% tariff duty may assist in the future. In 3Q, margins also remained under pressure due to excess capacity. This environment is likely to become Scorecard... competitive as Nigerian and Chinese companies enter the market.

Production at the pipe factory in Mozambique, Capital Star Steel (CSS), ceased in December 2014 and in March 2015, Capital Africa Steel signed an exclusive sale of shares agreement with a prospective purchaser. On 1 June 2015 the purchaser signed a heads of agreement with the banks in respect of restructuring the debt within CSS and the detailed funding arrangements are currently being negotiated. The quarry business, Bela-Bela, was disposed of during the year.

Following the successful completion of the Kathu 75MW solar energy plant in FY14, focus this year has been on the management and delivery of two large-scale and complex projects currently under construction, namely serviced accommodation for the Department of Statistics and a gas-fired power station in Mozambique. Both projects are on programme to meet their completion dates, at which time the related annuity income streams will begin to flow via the concession companies in which the group has an interest.

PERFORMANCE SCORECARD


FLEXIBILITY AND DIVERSIFICATION

Given that the construction environment is characterised by continually changing market conditions, we believe that flexibility and diversification are key attributes for success. Being flexible means our strategy is fluid and adaptable, thus enabling the proactive alignment of our procurement activities with those markets offering the best value. We strive to maintain a low, fixed cost base in higher risk territories, providing the flexibility to move easily between them in response to prevailing conditions. The implementation of a long-term diversification strategy across different geographies and industry sectors, and a presence across all levels of the construction value chain, facilitates our growth objectives, mitigates risk and reduces earnings volatility. Exposure levels to individual sectors and geographies are carefully managed over the short to medium term.




PROCUREMENT AND EXECUTION EXCELLENCE

Procurement and execution are simultaneous, continuous and interlinked processes within the group. The quality of submitted bids has a direct impact on the operational performance of the group. We strive to offer clients the right price at fair margins and an acceptable level of risk for all parties. During the procurement process, we seek to identify and secure those projects that will achieve our strategic objectives and create value for our stakeholders. During the execution or operational phase that follows, the brand and reputation of the group is created. A consistently high-quality experience for clients generates credibility and repeat work, and, in turn, enhances our ability to secure future projects.


REPUTATION AND RELATIONSHIPS

A visible profile in the marketplace and our reputation for reliability, consistency and value-for-money are critical to developing and maintaining close relationships with clients and being able to tender on large projects successfully. Our reputation stems not only from delivering a project to the highest standards, but by providing an all round “quality experience”. This is achieved by our commitment to “Execution excellence” and complemented by entrenching our culture and commitment to doing things “the WBHO Way” amongst our teams. The WBHO Way embodies a set of shared values, including reliability, delivery and a focus on building relationships, which together underpin our motto of being “a pleasure to do business with”.






CAPACITY AND TALENT MANAGEMENT

A key element of construction is people management: as demand fluctuates with economic cycles so to do our resourcing requirements, meaning we are in a constant process of right-sizing our teams either upwards or downwards. Robust recruitment processes and sound working relationships with labour unions are critical in achieving this. Active and new projects seldom end and begin in a linear fashion, while the number of workers needed at different stages of projects varies significantly as well. Handling the resulting lags or overlaps we call “managing the gap”, making sure the right skills and manpower are constantly available.

Providing our employees with tangible career development is crucial in earning their loyalty and commitment to “the WBHO Way” as well as achieving our “Execution excellence” and “Transformation” strategic objectives. Through our bursary schemes, inductions, on and offsite training initiatives and management development programmes we aim to equip our personnel with the requisite knowledge and skills at each of the key stages in their growth and development while at the same time addressing the serious skills shortages faced by the construction industry as a whole.






SAFETY AND ENVIRONMENTAL MANAGEMENT

Construction is an inherently dangerous, high-impact activity. As an international contractor with operations across Africa and Australia, it is imperative that we maintain the very highest health and safety standards, not only to ensure employee and subcontractor welfare, morale and productivity, but also because a proven safety record is essential in procuring work in some of our key markets, such as mining. We also have a moral and legal obligation to minimise our impact on the environment in the areas within which we operate. Non-compliance with environmental legislation could harm our reputation and result in legal and financial penalties.






LOCALISATION AND TRANSFORMATION

These objectives have become key issues on government agendas across all the geographies in which we operate, in particular the transfer of skills and economic benefits to the previously disadvantaged and local inhabitants, as well as representation within our management structures. In an industry dependent on a significant proportion of public sector spending, we understand this to be fundamental to our long-term sustainability.















THE CFO’S FINANCIAL REVIEW

“Our Roads and earthworks and Civil engineering divisions have adapted well to the prevailing market conditions, particularly the lack of mining sector opportunities, by targeting those geographies and sectors offering value and have delivered growth in a difficult environment.”

Supplementary download: "The key financials"


The group delivered disappointing operating results this year, severely affected by the performance of the Australian civil businesses. Strong overall performances from the Building divisions of the group were negated by the impact of weak conditions within civil markets globally. Having said that, our Roads and earthworks and Civil engineering divisions have adapted well to the prevailing market conditions, particularly the lack of mining sector opportunities, by targeting those geographies and sectors offering value and have delivered growth in a difficult environment.

The process of right-sizing our civil businesses both in South Africa and Australia, undertaken in response to the persistently weak demand from the global mining sector, was completed in the second half of the year with the overall costs associated with this restructuring amounting to R31 million.

Regrettably, the impact of these challenging conditions on the results of the group extended beyond our operating performance. The current poor performance of the Australian civil businesses, together with what remains a negative outlook for future earnings, necessitated an impairment of all the goodwill in these businesses, amounting to R50 million. Further impairments of goodwill, amounting to R57 million in respect of Monaco Hickey, a business focusing on the extremely competitive Australian pharmaceutical and healthcare markets, and R9 million in respect of Capital Africa Steel, were also recognised. In addition, the shrinking number of available civil projects in Australia has resulted in an over-supply of plant and a steep decline in market values. Impairments of R54 million have been recognised to reduce the carrying amounts of affected items of plant and equipment in Australia to their net realisable values.

These effects culminated in a decrease in earnings per share from continuing operations of 28,5%. Headline earnings per share from continuing operations, which excludes the effects of the impairments, decreased by 13,5%. On a positive note, cash balances increased by 51% to R3,9 billion and this enabled the group to maintain its gross dividend of 368 cents (2014: 368 cents), despite the poorer financial performance.

Revenue growth
The group surpassed its target of 10% growth in the current year, achieving overall top-line growth of 15%. Growth of 42% from the Australian building divisions, supported to a large extent by an exceptional year in Victoria, underpinned this performance. Overall growth from Australia amounted to 23% as revenue from the Australian civil businesses fell sharply by 29%. The growth of 21% in the rest of Africa was pleasing and reflects delivery of our strategy to increase the exposure our Building and civil engineering division to this region. Our local businesses grew by 3%, influenced by a heavier weighting of local projects within our Roads and earthworks division and ongoing strength in local building markets.

Operating margin
The decrease in the overall operating margin from 4% to 2,7% was predominantly due to the margin of 0,1% achieved in Australia. Locally, the operating margin decreased from 4,8% to 4,4%, and from 9,4% to 9% in the rest of Africa, both as a result of an increase in lower margin building work in general, and to a lesser to extent, impacted by declining margins within the Roads and earthworks division. The Construction materials businesses, 3Q Concrete and Reinforced Mesh Solutions, were both profitable, achieving a combined margin of 2,6%.

Share-based payments expense
In accordance with the revised remuneration policy of the group, a long-term incentive scheme for executive directors and senior management, The WBHO Share Plan, was implemented during the year. This, together with additional share options issued from the WBHO Management Trust, resulted in a share-based payment expense of R2 million, pro rata for two months out of twelve, in the current year. The balance of the share-based payment expense of R34 million relates to the existing BEE and management share schemes in place. During the year, 456 006 treasury shares were acquired by the WBHO Management Trust for use in future share schemes at a cost of R52 million.

Taxation
The effective tax rate increased to 33%, primarily as a result of the non-deductibility of the impairments to goodwill in Australia.

During the year, the group disposed of its interests in Bela-Bela, a quarry in Botswana, as well as Dywidag Systems International (DSI). The results of Bela-Bela have been disclosed as part of discontinued operations in the current year and the comparative information has been restated in accordance with IFRS. DSI had been disclosed as a discontinued operation at 30 June 2014.

The amounts reflected under discontinued operations in FY15 represent the final trading of Capital Star Steel (CSS), the results from Bela-Bela prior to disposal, as well as any gains or losses recognised on the actual disposals of the various businesses. Foreign exchange gains amounting to R147 million have been included in the trading of CSS, arising from the functional currency of CSS being US dollars.

The carrying amount of property, plant and equipment decreased by 8,3%, which reflects the conservative strategic approach of the group toward capital expenditure in the current climate, and takes cognisance of the outlook for the mining sector and a heavier weighting toward roadwork within the Roads and earthworks division. The replacement of plant, in accordance with the plant philosophy of the group, continues to be maintained to ensure operational efficiency. A budget of R260 million has been approved for FY16.

The increase in investments relates to a further investment of AU$6 million in the Caulfield property development in Australia in which the group has a 30% interest. Probuild is currently constructing Precinct 1 of the development. All of the housing units in this phase of development have been sold and it is expected to be complete by September 2016.

The group has an interest in three associated companies, namely Dipalopalo, a concession company responsible for serviced accommodation of the new building for the Department of Statistics, Gigawatt Power, the concession company, that will provide electricity generated from a new gas-fired power station (currently under construction in Mozambique) and Gigajoule International, a shareholder in the Matola Gas Company, which sells and distributes gas in Mozambique.

In the current year, equity of R67 million has been invested within two of the concession companies of the group. The income from associate of R46 million recognised this year relates to the share of income of the group in respect of Matola Gas Company and the rental income received by Gigawatt Power from Aggreko. No income has been recognised in respect of Dipalopalo during the year as the project is still in the construction phase.

Cash generated from operations increased substantially during the year due to a R1,1 billion working capital cash inflow. This reflects the heavier weighting of building work within the project portfolio of the group and three major projects, which have favourable milestone payment regimes. As a result, cash balances have increased by 51% to R3,9 billion, excluding the overdraft of R348 million (2014: R301 million) included within the disposal group held-for-sale.

Cash balances amounting to R1,7 billion are held in South Africa, an increase of R515 million from FY14, while R2,3 billion (2014: R1,5 billion) is held offshore, of which 55% relates to Australia.

The following graph illustrates the movement in cash balances over the year:

The group provides mezzanine financing to key clients where opportunities exist to unlock developments and procure work.

Interest is levied at rates higher than what is achievable with financial institutions and acceptable security is obtained. increase in long-term receivables in the current year represents additional funding of existing mezzanine financing arrangements. No new developments have been entered into and the funding of one project was repaid.

Return on capital employed (ROCE) has been introduced as a measure of performance in the current year. The target of 20% is aligned with the target set in respect of executive director remuneration. The ROCE of 18% achieved in the current year did not meet the target of 20% due to the poor profitability from Australia.

The following graph illustrates the movement in equity over the year:

In addition to the right-sizing of the Australian civil businesses, management’s interests in both WBHO Civils and Probuild Civils were acquired at a cost of AU$1,0 million. The group also increased its interest in Probuild Constructions in terms of the Contexx purchase agreement. A final settlement of AU$3,6 million was made in terms of the WBHO CARR purchase agreement. A net debit of AU$5,1 million was made to equity in respect of the above transactions.

Long-term liabilities represent capitalised finance leases over large plant items. The decrease represents payments against existing leases and the reduced capital expenditure discussed previously. The significant increase in net current liabilities relates to sizeable subcontractor and creditor accruals on major projects. The group has secured sufficient guarantee facilities with various financial institutions to cater for future growth prospects. The unutilised portion of these facilities at 30 June 2015 amounts to R3,1 billion.

SHARE PRICE PERFORMANCE AND MARKET CAPITALISATION
The share price closed 22,5% down on the prior year at R99,20 (2014: R127,98) on 30 June 2015. This decline is indicative of the current market sentiment towards the construction industry given the prevailing market conditions. Despite this decline, the share price of WBHO continues to outperform the Construction and Materials Index. As a consequence of the lower share price, the market capitalisation of the group declined by R1,9 billion to R6,5 billion (2014: R8,4 billion).

OUTLOOK
The group enters the new financial year with a healthy order book of R37,4 billion. The local Building and civil engineering division is well placed with 78% of FY15 revenue secured for FY16. While the order book of the Roads and earthworks division has declined by 25%, sufficient work has been secured subsequent to year-end to offer a reasonable outlook for the year ahead. The heavier weighting toward roadwork is, however, expected to negatively affect margins over the short to medium term. At the time of writing, three of the four loss-making projects in Australia have been completed and the claims negotiations on all the projects have been finalised. As the Australian order book is heavily weighted toward building work, with only 3% relating to civil projects, we anticipate normalised building margins to be achieved in FY16. Due to the combination of Scorecard... than 50% of group revenue being derived from Australia, a substantial increase in the volume of building work in general and aggressive competition in the Roads and earthworks sector, we expect future margins to remain at the lower end of our targeted range of between 3% and 4,5% over the medium term.

Charles Henwood

Chief Financial Officer s