Road freight: Small enterprises make inroads

Lukewarm activity in infrastructure investment looks set to carry into next year with major players treading a fine line between growth and profitability. The completion of existing projects and global financial crisis-related delays to investment in start-up projects in the mining sector have reduced the number of large-scale projects underway. This has put pressure on industry heavyweights seeking to sustain the growth achieved at the height of the previous cyclical upswing.

As its name implies, the non-building construction industry engineers infrastructure such as roads, railways, refineries, mines, water supply, telecommunication facilities and smaller on-site work including boilers and heavy machinery. The industry’s major players represent an estimated 25% to 30% of annual industry revenue. These firms mainly rely on lucrative large-scale projects as a source of income. High levels of technical expertise and capacity set them apart from smaller firms who do not have the resources to complete complex projects.

Major players with a proven track record of projects have managed to stand out and exert industry dominance, winning tenders frequently in the form of consortiums. By pooling skills, firms increase the competitiveness of tenders and reduce the risk of being excluded. It is not unheard of to have more than one subsidiary of a firm being involved in competing tenders for a project, as in the case of Victoria's $4.8 billion desalination plant. Thiess and John Holland, both subsidiaries of Leighton Holdings, bid for the project, with Thiess winning it in the end.

Vast resources are needed to run large-scale projects. All four firms are highly geared at between 60% and 70% (total liabilities/total assets). The current slump in projects has forced firms to look for additional sources of capital for continued growth. Lend Lease has recently completed a capital-raising exercise while Bilfinger Berger, the only private company among the four, will soon be floated on the ASX.

Lend Lease was significantly affected by the economic downturn, posting a large net loss of $653.6 million primarily due to writedowns and loss on property asset values. Lend Lease was not alone with three of the four major players delivering lower profits after tax. Half-yearly reports on these companies have indicated better results coming into the current reporting year; but, final year results are unlikely to resemble the double-digit growth figures of the past.

Despite the dip in profits, Australia's largest contracting firm Leighton Holdings has seen continued growth over the previous five years with a total revenue growth of 21.9%. Now majority owned by German parent Hochtief AG, Leighton has grown both organically and through acquisition. Through its subsidiaries, Leighton will be a beneficiary of key projects including the Gorgon gas project, Wonthaggi desalination plant and Prominent Hill mine.

Bilfinger Berger is expected to expand aggressively in the coming financial year and will be playing catch-up with its German rival with an imminent IPO exceeding $AUD 1billiion. Currently smallest among the four major players, the float will provide a competitive platform for Bilfinger Berger to bid on an increasingly shrinking number of new projects.

IBISWorld forecasts the industry to rebound from 2011-12. Firms will poise themselves for this next period of growth through acquisitions and strategic partnerships.

Source: IBISWorld