The heat has been turned down temporarily on the booming non-building construction industry.
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.
The approval of your comment is at the discretion of this article's publisher. Write your comment with the following in mind to ensure the highest likelihood of it being approved: - No promotional undertones - No use of profanity - Good spelling, grammar and layout - Check punctuation, language and missing words - No use of aggression - No unsubstantiated claims
We reserve the right to remove comments at our discretion. Your name is used alongside Comments.
Have your say...
The approval of your comment is at the discretion of this article's publisher. Write your comment with the following in mind to ensure the highest likelihood of it being approved:
- No promotional undertones
- No use of profanity
- Good spelling, grammar and layout
- Check punctuation, language and missing words
- No use of aggression
- No unsubstantiated claims
We reserve the right to remove comments at our discretion.
Your name is used alongside Comments.