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Wilson Bayly Holmes-Ovcon (WBO) will be the stock in focus: (Price at time of writing: R115.56 (15 May 2016))
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Background and overview of Wilson Bayly Holmes-Ovcon
Wilson Bayly Holmes Ovcon is one of the largest construction companies in Southern Africa. They are active in the building construction, civil engineering, roads and earthworks industries. They have a subsidiary in Australia called Probuild who's headquarters are in Melbourne.
A few of WHBO's projects they were involved in include:
A few of WHBO's projects they were involved in include:
- Mall of the North
- Peter Mokaba Stadium
- Kusile Power Station
- King Shaka Airport
- Cape Town Stadium
- Mall of Africa
- Moses Mabhida Stadium
Scroll over or click on the funnel chart to get more details of WBO's latest financial results
Financial review:
The net profit margin achieved by Wilson Bayly amounted to 2.44%. Then again, construction companies have never been known for achieving massive margins. This is partly due to the fact that there is a lot of competition out there and in order to get contracts, margins are sacrificed and as a consequence construction firms have hardly any meat on the bone left one everything is said and done.
The pie chart below shows the contribution of Wilson Bayly's operations to their revenue and pre-tax profit earnings (based on division).
From the pie chart above its clear the fatter margins are earned at their building and civil engineering divisions, which contributes 25% to turnover but 41% of pre-tax profits. Margins at the Australian operations seems extremely tight though, as the Australian operations brings in 56% of the revenue, but only accounts for 26% of pre-tax profits.
The pie chart below shows the contribution of Wilson Bayly's operations to their revenue and pre-tax profit earnings (based on Geography).
It is clear from the pie charts above that the bulk of WBO's pre-tax profits comes from their South African operations, even though the bulk of their revenues comes from their Australian operations. So the question is, are operating conditions in Australia really tough and margins tight, or are South African consumer being ripped off with excessive margins being achieved in South Africa? The advantage of operations in Australia is the fact that any exchange rate weakness will feed through to better Rand earnings for WBO.
WBO's headline earnings per share came in at R6.32 placing WBO's on a PE of 9.14 (which is not very demanding). Usually lower PE ratios implies the market is expecting lower/slower future earnings (making the current PE low, but forward PE might be a lot higher, if market expectations of lower earnings are met). Cash generated per share came in at R17.60 per share. Which is substantially higher than their earnings per share.
WBO currently has a order book of R35billion, This is down by 5.4% from their June 2015 order book of just over R37billion. Sign of tough economic times? The fact that new building projects are not being commissioned?
WBO's headline earnings per share came in at R6.32 placing WBO's on a PE of 9.14 (which is not very demanding). Usually lower PE ratios implies the market is expecting lower/slower future earnings (making the current PE low, but forward PE might be a lot higher, if market expectations of lower earnings are met). Cash generated per share came in at R17.60 per share. Which is substantially higher than their earnings per share.
WBO currently has a order book of R35billion, This is down by 5.4% from their June 2015 order book of just over R37billion. Sign of tough economic times? The fact that new building projects are not being commissioned?
A few financial ratios to mull over forWBO (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 1.76 (more than 2 shows high levels of financial leverage).
- Current Ratio: 1.24 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities)
- Quick Ratio: 1.22 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 2.57%
- Return on Equity (ROE): 7.09%
- Net Profit Margin: 2.44%
- Dividend Yield: 2.34%
A worry with regards to WBO's is the size of their current liabilities. In particular the trade and other payables worth R4.7billion (money WBO owes to suppliers of good and services rendered for the company). This increased from R3.9billion to R4.7billion (or just over 20% ) in 12 months. Question is whether interest is being charged on these outstanding amounts? If so potential WBO's shareholders needs to consider this. If interest is charged on these outstanding amounts, more money will be spent on interest and therefore less money available for say, dividend payouts.
In addition to this, trade and other receivables (I.e. money owed to WBO for services rendered), increased from R3.85billion to R4.36billion (or about 12%) in the last 12 months. WBO's needs to ensure this remains in check, as the bigger this number gets, the harder it will be for WBO's to collect all outstanding fees, and the more people they will have to employ to try and collect outstanding debts.
In addition to this, trade and other receivables (I.e. money owed to WBO for services rendered), increased from R3.85billion to R4.36billion (or about 12%) in the last 12 months. WBO's needs to ensure this remains in check, as the bigger this number gets, the harder it will be for WBO's to collect all outstanding fees, and the more people they will have to employ to try and collect outstanding debts.
Valuation:
Based on its current financial results, the market WBO's operates in, their declining order book and ballooning trade and other payables (and receivables), we value WBO's between R191.20 and R193.20. We therefore feel that WBO' offers significant value at their current price.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question