Watpac Packing On The Work
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Although a two-year holiday from profits has hurt long-term shareholders – Watpac is returning minus 5.5% a year over five years and minus 8.3% a year over three years – the stock has rebounded strongly in the last 12 months, generating a total return (including the resumption of dividends) of 57.1%.
Queensland-based construction, mining services and property development company Watpac Limited (WTP) can feel fairly satisfied with its last nine months.
After falling into net loss in both FY12 and FY13 – to the tune of $50.2 million and $4.7 million respectively – Watpac surged back into profitability in the year ended 30 June 2014, reporting a net profit of $17.9 million.
The recovery started at the interim result earlier this year, when Watpac reported a half-year net profit for the six months to December 2013 of $7.4 million, more than five times the 2012 interim profit.
The interim fully franked dividend of 2.5 cents a share for the half-year ended December 2013 was the company’s first dividend payment since March 2012. The final dividend of 3.5 cents a share announced with the FY14 result was the first time a final dividend has been paid since September 2011.
The final dividend was only 12.5% franked, however, because Watpac did not have enough franking credits. The company told shareholders that unfranked dividends may be necessary for the next 12 months.
The group lifted work on hand to $1.84 billion as at 30 June 2014, up from $1.34 billion a year earlier. Cash on the balance sheet stood at $190.2 million.
Watpac halved in market capitalisation between 2010 and 2013, as the post-GFC downturn ate into national construction and mining services activity. Last year the group closed its civil engineering operations on the east coast of Australia and sold more than $120 million in property assets, to retire debt, and took $11 million worth of property write-downs, which hurt the FY13 result.
The company now has three operating divisions, namely contracting, national mining/WA civil, and property development, with a small specialty services business. In FY14 contracting brought in 71% of revenue, with national mining/WA civil accounting for 24% and the rest coming from the property business.
In May 2013 Watpac shored up its balance sheet by welcoming Belgian construction group BESIX as a major shareholder, buying 15.6% of the stock.
This year, Watpac has picked up a swag of new contracts, including:
• a $45 million contract from private hospital group Healthscope for expansion works at the Knox Private Hospital in eastern Melbourne;
• Stage 1 managing contractor job for the construction of the new $55 million Queensland State Velodrome in Brisbane, which is being built for the 2018 Gold Coast Commonwealth Games;
• a $29 million contract with Hanking Gold Mining to provide mining services at its Cornishman Pit, at its Southern Cross operations in Western Australia;
• the $114 million Southpoint Office Tower in Brisbane;
• the $83 million Nuclear Medicine Molybdenum-99 Facility in Lucas Heights, New South Wales;
• the $60 million Leicester Street Student Accommodation Project in Melbourne;
• Stage one of the new Mater Private Hospital in Springfield, Queensland, valued at $47 million;
• the $46 million Kempsey District Hospital Redevelopment in Kempsey, News South Wales;
• a $80 million contract from Caydon Property Group to build the prestigious STK Apartments in St Kilda, Melbourne;
• a $72 million contract with Charter Hall to build a new 1-storey office building at 333 George Street in the heart of Sydney's CBD; and
• a $350 million contract to build ten new Queensland schools in a Public Private Partnership (PPP) agreement with the Queensland government.
These are on top of the group’s largest project to date, the Central Park precinct, a $600 million mixed-use residential and retail project located at the southern end of the Sydney CBD. Central Park includes more than 1,350 residential apartments in five separate residential towers and more than 15,000sqm of retail space as part of the development, by joint venture partners Frasers Property Australia and Sekisui House Australia.
Watpac has also recently developed the Waterloo Junction (Stage 1) project in Brisbane (which includes the company’s national headquarters), a major urban renewal project comprising a commercial office and retail precinct and including the redevelopment of the landmark, heritage-listed Waterloo Hotel. Similarly, in Sydney the company built a mixed-use retail and commercial tower at 8 Australia Avenue in Sydney Olympic Park, a development that incorporates Watpac’s New South Wales headquarters.
Other recent projects include the Advanced Engineering Building at the University of Queensland, the Dandenong Municipal Building in Victoria, the University of New South Wales Joint Health Facility and Stage 1 of the Charles Sturt University permanent campus in Port Macquarie, work that flowed from Watpac’s Port Macquarie Base Hospital Project.
Mining has been a bit more problematic. Watpac has had to amend its mining services contract with Pluton Resources at the Cockatoo Island high-grade iron ore project, after payment delays. But the company has large contracts in place with BC Iron at Nullagine Iron Ore (to 2015), Ramelius Resources at the Mount Magnet gold mine in WA (to 2016), and Iluka Resources at Tutunup South Mineral Sands in WA and Ouyen in Victoria (both to 2015).
Although the two-year holiday from profits has hurt long-term shareholders – Watpac is returning minus 5.5% a year over five years and minus 8.3% a year over three years – the stock has rebounded strongly in the last 12 months, generating a total return (including the resumption of dividends) of 57.1%. At a share price of 96 cents, Watpac is trading on an historical price/earnings (P/E) ratio of 10.4 times earnings, and a forecast FY15 (on analysts’ consensus) P/E of 9.6 times earnings. The forecast FY15 dividend yield is an attractive 6.25%, but remember that will not be fully franked. Last but not least, Watpac is well below its analysts’ consensus target price of $1.15, giving the stock a nice bit of room to move. The company is cashed-up and busy with a healthy swag of work: Watpac is a stock that appears to have put difficult days behind it.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au