Construction firms build on diverse foundations

The SmartCompany Dun & Bradstreet Industry Growth List for the construction sector reveals a fragmented broader industry that has shown strong growth in favoured parts but revenue that is sensitive to wide ranging influences. By MIKE PRESTON

By Mike Preston

The SmartCompany Dun & Bradstreet Industry Growth List for the construction sector reveals a fragmented broader industry that has shown strong growth in favoured parts but revenue that is sensitive to wide ranging influences.

The construction industry may be plagued by lumpy revenue, tight credit and a skills shortage, but that hasn’t got in the way of strong growth for the sector’s top performers in recent years.

This is evident from the SmartCompany Dun & Bradstreet Industry Growth List, which uses revenue over two years to identify the fastest growing company for 2006-07.

The list reveals a diverse industry, with three sub-sectors – commercial, residential and infrastructure construction – operating in three largely separate markets. And they have three different outlooks on the future.

The residential market is pessimistic due to rising interest rates, the commercial market is uncertain as the credit squeeze affects financing. But those in the infrastructure sub-sector have been buoyed by federal budget promises and the resources boom.

At the top of the list is one of the few businesses that straddles all three sub-sectors –Laing O’Rourke (BMC), the Australian arm of Britain’s largest privately owned construction company.

Laing O’Rourke achieved astonishing revenue growth for the 2006-07 financial year of 767%, working on projects across the spectrum, from residential developments in inner Sydney to the Dampier port jetty in the north of Western Australia – success that is all the more remarkable in light of the fact that the business only set up its Australia subsidiary in 2004.

Organic growth has contributed to that success, but the 2006 acquisition of construction firm Barclay Mowlem has also been significant. An infrastructure construction specialist, the Barclay Mowlem acquisition has helped Laing O’Rourke position itself to take further advantage of Australia’s resources and infrastructure boom.

This boom has been a significant factor in the growth of many of the businesses on the construction industry list.

The second ranking business on the list, WDS Ltd, embodies the changing commercial influences brought by the new boom. The ASX listed WDS predecessor, Walter Construction, was one of the largest residential builders in the country before it went out of business in 2005. A management buyout later that year rescued the smaller mining services division of the company at just the right time – in the following year, the business achieved 172% growth and more than $100 million in earnings.

A key contributor to that growth has been the construction arm of the business, the Diversified Construction Corporation, a provider of pipeline construction and maintenance services to the oil and gas industry.

WDS managing director Garry Ash says their early move to expand capacity to meet the needs of the then emerging resources boom has paid dividends.

“We saw the opportunity that was coming in the pipeline industry very early, particularly in Queensland,” Ash says. “We capitalised very quickly, poured money into buying very expensive specialised equipment and put some very experienced management in place – you have to plan to grow quickly, so we didn’t waste time putting the management systems in place.”

With direct exposure to both the infrastructure market (through DCC) and the resources sector through its mining services division, WDS is well placed to take advantage of future growth opportunities. According to Ash, however, there is one key limitation that his business – and the whole sector – must overcome to do so; the skills shortage.

“Our biggest challenge is people, no question. We’ve got a direct workforce of about 1200 people and they are very loyal, but if someone said we need 2000 people tomorrow I wouldn’t know where to get them from,” Ash says. “It’s not just skilled labour, it’s the whole skill chain, from labourers to management and engineers.”

While the resources sector is a key source of demand for new infrastructure construction, it is only one aspect of a wider push that ranges across all sectors of the economy, Australian Industry Group Construction & Infrastructure associate director Jim Barrett says.

“If you look at all the state and federal budgets, there is this huge infrastructure spend there. That will feed the infrastructure market for some time to come with demand for everything from desalination plants to pipelines and roads programs – the only question will be whether the construction sector has the resources to meet that demand,” Barrett says.

The diverse opportunities the infrastructure boom presents to the construction sector are reflected in the success of Service Stream Ltd, the 20th ranking business on the list.

Service Stream, a public listed company, provides a broad range of services to the telecommunications industry, from call centre services and staff training to the construction of telecommunications infrastructure.

Like WDS, Service Stream’s construction arm has made a strong contribution to the growth of the group in recent years, but while WDS focuses primarily on the resources sector, Service Stream has a wider focus.

Service Stream aims to become a key provider or multi-utility relocation services – in short, the company you go to for the construction or relocation of pipes, whether they carry water or fibre-optics.

Service Stream executive general manager Stephen Ellich says several acquisitions – most recently the October 2007 purchase of utility relocation group McCourt Dando – mean the business is now uniquely placed in its multi-utility capabilities to clients ranging from the big road contractors to national telecommunications companies.

“We’d like to think we can now relocate any network that someone needs to move anywhere and to be able to manage the end-to-end risk as well. We believe that is a compelling offer to the customer,” Ellich says.

The resources and infrastructure boom also helps explain the success of many commercial construction businesses in recent years, both directly and through the new demand for office and industrial space that a strong Australian economy has generated over the past decade.

One strong commercial construction performer on the list is Adelaide firm Badge Constructions, listed 19th. Adelaide is not generally the first Australian city that comes to mind when one thinks of fast economic growth, but co-founder and managing director Jim Whiting says he is happy for that misconception to continue.

“Being based in Adelaide has worked for us and we’re happy if everyone else keeps out. It’s always been an orderly market, and now things are busier here than they’ve been for awhile, and it’s very easy to cover the work we do in Brisbane and Perth from here,” he says.

Whiting is confident of Badge’s continued growth – he expects revenue to hold steady this year before growth picks up again in 2008-09, a reflection of the cyclical nature of the industry – but says the industry as a whole could be in for some tough times.

“I think the industry is seeing a plateauing in growth at the moment. A big part of that is because of rising interest rates and the credit squeeze, and they are probably going to have a bigger impact than people realise,” Whiting says. “It will clear out some of the fringe operators because they just won’t have the cash to operate, so there will be opportunities left for well-resourced people such as ourselves, but there is no question it will have an impact.”

The cost of credit is also a front-of-mind issue for the third sub-sector of the construction industry, residential building.

The already weak Australian housing industry has been hit hard by interest rate rises in 2007 and 2008, triggering falls in new home sales, building finance approvals and new housing starts.

But while parts of the Australian industry have been struggling for some time, back in 2006-07 relatively low interest rates and a strong economy meant much of the industry prospered, a fact reflected by the presence of at least 20 companies with at least a partial residential building focus in the list.

A strong regional bias can be seen among the list’s strongest residential construction performers, with three in the top 10 – Devine, Raptis Group and Tamawood – all performing the bulk of their work in the fast-growing south-east Queensland corridor.

Higher interest rates are now taking their toll even in that booming part of Australia, however. Listed company Tamawood (listed 10th, and the business trades primarily as Dixon Homes) for example, recently revised after-tax earnings growth for 2007-08 from 30% to 25% because of tougher than expected trading conditions.

Tamawood executive chairmen Lev Mizikovsky says he expects the housing market in Queensland to become more difficult before conditions improve.

“We will get 25% profit growth this year and we’d like to do better, but we are moving into a more adverse environment. I believe the slow down will be in the vicinity of 40% to 50% over the next 12 to 18 months in the construction industry, but I believe we are the lowest cost builder in the state, and that will help us,” he says.

Mizikovsky’s view is confirmed by construction industry analyst and Econtech senior economist Emily Brown.

“Queensland residential building as been growing strongly, mainly due to population growth in South-East Queensland,” Brown says, “but we think it will now grow at a more typical rate in line with national trends.”

The return of Queensland to the pack is not the only story in the sector, however. According to Brown, the Sydney residential housing sector, arguably the weakest housing market in recent years, is about to make a comeback.

“Sydney has experienced a more severe downturn than the other states, and we’re now forecasting a stronger recovery that the other states. We think there will be a fair bit of growth there compared to the other states over the next three years,” Brown says.

Brown’s analysis reflects a broader truth about the construction sector– it is one industry, but the diverse geographical and sectoral differences that divide it mean there will always be winners and losers.

Compiled by Dun & Bradstreet using information from its commercial database of more than 2.7 million companies.

Read more about construction firms and about industry sector trends