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Send  Share  RSS  Twitter  11 Apr 2010

BUILDING: Wearne Experiencing Tough Times


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IN July last year CBN contended that JSE-listed building supplies company WG Wearne had paid a steep price to break into the Western Cape market with a R200 million transaction to buy Durbanville-based Portland Holdings and associated businesses.

That contention may well be an understatement with Portland, best known for its readymix cement, seemingly under great pressure to justify its large price tag.

WG Wearne’s latest annual report shows that the Portland companies grossly under-performed in the year to end February 2009.

A divisional breakdown in the annual report showed Portland Readymix notching up a loss of R1.7 million. The newly established Portland Hollowcore Slabs - which cost Wearne R60 million - showed a R2.3 million loss, while Portland Quarry recorded a loss of more than R500 000.

Portland Sand Mines showed a small loss, while Aggregate Sales and Concrete Pumps managed profits of R254 000 and R413 000 respectively.

This performance certainly does not lend any credence to Wearne’s initial claims that the Portland acquisition provided a “strategic geographical expansion opportunity into the lucrative Western Cape market”.

Wearne’s recent interim results suggest the situation at Portland has not got any better.

Depreciation and amortisation of R27 million and net interest paid of R27 million - which cut into Wearne’s income statement for the period ending August 2009 - were largely attributed to the acquisition of the Portland Group.

While providing no detail on Portland’s financial performance, the official comments by Wearne directors sounded quite ominous. They said Portland had been particularly hard hit by the decline in available work in the Western Cape, and consequently had returned a small loss for the interim period.

The big problem for Wearne is that its cash flow deteriorated during the 2009 financial year, and has already prompted an issue of new shares to raise R30 million to shore up a strained balance sheet.

The truth of the matter is that the Portland performance flies in the face of comments made by Wearne at the time of the acquisition. At that stage Portland was lauded as “an established profitable operation with a good track record.

Wearne reckoned Portland could operate as a stand-alone and self-sufficient business unit.

One also needs to remember that the R123 million price tag for the core Portland Holdings business (excluding the property housing, a quarry and the Hollowcore business) was dependent on the audited profit after tax of the Portland Group being more than R20 million for the year ended February 2008.

CBN wonders what the chances are of Portland achieving that R20 million mark in after tax profits any time soon? Slim or none, probably.

Thankfully for Wearne the R60 million Portland Hollowcare Slabs transaction specified payment of an amount equal to five times the average annual audited after-tax profits of the company for the two 12 month periods ending August 31, 2009 and August 31, 2010. Certainly the maximum purchase price consideration of R60 million - to be settled by the issue of shares - won’t come into play - unless there is a dramatic recovery in demand for building supplies in the Western Cape.

At this juncture CBN – which is hearing increasingly audible rumours about consolidation in the local building supplies sector - wonders whether Wearne has given thought to perhaps selling off Portland.

The issue, of course, is what Portland would fetch in the current market. Could Wearne squeeze as much as R80 million from a buyer?

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