Friday 20th September 2019
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Fulton Hogan decided to keep its Australian civil construction division after potential buyers didn't make a tempting enough offer.
The privately-held civil construction company hired Macquarie Investment Bank to test the waters earlier this year, having singled it out in 2018 as the only division that didn't deliver a sound financial result.
However, Fulton Hogan said the unit returned to profit in the year ended June 30 with a number of good project results and as it closed out historical projects and settled a number of claims, chair David Faulkner and managing director Cos Bruyn say in their annual review to shareholders.
"Having reviewed a pool of potential buyers, the board decided not to proceed through to the next phase, as we did not find an acceptable outcome for the group," they said.
Fulton Hogan reported a $173.6 million net profit in the June year, down from $180.1 million a year earlier, with revenue largely flat at $4.68 billion. Faulkner and Bruyn said the bottom line was affected by changes to accounting standards and fair value adjustments on land. It also faced costs from the unsuccessful sale process and $19 million of costs from acquiring Stevenson Group's construction and quarrying activities.
In its half-year update, the Christchurch-based infrastructure and construction group warned shareholders the Australian unit's problematic projects continued to be a drag, and that it was focused on managing its position in an environment where the large pipeline of infrastructure works was placing significant pressure on resources.
The annual review shows Fulton Hogan paid $238.5 million to buy the Stevenson businesses, which outperformed the company's budget and were profitable. Fulton Hogan has integrated the two subsidiaries into the group and rolled its existing upper North Island quarries into the Stevenson brand.
Fulton Hogan upgraded its Brisbane quarry to double production capacity to 1 million tonnes a year, bought two new asphalt plants in New South Wales, invested in a joint venture asphalt plant in Laverton and lifted its cash balances to meet prequalification requirements, which are the minimum amounts required to bid for contracts.
That saw Fulton Hogan's net debt after deducting cash jump to $659.4 million as at June 30 from $294.5 million a year earlier. The board says its priority is to significantly repay that debt over the next three years.
Faulkner and Bruyn said they continue to receive strong support from their banking partners - Bank of New Zealand/National Australia Bank, Mitsubishi UFJ Financial Group, Australia & New Zealand Banking Group, and Westpac - which provided funding for the Stevenson acquisition and a further $100 million to support working capital needs.
Gross bank debt was $919.6 million and Fulton Hogan can draw down a further $194.1 million on its banking facilities. The focus on debt repayment meant Fulton Hogan paid an unchanged dividend of 60 cents per share.
Fulton Hogan's operating cash inflow shrank to $86.8 million from $311.5 million a year earlier, which it said was due to the ongoing investment in land for development, lower advance payments on major projects, outflows on unprofitable projects, and claims and variations on completed work where the company hasn't been paid yet.
The firm said its Australian utilities division performed well in the year, although Australian infrastructure remained tough. In New Zealand, the government's new transport policy settings led to a general slowdown. Fulton Hogan said its land development division is operating well and meeting all targets.
"We have commenced the 2020 financial year with the knowledge that there are challenges ahead for all sectors of the business," Faulkner and Bruyn said.
Fulton Hogan will continue to run its Australian construction division as a fully operational business, while its Australian utilities unit will keep pursuing water sector business and expand its communications client base.
It wants to grow Australian infrastructure services on the back of maintenance contracts and will pursue quarry acquisitions close to major metropolitan centres.
Fulton Hogan said it will keep growing its New Zealand presence in the water sector and expand its position as one of the country's biggest aggregates providers.
"With both local and general elections on the horizon, we expect infrastructure to be high on the country's policy agenda," Faulkner and Bruyn said.
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