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McConnell Dowell posts $20.6M loss on underperforming irrigation, Kawarau Falls contracts

Monday 4th December 2017

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 McConnell Dowell Constructors has posted a full-year loss in the face of lower sales and "material losses" at its North Otago Irrigation Co (NOIC) and Kawarau Falls Bridge contracts.

The loss was $20.6 million in the 12 months ended June 30 from a profit of $4.4 million a year earlier, the company's annual report shows. Sales fell 9.9 percent to $251 million.

Most of the deficit came from "material losses" at the two projects, according to a going concern note to its accounts that also highlighted a net working capital deficit of $16.1 million. 

McConnell Dowell Constructors is the New Zealand and Pacific arm of a global construction firm that's ultimately owned by Johannesburg Stock Exchange-listed Aveng. A spokeswoman for McConnell Dowell didn't respond to queries from BusinessDesk but Aveng says in its annual results that revenue at the New Zealand-based business fell as major projects were completed, such as the Waterview tunnel and its work on the Christchurch rebuild.

"Even though some projects exceeded tendered margins within the business, these performances were not sufficient to compensate for the adverse impacts of the underperformance on the NOIC and Kawarau Falls Bridge projects, resulting in an overall operating loss for this business," it said. One of these contracts has now been completed, and the other is scheduled for completion during 2018.

The irrigation project, which extends the scheme into the Kakanui Valley, suffered a "significant setback" when the pipeline failed during testing, the Otago Daily Times reported in December 2016, adding that former managing director Roger McRae had flown in to see the problems first hand and meet with shareholding farmers. In May this year, the company appointed Fraser Wyllie as managing director of its New Zealand and Pacific Islands operations. 

The ODT reported in March this year that McConnell Dowell would absorb costs of drilling through harder-than-expected rock on the Kawarau Falls bridge replacement project near Queenstown.

The losses come in the same period that Fletcher Building fired its chief executive and recorded a $292 million loss at its construction division after failing to manage two major building contracts. Fletcher has said the construction industry faces capacity constraints which have driven up costs, squeezed margins and resulted in shortages of labour.

McConnell Dowell was set up in New Zealand engineers Malcolm McConnell and Jim Dowell in 1961 and within about a decade had expanded into Australia and Asia. It listed on the NZ stock exchange in the 1980s after the reverse takeover of rival construction firm Hawkins Holdings. Aveng acquired 100 percent of the business via a scheme of arrangement in 2003.

Aveng has been going through its own struggles in the face of broader losses. Chief executive Kobus Verster resigned with immediate effect in September, when the company reported its delayed full-year results, which showed a loss of 6.4 billion rand, partly reflecting 2.7 billion rand of impairments. Executive chair Eric Diack announced a strategic review of the business to turn around an unacceptable performance.

Aveng's McConnell Dowell business was restructured in 2016 with an overhaul of its management team and its focus for 2017 was to be to maintain focus on core competencies with "enhanced focus on project selection," according to the 2016 annual report. The business was restructured into four geographic business units – Australia, New Zealand and the Pacific, Southeast Asia and Built Environs – "to reduce complexity and improve efficiency."

Aveng made a capital injection into its Australian operations and renegotiated its banking arrangements. It was more upbeat about New Zealand, though, noting that the market "continues to gain momentum, with government investment in large-scale transport and water projects, which will continue to fuel growth for the region and expansion of the construction industry."


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