Monday 27th May 2019
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It’s no secret the construction industry is troubled, despite the ongoing boom. Building owners, often the government in one shape or form, have shifted more risk onto construction companies, turning already razor-thin profit margins into losses.
The list of construction companies that have failed is lengthening: Arrow International went into receivership in late February following the collapses last year of Ebert and Orange-H, the part of the Hawkins business Australian purchaser Downer didn't want.
The largest home-grown high-rise construction business, the Building + Interiors unit of Fletcher Building, managed to lose nearly $1 billion over 18 months, and quite a number of smaller companies have also gone out of business.
That helps explain why Christchurch-based construction company Southbase decided to make public the fact that its shareholders have tipped in further capital.
Since Southbase is a privately-owned company, it didn’t have to reveal that its shareholders had contributed a further $3.6 million of capital in the form of mandatory convertible notes at the end of October last year.
Companies Office records show the pre-existing capital was 2.48 million shares but provides no information as to their value.
A month later, Southbase won the Deloitte Fast 50 “Master of Growth” award, having grown revenue 745 percent from $5 million in its first year.
In accepting the award, chief financial officer Leon Brazier attributed his company’s success to “a little bit of being in the right place at the right time” and to the company’s “extremely experienced team,” as well as “an outstanding delivery record for our clients, based on innovation and knowledge.”
Incidentally, Brazier has resigned, for personal reasons, he says.
Chief executive Quin Henderson, who founded the company in 2013, had previously worked for Hawkins for nine years – Hawkins was sold to Downer in 2017.
Southbase was backed by two prominent Christchurch businessmen, Philip Carter and Benjamin Gough. Both men stepped down from the board last year, but Carter’s daughter Nicki Carter replaced him as a director.
Henderson says the new capital was needed to cover retentions and to back building bonds provided by Southbase’s banker, Bank of New Zealand.
While clients typically hold back money in retentions until a project is complete, a lead contractor, as Southbase often is, also has to put money aside to cover payments owed to sub-contractors.
“In addition to that, you need equity to back your bonding. It means there’s quite a bit of cash you have to maintain in your business,” Henderson says. Typically that could be $25-30 million for a company the size of Southbase,
“The returns that we get on that aren’t necessarily as good a return as you could get on anything else,” he says, adding that 5 percent margins are typical.
Southbase gained first-hand experience of the pressures on smaller construction companies last August when Maven Interiors, often known as M-Int, went into liquidation while its staff were working on Southbase's joint campus project for Christchurch's Avonside Girls' and Shirley Boys' high schools.
Henderson says his company dealt with that problem by hiring M-Int's staff directly.
He says his company is profitable. “I’ve just done my final accounts for the year and they look good. I made some money. It could always be better but...”
When Southbase pulled out of the Lincoln/AgResearch contract to build a new joint research centre in June last year, rumour had it that Southbase hadn’t been able to come up with an $11 million insurance bond.
Henderson says it wasn’t that at all; it was the contract for the $200 million-plus centre that was “quite onerous” and Southbase hadn’t been able to make the budgeted numbers stack up with what the clients wanted.
It appears no other construction company could make those numbers stack up either; Education Minister Chris Hipkins scrapped the proposal altogether in February after having rejected a third funding proposal in December.
It appeared Lincoln was unable to meet Treasury guidelines for the project’s cost.
In any case, since CBL’s collapse, insurance bonds aren’t available anymore and Southbase has switched to bank bonds, Henderson says.
With bonding capacity of about $35 million, “that’s more than adequate for us”.
Southbase had decided instead to focus on competing for the contract to construct the $300 million MetroSport centre, but it missed out on that contract, which was awarded to Australia-based CPB, part of the CIMIC group, which also owns Leighton Contractors and Thiess.
Southbase and CPB may have been rivals then but they were 40/60 joint venture partners on the recently finished five-school $150 million Education Ministry contract to design and build schools, including the Christchurch schools project.
Henderson denies there’s any bad blood between the companies. “They decided to do MetroSport on their own and we thought we could do it on our own,” he says.
“In the infrastructure world, teams often do jobs together and then they do jobs competitively.”
He doubts there will be many new public/private partnerships for a while: “This government doesn’t appear to support them.”
About 90 percent of Southbase’s work has been government contracts and about 30 percent Ministry of Education buildings.
Building schools has been a key part of Southbase’s growth, giving it inroads to communities outside of its Christchurch home base, Henderson says.
He is enthusiastic about the Construction Sector Accord launched by the government last month to tackle systemic industry issues. The accord is chaired by the Fletcher construction chief executive Peter Reidy, who took over the reins of that troubled division in November last year.
“I think he will represent us well. I believe they’re now setting the parameters of where they want to go.”
The industry has very little regulation and the practice in recent years of “putting clauses in contracts that are significantly more onerous than what is fair and reasonable” have come close to destroying the domestic industry, he says.
The government is unlikely to want the industry to end up being dominated by foreign-owned firms.
Australia's CIMIC group, for example, had $14 billion turnover last year. “How do I compete with that?” Henderson says.
He classes Southbase as ranking in the second tier of construction companies, along with firms like Naylor Love, Leighs Construction and Dominion Constructors.
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