Back to basics approach for Diploma rebuild

NICK Di Latte is under no illusions about where Diploma Group needs to focus its attention.

After reporting a net loss of $25.5 million last financial year, Mr Di Latte is looking to rebuild a fractured business by bringing in reliable work with healthy margins.

That means a big focus on the group’s construction business.

“We need to ensure we deliver on the construction orders we get,” Mr Di Latte told WA Business News.

However, he isn’t letting go of the company’s development business entirely.

“We’re looking to work through the existing pipeline, getting them to the construction phase,” he said.

Mr Di Latte said he was also looking for potential joint-venture partners for some projects, and the sale of some sites.

In other words, Diploma is open to all options as it seeks to bolster its balance sheet after last year’s shock loss.

The good news on the development front is that work is due to start on One Aberdeen, a 50:50 residential joint venture with the Department of Housing in Northbridge.

The $72 million project includes 168 apartments over 14 levels, with 94 per cent already pre-sold, primarily to investors.

Diploma was selected as preferred developer in early 2010 and signed a development management agreement in August of that year.

Work was originally expected to commence in March 2011, but will finally get under way this month.

Mr Di Latte said Diploma was also progressing its Abode joint venture with the department in Campbell Street, West Perth.

This $40 million project involves the construction of 88 apartments. Mr Di Latte expects construction to start in January 2013.

A third development project is a $24 million serviced apartment complex in Rockingham.

Diploma has secured development approval for the seven-storey, 48-dwelling Quest Serviced Apartments complex, with Quest taking on a proposed 10-year lease.

Mr Di Latte said the agreement was the first in a series of proposed Quest developments.

These projects will join several construction contracts Diploma has been awarded this year.

The new contracts include two with Rio Tinto, worth a combined $93 million, for prefabricated accommodation in the Pilbara.

It is also building apartments for Frasers Property Group in East Perth, Match Properties in South Beach, and TRG Properties in Port Coogee.

The latest contract has taken Diploma’s order book to $346 million, to be completed over the next 24 months.

The contract wins have brought just a little respite to the company’s share price, which is off the all-time lows of four cents it hit earlier this month (see graph).

The share price slump was driven by a succession of bad news, culminating in the unexpectedly large loss last financial year.

The primary driver behind the loss was a significant drop in sales revenue from its pre-GFC developments, particularly a high rate of defaults by ‘off-the-plan’ purchasers at the Zenith and Rise apartment projects in Perth’s CBD.

The scale of these projects meant there was a long gap between the timing of pre-sales and completion, with the market experiencing a big downturn over that period.

The Equus apartment project on Barrack Street faced a similar problem, culminating in developer Birchwood Nominees going into administration last year.

Diploma’s loss included a $10 million impairment after the group decided to exit its fledgling operation in the United Arab Emirates.

The group’s construction division also suffered from delays in commencement of new work.