18/02/2009 - 22:00

Hot competition in tight market

18/02/2009 - 22:00

Bookmark

Save articles for future reference.

Record sales and revenue figures seem out of step with all the doom and gloom.

Hot competition in tight market



RECENT profit reports by stock market-listed companies help to explain why many private business owners are confused about the current business environment.

Some listed companies are reporting record sales and revenue, and some are reporting record profits, defying all of the gloom and doom about the state of the economy.

That accords with the experience of many private business owners, who have told WA Business News they are still enjoying good trading conditions and can't understand why there is so much negative commentary.

However, listed companies reporting increased profits are the exceptions. Most listed companies are reporting a slide in profits, even when they have achieved record turnover.

And while many companies express cautious optimism about future opportunities, very few are confident about their growth prospects.

Transportable accommodation and caravan manufacturer Fleetwood Corporation was one company that surprised with a strong profit report for the half-year to December 2008. Revenue was up 23 per cent to $196 million and net profit rose 16 per cent to a record $18.4 million.

Engineering company Monadelphous Group has continued its impressive run. It lifted revenue by 22 per cent while net profit rose 15 per cent to a record $36.8 million.

Heavy equipment supplier Emeco has also done well, predicting a record net profit of $39.1 million for the half-year.

Mining equipment supplier Bradken, which has substantial operations in WA, added to the flow of good news this month by reporting a record net profit of $34.9 million and strong growth in earnings per share.

Construction giant Leighton and local engineering and fabrication company Ausclad Group also achieved record turnover, but that did not translate to the bottom line.

Why the difference?

Leighton's bottom-line profit was held back by write-downs on a range of infrastructure investments, especially toll roads.

Ausgroup was hit by lower margin contracts and the timing of variation approvals on some of its projects.

The other companies had a clean performance, underpinned fundamentally by the pipeline of work that was won prior to the global economic downturn.

Monadelphous, for instance, said its revenue growth was achieved from the high value of contracts won in the previous financial year, coupled with volume growth on established contracts.

Similarly, Fleetwood was helped by two big contracts that pre-date the downturn - supplying accommodation for Worsley Alumina's expansion project and the take-or-pay contract for its Searipple accommodation village at Karratha. The contract with Woodside continues until June 2010.

Looking ahead, all companies agree that the changed economic environment will make business more difficult.

As economic growth declines and the flow of new projects slows, they anticipate pressure on their profit margins.

Some companies have a business model that can benefit from these changed conditions.

Fleetwood, for instance, expects that its clients will be more inclined to hire buildings for construction camps rather than purchase, as a means of conserving cash.

Similarly, Emeco expects that mining and construction companies will increasingly look to rent their heavy equipment, as a result of tighter credit and operating conditions. Despite that, it has still revised down its future profit guidance.

Monadelphous, which has consistently delivered above-average returns to shareholders over the past decade, according to the WA Business News annual shareholder return survey, is adapting its strategy to suit the changed business landscape.

Managing director Rob Velletri says the group is shifting its focus away from expanding capacity to maximising efficiency.

The group aims to reduce operating and fixed costs and improve productivity and "consolidate the organisational structure".

The challenge for any management team is to turn those broad goals into tangible changes that deliver the efficiency dividend without damaging the company's long-term growth prospects.

A common theme for many companies is a sharper focus on growth sectors. There are two that stand apart.

One is infrastructure, helped by the federal government's largesse.

The second is the oil and gas sector, and specifically the prospect of more multi-billion dollar liquefied natural gas projects in the state's north.

Expect more competition as many businesses chase these opportunities.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

Subscription Options