Softer conditions outside mining don’t bother big private companies too much.
IN a two-speed economy, businesses focused on sectors in the slow lane are supposed to be left for dead.
But among Western Australia’s biggest private companies, which are heavily biased to sectors outside the booming mining sector, there are few signals this is the case.
In the main, this appears to reflect the flexibility, diversification and access to capital, which allow the state’s major private players to deal with softer retail conditions and invest in the growth opportunities that suit their business strategies.
Residential building companies such as BGC, Alcock/Brown-Neaves Group and JWH, fast food franchisors including Quick Service Restaurants and Competitive Foods, and motor vehicle sellers John Hughes Group, DVG Automotive Group and Perron Group are showing few signs of struggling despite anecdotal evidence that mining is leaving other sectors in its wake.
Almost all these companies reported improved revenue or big jumps in key business indicators in the year ending June 10.
Those that talked to WA Business News for this story found local consumer markets were softer and competition for labour with the resources sector was becoming tougher – but none saw this as catastrophic for their businesses and all remained positive about WA’s non-resources outlook.
Of course, the collapse of private coal and energy player Griffin just 12 months ago and the more recent woes at Burrup Fertilisers should not be ignored, but it appears those debt-related failures differentiate them from the rest of the private pack.
Last financial year, for instance, BGC increased housing starts by 14 per cent to 4,392, a shift that would appear healthy in almost any economy. This rise was not restricted to BGC, which has significant clout as Australia’s biggest residential builder. ABN was up 23 per cent to 3,526 and JWH was up 19 per cent to 1,651.
BGC admits that its construction business was aided by federal government stimulus in the form of first homeowner grants in the residential market and the Building the Education Revolution spending in commercial sector.
Nevertheless, the building giant owned by Len Buckeridge is hardly batting an eyelid as its views the opportunities within WA, even as it feels the effects of a slowing housing market.
Julian Ambrose, who heads BGC’s residential construction business, said the firm was in the early stages of building a 24,000 square metre factory for modular housing fabrication next to its brickworks at Perth Airport.
The objective is to make an all-weather manufacturing facility for transportable housing to service the market for permanent and semi-permanent mine and remote housing.
While Mr Ambrose said some issues with the plan had emerged from the airport operator, Westralia Airports, which has somewhat reduced its pre-GFC thirst for development, the modular housing project reveals a major private business investing in opportunity and diversifying to take advantage of growth areas created indirectly by the mining boom.
It’s not hard to find other examples.
Last month, ABN Group won a state government contract to build 80 homes in Karratha as part of the initiative to ease the serious shortage of housing in the Pilbara regional centre. JAXON, owned by another major private construction player Doric Group, is also looking to the Pilbara.
Rival JWH Group is taking a different path. Its owner, Julian Walter, has a different diversity strategy, heading into agricultural land development and brand building.
Mr Walter wants to grown his Cherylton brand to match other players in the sector, like those owned by Milne AgriGroup such as poultry label Mt Barker Free Range Chicken.
Research highlighting the resilience of high-quality agricultural land prompted him to shift his emphasis to that sector, in which his family already has substantial land holdings, especially after the GFC.
The agricultural holdings are spread across two key geographical areas in the South West – Brookhampton and Kojonup – and consist of nearly 10,000 hectares. Brookhampton is home to stud cattle breeding, which is currently concentrated on the embryo market for Angus cattle, orchards and marron. Konjonup has sheep and broadacre cropping.
Agriculture is a common theme among the big private businesses in WA.
Apart from Milne, another major player is Wellard, a farming and livestock transport group controlled by the Balzarini family behind the Italian sea transport group Siba Ships. It owns 33,000 hectares of farmland in WA, including The Grange property near Dongara, and is understood to be one of the top 20 grain producers in Australia.
Last month, Wellard struck an $83 million convertible note deal with Standard Chartered Private Equity to fund the group’s growth in the wider Asian region. The Balzarini family took a $22 million convertible note on the same terms.
In other major deals involving big private companies, Gull Petroleum sold its WA independent fuel distribution business to Darwin-based Ausfuel. The Rae family, which founded Gull, will retain the underlying properties and a New Zealand fuel business that they expect to expand.
“We’ve retained all the real estate, and over the years we’ve accumulated quite a portfolio of properties where we’ve had service stations,” Gull chairman Fred Rae said regarding the deal.
“We’ve got quite an array of properties that are imminent for development.
“We retained totally Gull Petroleum in New Zealand, its going unbelievably. It’s taken some time, we’ve been there about 11 years, but it’s really flying now. Its equivalent’ to what Gull Western Australia was about 15 years ago.”
Another big transaction was the sale of WA transport group Mitchell Corp to national giant Toll Group for $110 million. Mitchell is a big supplier to the mining sector and had revenue of around $175 million a year.
A deal even more directly related to resources is that of mining services company Barminco, a major private company 60 per cent owned by the private equity division of Gresham Partners. Barminco announced three weeks ago that it had secured $50 million in mezzanine funding from Goldman Sachs as part of strategic review process, which is likely to result in an IPO or trade sale.
But major private mining services companies are rare, especially after the pre-GFC rush of initial public offeringss and trade sales in the sector.
Another private equity-linked player, Quick Service Restaurant Holdings, has shifted its growth strategy offshore in recent years expanding its east coast-based Oporto business.
Quick Service – which also owns of the Red Rooster and Chicken Treat brands – bought Oporto for $60 million in 2007, just a few months after a $180 million Quadrant Private Equity-backed management buyout led to WA entrepreneur Nick Tana exiting the business.
Within the past three years Quick Service has established operations in New Zealand, the UK, China and, most recently, the US.
Over the next five years, it plans to add 250 new stores to its existing 600 stores, which are now 75 per cent franchised; a dramatic shift from 18 months ago when the company owned three quarters of its stores.
The company said this conversion to a franchisee-dominated model had been achieved through a combination of existing franchisees taking on more restaurants as well as greenfield operators entering the system for the first time.
Quick Service said that, while mining sector’s dominance in WA had made the franchising market tougher here, one of the biggest franchising challenges at present was the tight lending practices of major banks to potential franchisees, which were part of its growth strategy.
The company is also opposed to proposed new franchising laws in WA.
The Quick Service focus is not all organic. Last year it bought the 40-outlet CHOOKS operation and will rebrand them as Chicken Treat.
Perron Group is another player significantly exposed to the WA consumer market through its ownership of several shopping centres and the Toyota franchise for the state.
The reported numbers for Perron Investments Pty Ltd show a 15 per cent decline in sales, but WA Business News understands the reported numbers understate overall group revenue by as much as 50 per cent and may not reflect the overall trend.
“Business is still good, retail is a bit quiet, (but the) motor car business is still very solid,” founder Stan Perron said.
ABN Group is an example of the resilience and positive outlook among of the local major private companies. It is more concerned about dealing with the boom to come than current soft conditions.
Managing director Dale Alcock said the new homes market, a key economic driver and indicator in WA, had slumped since June and predicted it would remain subdued for the rest of 2011, correlating to the anticipated weakness in the established housing market.
The residential housing market is suffering from a big overhang of stock partly linked to the exit of first homeowners, who are viewed as the catalyst to the overall market.
With the tough environment for WA residential house sales, ABN Group, Australia’s second biggest homebuilder, has seen a corresponding lift in renovations.
Mr Alcock said the issue with the volatility in the new homes market was not a significant problem for his business due to its flexible structure, but was damaging for the state because tradespeople increasingly viewed the resources sector as a more stable employer.
“Before the mining boom, tradies used to take time off (in downturns), now they leave the building industry and get well-paid fly-in, fly-out jobs,” he said.
“There is a diminishing labour market as a result.”
Mr Alcock warned that the permanently reduced labour pool meant the building industry would struggle to meet demand when it improved again, as it would if the resources sector continued to draw people to the state.