Meet the builder aiming for a 5pc profit margin

The latest Australian Construction Industry Forum forecasts show work is picking up in commercial construction due to growing investment in health and aged care, education, data centres and industrial facilities.

Since 2021, data centres have been a sideline business for Hickory, which has completed its first facility of two 36-megawatt data centres in Truganina in Melbourne’s western suburbs, in partnership with Stack Infrastructure.

The builder of office tower 41X in Melbourne, which built and developed its own office tower Market Lane in South Melbourne and last year completed its first Sydney project, Golden Age’s Ace Hotel Surry Hills, has now appointed its first external director – developer, property consultant and former Fender Katsalidis chairman Benni Aroni – to advise on strategy and navigate growth.

But improvement won’t come quickly, as builders Richard Crookes Constructions in NSW and ABN Group in Western Australia have already pointed out.

Hickory, which reported a near-one-third drop in net after tax profit to $10.3 million in FY22, expected revenue to hold at about $600 million, but it would take another two years for profit margins to widen again, Mr Argyrou said.

“I think 2023 and 2024 would be worse than 2022,” he said. “And that’ll be the bottom of our trough. And 2025, unless there’s another major catastrophe, then we expect to get back to normal. I think we will get through our [loss-making] legacy [projects] in 2023 and 2024.”

He declined to say which projects were unprofitable.

Improvement for Hickory – and contracting as a whole – would come when the balance of risk in the construction chain shifted and developers took more responsibility for variables such as weather delays and rising material costs, he said.

“The ecosystem’s broken,” Mr Argyrou said. “We’re witnessing carnage in the industry. And out of carnage, we all need to regroup and say, ‘How do we pick up the pieces and rebuild our ecosystem?’

“That’s a paradigm shift that actually involves multiple stakeholders reassessing the way they do business and the way they apportion risk.”

Hickory wants to rebuild its earnings before interest, tax, depreciation and amortisation (EBITDA) profit margin to more than 5 per cent – a big ask for a sector in which the global average is 1.8 per cent and aspirational one for the company that chalked up a 3 per cent margin in FY22, he said.

“That’s a fairer reward for the risk that we take on as contractors,” Mr Argyrou said.

“I’d like to see all of our competitors be in that range, not just us. I’d like to see a shift in the industry.”

Hickory has long sought to boost its profit margin over that of the low-margin contracting game by expanding into related businesses. One of these was the modular Unitised Building System it developed with architect Nonda Katsalidis.

Unitised Building, or UB, failed, but from it emerged another operation, Sync, which tapped skills from Australia’s now-defunct car-making industry to make modular bathroom pods – 100 a week – for customers including Mirvac.

Hickory wants to double the $50 million revenue of the Laverton-based business, which has also supplied Hickory rivals including Watpac, HansenYuncken and Taylor Construction Group, over the next three years.

“It’s like a Tesla factory that makes bathrooms,” Mr Argyrou said.

It has reduced risk in its traditional contracting business by taking some key trades in-house. Like Queensland-based Hutchinson Builders, which now does its own joinery work, Hickory has taken its own structural and facade work in-house to reduce exposure to subcontractors who could go bust.

“Whilst it’s insulated us from the disruption of insolvencies with our subbies, it has not insulated us from the escalating costs,” Mr Argyrou said.

“So our margins and profitability are just as impaired as the rest of the industry.”

Hickory also wants to develop an affordable housing business. It bid unsuccessfully for Victoria’s second so-called ground lease public housing renewal package of 1400 homes – won by contractor Icon Kajima and funder Tetris Capital – but says no operator has yet got the model right.

“We’ve got a bunch of people working on how [to] create an affordable-housing platform because I think that nut has not been cracked by anybody,” he said.

“We’ve got a bunch of smart people in our business really working hard, who potentially will crack the nut with some partnering with bankers and government and other groups in order to be able to deliver affordable housing.”

Expanding the scope of the 900-person company was not a sign of “strategic drift”, Mr Argyrou said.

“It’s just vertical integration,” he said. “Our core business is as a contractor, I’m a builder at heart. The other bits are just other bits that service, ultimately, our core construction company.”