Solel Boneh's Road to Health

Jehoshua Rapaport, the brand-new chief executive of Solel Boneh, doesn't waste time. Two days after he took the job, several company executives, including some who had been at the troubled construction company for years, were surprised to find themselves fired, with immediate effect.

The casualties included chief financial officer Iftach Naor; the chief accountant, Asher Schreiber; the treasurer Danny Aflalo; the logistics veep Ephraim Ariely; and the human resources manaher, Danny Razgor.

 Solel Boneh is a subsidiary of Housing & Construction (TASE: HUCN). The letters of dismissal were handed over right after the Housing & Construction board of directors approved the group business plan for 2006, which includes sweeping changes at Solel Boneh. Less construction of residential housing, and lose some of the costs at the top.

The extensive dismissals left a very sour mood in the corridors of Solel Boneh, nor have the company's massive losses in recent years helped much. But the dismissals do not indicate that Solel Boneh has reached the end of its road: on the contrary, they are efficiency measures intended to boost the company to profits within a few years.

Moreover, company management says that this time around, they are confident the moves will succeed. (Prior restructuring didn't.) The management and workers are allied in the effort to heal the company, however painful the process may be, the sources say.

Three growth drivers

Housing & Construction is owned by the Arison investment group and its own workers. In the third quarter of 2005 it lost a whopping NIS 111 million. From January to September 2005, it racked up a loss of NIS 132 million.

The main reason is Solel Boneh's problems with its construction services, on which it lost NIS 11 million on turnover of NIS 170 million in the third quarter of 2005. In the parallel quarter of 2004, it had lost NIS 45 million on turnover of NIS 275 million.

Shikun Ovdim, another construction company that has been quite the cash cow for Housing & Construction, did badly in 2005. Its initiation and land sales sector yielded NIS 1.6 million profit on turnover of NIS 113 million, a sorry state compared with the NIS 43 million it netted on turnover NIS 214 million in the parallel quarter of 2004.

The Housing & Construction rehabilitation plan is based on three growth drivers. The first is expanding its project initiation in Israel (where it will continue to be handled by Shikun Ovdim) and abroad.

Outside Israel, Housing & Construction operates mainly in eastern Europe through Solel Boneh Overseas Countries. The strategic plan includes expansion in eastern Europe and penetration of new markets, building mainly housing and commercial projects.

More toll roads

The second growth engine is franchises, which means BOT - build, operate, transfer - projects. The contractor builds something, say a toll road; operates it for fees throughout a protracted period of time, typically some 25 years; then transfers ownership to the state free of charge. That is how the Trans-Israel Highway toll road was done.

Housing & Construction will continue to compete in toll road tenders in Israel and abroad, and other BOT projects, mainly in the transport sector.

The third growth driver is infrastructures, where Solel Boneh plans to expand massively outside Israel in the coming two to three years. But it won't be scorning Israel, where it wants to build roads, bridges and the like.

This year Solel Boneh will be scaling down residential construction considerably.  Public works, such as building hotels and hospitals, will only be carried out if the project is big in scale and significantly profitable.

The management apparently believes that infrastructures is the road to curing Solel Boneh, partly because the government is expected to make massive investment in the sector, through the new public works department and through Israel Railways.

Also, Solel Boneh will be selling assets that "have matured", including its 50% in the Givatayim mall, and using its tremendous land reserves to build. It may be leaving the Givatayim mall but it has plans to build one in Beer Sheba, and another in Ir Yamim, Netanya.