1. BASIS OF PREPARATION

The Group operates in the mining, oil & gas and power & water markets and as a result the revenue is not seasonal in nature but is influenced by the nature of the contracts that are currently in progress. Refer to commentary for a more detailed report on the performance of the different operating platforms within the Group.

The provisional summarised consolidated financial statements for the year ended 30 June 2018 have been prepared in compliance with the Listings Requirements of the JSE Limited, the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (“IFRS”), the minimum requirements of the International Accounting Standards (“IAS”) 34, Interim Financial Reporting, SAICA Financial Reporting Guidelines as issued by the Accounting Practices Committee and the Financial Pronouncements as issued by the Financial Reporting Standards Council and the Companies Act, No. 71 of 2008 (“Act”). These provisional summarised consolidated financial statements and full set of consolidated financial statements were compiled under the supervision of DF Grobler (CA)SA, Group financial director and have been audited in terms of Section 29(1) of the Act and signed by the directors on 29 August 2018.

The accounting policies and methods of computation used in the preparation of these results are in accordance with IFRS and are consistent in all material respects with those used in the audited consolidated financial statements for the year ended 30 June 2017. There have been no new Standards and Interpretations applied in the current financial year.

The external auditors, Deloitte & Touche, have issued their opinion on the Group’s consolidated financial statements for the year ended 30 June 2018. The audit was conducted in accordance with International Standards on Auditing. The auditor responsible for the audit is G Berry. They have issued an unmodified audit opinion on the consolidated financial statements and provisional summarised consolidated financial statements. These provisional summarised consolidated financial statements have been derived and are consistent in all material respects with the Group’s consolidated financial statements. Copies of their audit reports on the consolidated financial statements and on these provisional summarised consolidated financial statements are available for inspection at the Company’s registered office. Any reference to future financial performance included in this announcement has not been audited and reported on by the Group’s external auditors. The auditor’s report does not necessarily report on all of the information contained in this announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor’s engagement they should obtain a copy of that report together with the accompanying financial information from the issuer’s registered office.

The information presented in the notes below represent audited results for the years ended 30 June 2017 and for 30 June 2018.

2. PROFIT BEFORE INTEREST AND TAXATION

R millions 30 June
2018
30 June
2017
Items by function    
Cost of sales (19 597) (19 552)
Distribution and marketing expenses (13) (11)
Administration costs (1 984) (2 104)
Other operating income 611 757

3. LOSS FROM DISCONTINUED OPERATIONS

Discontinued operations include Genrec operations and the retained assets and liabilities of the Southern African Infrastructure & Building businesses that were sold during the current and prior financial years. These operations met the requirements in terms of IFRS 5 Discontinued Operations and have been presented as discontinued operations in the Group’s statement of financial performance.

3.1 LOSS FROM DISCONTINUED OPERATIONS

R millions 30 June
2018
30 June
2017
Revenue 525 3 674
Loss before interest, depreciation and amortisation (273) (279)
Depreciation and amortisation (2)
Loss before interest and taxation (note 3.2) (273) (281)
Net interest expense (5) (9)
Loss before taxation (278) (290)
Taxation credit 37
Loss after taxation (278) (253)
Income from equity accounted investments
Loss from discontinued operations (278) (253)
Attributable to:    
– Owners of Murray & Roberts Holdings Limited (278) (253)
– Non-controlling interests
  (278) (253)

3.2 LOSS BEFORE INTEREST AND TAXATION

R millions 30 June
2018
30 June
2017
Loss before interest and taxation includes the following significant items:    
Loss on disposal of businesses (net of transaction and other costs) (28)
Fair value adjustment on disposal group held for sale (13) (96)
Voluntary Rebuild Programme charge (170)

3.3 CASH FLOWS FROM DISCONTINUED OPERATIONS INCLUDE THE FOLLOWING:

R millions 30 June
2018
30 June
2017
Cash flow from operating activities (172) (110)
Cash flow from investing activities 40 (78)
Cash flow from financing activities (2) 25
Net decrease in cash and cash equivalents (134) (163)

4. RECONCILIATION OF HEADLINE EARNINGS

R millions 30 June
2018
30 June
2017
Profit attributable to owners of Murray & Roberts Holdings Limited 267 48
Loss on disposal of businesses (net) 28
Profit on disposal of property, plant and equipment (net) (13) (30)
Profit on disposal of investment in associate (80)
Profit on sale of assets held for sale (net) (17)
Impairment of assets (net) 11
Reversal of impairment of property, plant and equipment (net) (2) (1)
Fair value adjustment on disposal group classified as held for sale 13 96
Fair value adjustments on investment property (7)
Taxation effects on adjustments 3 (22)
Headline earnings 188 106
Adjustments for discontinued operations:    
Loss from discontinued operations 278 253
Loss on disposal of businesses (net) (28)
Profit on disposal of property, plant and equipment (net) 8
Profit on sale of assets held for sale (net) 17
Fair value adjustment on disposal group classified as held for sale (13) (96)
Fair value adjustments on investment property 7
Taxation effects on adjustments 26
Headline earnings from continuing operations 453 293

5. GOODWILL

R millions 30 June
2018
30 June
2017
At beginning of year 607 642
Foreign exchange movements 9 (35)
  616 607

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. Based on the assessment performed as at 30 June 2018, no impairment was recorded.

6. CONTRACTS-IN-PROGRESS AND CONTRACT RECEIVABLES

R millions 30 June
2018
30 June
2017
Contracts-in-progress (cost incurred plus recognised profits, less recognised losses) 1 796 1 903
Uncertified claims and variations less payments received on account of R288 million (FY2017: R445 million) (recognised in terms of IAS 11: Construction Contracts) 1 292 914
Amounts receivable on contracts (net of impairment provisions) 2 386 2 343
Retentions receivable (net of impairment provisions) 183 296
  5 657 5 456
Amounts received in excess of work completed (1 527) (1 571)
  4 130 3 885
Disclosed as:    
Amounts due from contract customers – non-current10 568 542
Amounts due from contract customers – current 5 089 4 914
Amounts due to contract customers – current (1 527) (1 571)
  4 130 3 885
  • 10 The non-current amounts are considered by management to be recoverable.

7. FINANCIAL INSTRUMENTS

The Group’s financial instruments consist mainly of deposits with banks, local money market instruments, short-term investments, accounts receivable and payable and interest-bearing borrowings.

R millions 30 June
2018
30 June
2017
Categories of financial instruments    
Financial assets    
Financial assets designated as fair value through profit or loss (level 3) 1 308 893
Loans and receivables 6 094 6 109
Available-for-sale financial assets carried at fair value (level 1)
Derivative financial instruments (level 2) 2
Financial liabilities    
Loans and payables11 4 746 4 528
  • 11 The prior year amounts reflected in financial liabilities have been adjusted due to the incorrect inclusion of provisions.

7.1 FINANCIAL ASSETS DESIGNATED AS FAIR VALUE THROUGH PROFIT OR LOSS

R millions 30 June
2018
30 June
2017
Investment in infrastructure service concession (level 3)12    
At beginning of year 893 811
Additions 357
Realisation of investment (220) (170)
Fair value adjustment recognised in the statement of financial performance 278 252
  1 308 893
12

The Group concluded the acquisition of a further 17% in the Bombela Concession Company (RF) Proprietary Limited (“BCC”) for an adjusted purchase price of R357 million in December 2017 (original purchase price of R405 million adjusted for dividends declared and interest from 1 October 2017). The Group’s investment in BCC has therefore increased to 50%. Post the transaction, the investment is still reflected at fair value through profit or loss, as the investment meets the requirement of IAS 28.18 with regards to venture capital organisations or similar entities, as the transaction does not result in a change of control.

The fair value of BCC is calculated using discounted cash flow models and a market discount rate of 18.5% (FY2017: 18.5%). The discounted cash flow models are based on forecast patronage, operating costs, inflation and other economic fundamentals, taking into consideration the operating conditions experienced in the current financial year. The future profits from the concession are governed by a contractual agreement and are principally based on inflationary increases in the patronage revenue and operating costs of the current financial year.

A once off fair value gain of R50 million (FY2017: R100 million) was recognised following an amendment in the operating company fee structure due to a non-recurring event in each of the respective years which has resulted in a reduction of the fee payable to the operator. The reduction in the operator fee is a cost input in the fair value model which resulted in a corresponding increase in the fair value of the investment.

Operating cost includes an operating fee that is payable to the Bombela Operating Company Proprietary Limited (“BOC”), the company responsible for the operation and maintenance of the Gautrain. The fee payable to BOC is subject to annual inflationary increases. The contract is subject to review every fifth year where increases of more than inflation are considered. An annual operating fee increase of 1% above inflation will result in a decrease in the value of the concession investment of approximately R9,0 million (FY2017: R17,7 million).

Operating cost also includes a Railway Usage Fee (“RUF”) which constitutes a fee for the use of the system owned by Gauteng province. The fee is 50% of the concessionaires excess free cash flow above a 18% real rate of return. The fee reduces to 35% should the concessionaire comply with certain Socio Economic Development (“SED”) obligations. Historically the SED obligations have been achieved and the valuation is based on the SED obligations being achieved. If these obligations are not achieved, then the result would be a decrease in the value of the concession investment of R301 million (FY2017: R191 million).

Revenue based on patronage is underpinned by the Gauteng province. The Patronage Guarantee is the difference between the Minimum Required Total Revenue (“MRTR”) and the Actual Total Revenue (“ATR”) in each month. Due to the predictable nature of revenue it is not considered to be a significant unobservable input and therefore no quantitative information is provided.

A decrease of 1% in the discount rate would result in an increase in the value of the concession investment of approximately R46,2 million (FY2017: R31,2 million).

8. CONTINGENT LIABILITIES

The Group is from time to time involved in various disputes, claims and legal proceedings arising in the ordinary course of business. The Group does not account for any potential contingent liabilities where a back-to-back arrangement exists with the clients or subcontractors and there is a legal right to offset (R2,3 billion). The Board does not believe that adverse decisions in any pending proceeding or claims against the Group will have a material adverse effect on the financial condition or future of the Group.

R millions 30 June
2018
30 June
2017
Operating lease commitments 1 215 1 314
Contingent liabilities 2 297 1 943
Financial institution guarantees 6 222 5 881

UPDATE ON THE GROUP’S CLAIM PROCESSES

Uncertified revenue as at the end of the financial year increased to R1,3 billion (FY2017: R0,9 billion), largely represented by claims on projects in the Middle East and the remainder in the Power & Water platform.

GRAYSTON PEDESTRIAN BRIDGE TEMPORARY WORKS COLLAPSE – UPDATE

The Department of Labour instituted a Section 32 Inquiry (“Inquiry”) in November 2015 into this incident to determine the cause or causes of the collapse of the temporary works structure. The Board would welcome an expeditious conclusion to this Inquiry.

9. IMPLEMENTATION OF IFRS 15 (REVENUE FROM CONTRACTS WITH CUSTOMERS) AND IFRS 9 (FINANCIAL INSTRUMENTS)

In the 2019 financial year IFRS 15 and IFRS 9 will be implemented, as they are applicable to financial years commencing on or after 1 January 2018.

The Group has decided that it will apply the modified retrospective approach to transition from existing IAS’s to IFRS 15 and IFRS 9. Therefore comparatives will not be restated. The cumulative effect of initially applying IFRS 15 and IFRS 9 will be an adjustment to the opening balance of retained earnings at the date of initial application, being 1 July 2018.

IFRS 15:56 states that variable consideration should only be included in the transaction price, when recognising revenue, to the extent that it is highly probable that a significant reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. IFRS 5 defines “highly probable” as “significantly more likely than probable”, where “probable” means “more likely than not” (IFRS 5: Appendix A).

Uncertified claims and variations of R1,3 billion (FY2017: R914 million) are disclosed separately under amounts due from contract customers (note 6) in the statement of financial position. These claims and variations are yet to be finalised and may be subject to arbitration and/or negotiations. IFRS 15 will result in the delayed recognition of variable consideration until such time that it is not highly probable that the revenue will not be reversed when the uncertainty is resolved.

The cumulative effect of initially applying IFRS 15 is currently estimated to be R0,7 billion and R1,0 billion as at 1 July 2018. The estimated IFRS 15 adjustment consists mostly, but not entirely, of the R1,3 billion uncertified revenue disclosed separately under amounts due from contract customers (note 6) in the statement of financial position. The IFRS 15 adjustment relates mainly to amounts in the Middle East and the Power & Water platforms. The Group remains confident that post the implementation of IFRS 15 the uncertified claims and variations will be recognised at a later date, once the uncertainty has been resolved.

The impairment requirements under IFRS 9 are based on an expected credit loss (“ECL”) model that replaces the IAS 39 incurred loss model.

The cumulative effect of initially applying the ECL model to assess impairments of receivables in IFRS 9 is currently estimated to be less than a R150 million.

10. DIVIDEND

A gross annual dividend, relating to the 30 June 2018 financial year, of 50 cents per share was declared in August 2018. In line with the approved dividend policy, the board of directors will only consider paying an annual dividend.

11. RELATED PARTY TRANSACTIONS

There have been no significant changes to the nature of related party transactions since 30 June 2017 or any transactions outside the normal course of business.

12. EVENTS AFTER REPORTING DATE

The directors are not aware of any matter or circumstance arising after the year ended 30 June 2018, not otherwise dealt with in the Group’s annual results, which significantly affects the financial position at 30 June 2018 or the results of its operations or cash flows for the year then ended.