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 condensed consolidated interim financial statements for the period ended 31 December 2018 have been prepared in accordance with and contain the information required by International Financial Reporting Standard (IAS) 34: Interim Financial Reporting, the SAICA Financial Reporting Guides, as issued by the Accounting Practices Committee and the Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa. The condensed consolidated financial information was compiled under the supervision of DF Grobler (CA)SA, Group financial director.

The accounting policies used in the preparation of these results are in accordance with International Financial Reporting Standards (IFRS) and are consistent in all material respects with those used in the audited consolidated financial statements for the year ended 30 June 2018. IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) have been implemented in the current financial year, refer to note 9 for further details.

The independent auditor’s review has been conducted in accordance with International Standards on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor, Deloitte & Touche, and their unmodified review report is available for inspection at the Company’s registered office. Any reference to future financial performance included in this announcement has not been reviewed or 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/financial results. 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 the auditor’s report together with the accompanying financial information from the registered office.

The information presented in the notes below represents audited results for 30 June 2018 and reviewed results for 31 December 2017 and 31 December 2018.

2. PROFIT BEFORE INTEREST AND TAXATION

R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Items by function          
Cost of sales (8 685)   (10 695) (19 597)  
Distribution and marketing expenses (3)   (3) (13)  
Administration costs (1 004)   (990) (1 984)  
Other operating income 286     228   611    

3. LOSS FROM DISCONTINUED OPERATIONS

Discontinued operations includes the close out of retained assets and liabilities, following the sale of Genrec operations and the Southern African Infrastructure & Building businesses in 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 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Revenue   45     337   525    
Loss before interest, depreciation and amortisation   (37)   (134) (273)  
Depreciation and amortisation   –     –   –    
Loss before interest and taxation (note 3.2) (37)   (134) (273)  
Net interest expense   (2)   (2) (5)  
Loss before taxation   (39)   (136) (278)  
Taxation credit   –     22   –    
Loss after taxation   (39)   (114) (278)  
Income from equity accounted investments   –     –   –    
Loss from discontinued operations   (39)   (114) (278)  
Attributable to:                  
– Owners of Murray & Roberts Holdings Limited   (39)   (114) (278)  
– Non-controlling interests   –     –   –    
    (39)   (114) (278)  
3.2 LOSS BEFORE INTEREST AND TAXATION                  
R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Loss before interest and taxation includes the following significant items:          
Fair value adjustment on disposal group held for sale –     (8) (13)  
3.3 CASH FLOWS FROM DISCONTINUED OPERATIONS INCLUDE THE FOLLOWING:          
R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Cash flow from operating activities (27)   (67) (172)  
Cash flow from investing activities –     (27) 40    
Cash flow from financing activities –     49   (2)  
Net decrease in cash and cash equivalents (27)   (45) (134)  

4. RECONCILIATION OF HEADLINE EARNINGS

R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Profit attributable to owners of Murray & Roberts Holdings Limited   186     110   267    
Profit on disposal of property, plant and equipment (net) (5)   (2) (13)  
Profit on disposal of investment in associate   –     –   (80)  
Reversal of impairment of property, plant and equipment (net) –     (2) (2)  
Fair value adjustment on disposal group held for sale   –     8   13    
Taxation effects on adjustments   1     (1) 3     
Headline earnings   182     113   188    
Adjustments for discontinued operations:                  
Loss from discontinued operations   39     114   278    
Fair value adjustment on disposal group held for sale   –     (8) (13)  
Taxation effects on adjustments   –     2   –    
Headline earnings from continuing operations   221     221   453    

5. GOODWILL

R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
At beginning of year 616     607   607    
Foreign exchange movements 1     (6) 9    
  617     601   616    

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 31 December 2018, no impairment was recorded.

6. CONTRACTS-IN-PROGRESS AND CONTRACT RECEIVABLES

R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Contracts-in-progress (cost incurred plus recognised profits, less recognised losses) 1 439     2 082   1 796    
Uncertified claims and variations less payments received on account of R298 million (FY2018: R288 million) 650     1 026   1 292    
Amounts receivable on contracts (net of impairment provisions) 2 751     2 372   2 386    
Retentions receivable (net of impairment provisions) 296     256   183    
    5 136     5 736   5 657    
Amounts received in excess of work completed   (1 782)   (1 625) (1 527)  
    3 354     4 111   4 130    
Disclosed as:                  
Amounts due from contract customers – non-current8   345     513   568    
Amounts due from contract customers – current   4 791     5 223   5 089    
Amounts due to contract customers – current   (1 782)   (1 625) (1 527)  
    3 354     4 111   4 130    
8 The non-current amount is 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 31 December
2018
  31 December
2017
30 June
2018
 
Categories of financial instruments          
Financial assets          
Financial assets designated as fair value through profit or loss (level 3)   1 270     1 283   1 308  
Amortised cost9 6 389   5 803 6 094  
Financial liabilities          
Amortised cost10 5 202   5 196 4 746  
9 Measurement category under the current IFRS 9. Prior period amount reflects loans and receivables as per IAS 39. Measurement basis has not changed.
10 Measurement category under the current IFRS 9. Prior period amount reflects loans and payables as per IAS 39. Measurement basis has not changed.
7.1 FINANCIAL ASSETS DESIGNATED AS FAIR VALUE THROUGH PROFIT OR LOSS          
R millions 31 December  
2018  
  31 December  
2017  
30 June  
2018  
 
Investment in infrastructure service concession (level 3)11          
At beginning of year   1 308     893   893    
Additions   –     357   357    
Realisation of investment   (153)   (106) (220)  
Fair value adjustment recognised in the statement of financial performance   115     139   278    
    1 270     1 283   1 308    
11

The Bombela Concession Company (RF) Proprietary Limited (“BCC”) is 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. There has been no change to the classification or measurement basis of the investment upon adoption of IFRS 9.

The fair value of BCC is calculated using discounted cash flow models and a market discount rate of 18.5% (FY2018: 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 period.

In the prior year a one-off fair value gain of R50 million (FY2018 H1: R25 million) was recognised following an amendment in the operating company fee structure which resulted in a reduction in the fees payable to the operator. The reduction in the operator fee payable is a cost input in the fair value model and therefore resulted in an increase in fair value of the investment.

Operating cost includes an operating fee that is payable to the Bombela Operating Company (Pty) Ltd (“BOC”), the company responsible for the operation and maintenance of Gautrain. The fee payable to BOC is subject to annual inflationary increases. The contract is subject to review every 5th 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 (FY2018: R9,0 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 an 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 (FY2018: R301 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 (FY2018: R46,2 million).

The above investment is included in other non-current assets on the condensed consolidated statement of financial position.

8. NET MOVEMENT IN BORROWINGS

R millions 31 December
2018
  31 December
2017
  30 June
2018
 
Loans raised 595     7     59    
Loans repaid (40)   (59)   (109)  
  555     (52)   (50)  
Capitalised leases repaid (71)   (111)   (167)  
  484     (163)   (217)  

9. 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 (R2,4 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 31 December
2018
  31 December
2017
  30 June
2018
 
Operating lease commitments 1 173   1 159   1 215  
Contingent liabilities 2 691   2 210   2 297  
Financial institution and Murray & Roberts guarantees granted to third parties 6 640   6 203   6 222  

Update on the Group’s claim processes

Uncertified revenue as at the end of the financial period decreased to R0,7 billion (FY2018: R1,3 billion) largely due to the implementation of IFRS 15. It consists mainly of claims on projects in the Power & Water platform and the Middle East.

Grayston 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 Inquiry has been concluded and it is expected that the presiding officer will submit his report to the National Director of Public Prosecution, by April 2019.

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

On 1 July 2018 the Group implemented IFRS 15 and IFRS 9, as these standards are applicable to financial years commencing on or after 1 January 2018.

The Group decided to apply the modified retrospective approach to transition from existing IASs to IFRS 15 and IFRS 9. Therefore comparatives were not restated. The cumulative effect of initially applying IFRS 15 and IFRS 9 was an adjustment to the opening balance of retained earnings at the date of initial application, being 1 July 2018.

Due to the fact that the modified retrospective approach has been applied for both IFRS 15 and IFRS 9, there is no resultant impact on IAS 33 (Earnings per Share).

10.1 IMPLEMENTATION OF IFRS 15 (REVENUE FROM CONTRACTS WITH CUSTOMERS)

IAS 11 (Construction Contracts) stated that contract revenue shall comprise variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue.

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).

Due to the higher threshold required for recognition and measurement purposes, IFRS 15 will result in the delayed recognition of variable consideration until such time that it is highly probable that the revenue will not be reversed when the uncertainty is resolved.

The cumulative effect of initially applying IFRS 15 was concluded at an amount of R1,1 billion at 1 July 2018. The IFRS 15 adjustment relates mainly to amounts in the Power & Water platform and the Middle East. The Group remains confident that all uncertified revenue and revenue previously recorded as such, will be recognised once attendant commercial matters have been settled.

R millions    
Impact of adoption:    
Retained earnings impact:    
Retained earnings at 30 June 2018 (Audited) 3 046    
IFRS 15 adjustment ( 1 072)  
Retained earnings – before IFRS 9 adjustment 1 974    
Total assets impact:    
Non-current assets impact:    
Amounts due from contract customers at 1 July 2018 568    
IFRS 15 adjustment (239)  
Restated amounts due from contract customers at 1 July 2018 329    
Current assets impact:    
Amounts due from contract customers at 1 July 2018 5 089    
IFRS 15 adjustment (857)  
Restated amounts due from contract customers at 1 July 2018 4 232    

10.2 IMPLEMENTATION OF IFRS 9 (FINANCIAL INSTRUMENTS)

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 was concluded at an amount of R9 million.

R millions    
Impact of adoption:    
Retained earnings impact:    
Retained earnings – before IFRS 9 adjustment, after IFRS 15 adjustment 1 974    
IFRS 9 adjustment (9)  
Restated retained earnings 1 July 2018 – IFRS 15 and IFRS 9 1 965    

The condensed consolidated statement of financial position impact of the above IFRS 9 adjustment of R9 million is reflected under trade and other receivables.

Adoption of IFRS 9 has resulted in a change in measurement categories of financial instruments. For change in relevant measurement categories applied, refer to note 7.

11. DIVIDEND

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

12. RELATED PARTY TRANSACTIONS

There have been no significant changes to the nature of related party transactions since 30 June 2018 or any transactions outside the normal course of business.

13. EVENTS AFTER REPORTING DATE

The directors are not aware of any matter or circumstance arising after the period ended 31 December 2018, not otherwise dealt with in the Group’s interim results, which significantly affects the financial position as at 31 December 2018 or the results of its operations or cash flows for the period then ended.