Group chief executive's and Financial director's report


HENRY LAAS AND COBUS BESTER   “WE HAVE MADE MEANINGFUL PROGRESS IMPLEMENTING THE GROUP’S NEW STRATEGIC FUTURE  PLAN SINCE OUR LAST REPORT, DESPITE THE CONSTRAINTS OF WEAK MARKETS. SPECIFICALLY, WITH THE SALE OF OUR I&B PLATFORM, THROUGH A POTENTIAL EMPOWERMENT TRANSACTION, OUR STRATEGIC FOCUS IS NOW FIRMLY ON THE GLOBAL NATURAL RESOURCES MARKETS.”  
HENRY LAAS AND COBUS BESTER      


REVENUE FROM CONTINUING OPERATIONS
R26,1 billion
(FY15: R24 billion)

 

ATTRIBUTABLE PROFIT
R753 million
(FY15: R881 million)

 

The Group’s strategic journey is reflected in a revised vision to be a leading multinational group that applies its project lifecycle capabilities to optimise fixed capital investment. We believe that focusing the Group’s expertise and capacity on delivering sustainable
fit-for-purpose project solutions in selected oil and gas, metals and minerals, and power and water market sectors, will enhance shareholder value over the long term.

In the past year we have continued to position the business platforms to provide a specialised and differentiated service offering across the project lifecycle to clients in its target market sectors, under the leadership of platform chief executive officers and platform chief financial officers. In line with this client orientation, business platforms will be specialised with an international focus in their target market sectors, as opposed to being general contractors in a specific geographic region. To support the international focus, business platforms will establish a permanent presence in those geographies where most of the project opportunities are expected to occur. Outside of such regions, the platforms follow their clients on a project-by-project basis.

The Underground Mining platform, which is active in all phases of the project lifecycle and delivers projects across an international footprint, from offices in Africa, the USA, Canada and Australia, best represents the multinational model which we aspire to in each of our business platforms. It is expected that the Oil & Gas platform will achieve a corresponding level of maturity in the next three years, while it will take longer for the Power & Water platform to establish an international footprint.

We are strategically and systematically growing the presence of the three business platforms in our chosen geographic regions and market sectors and increasing the value they should return to our shareholders. This is the ultimate outcome of our New Strategic Future plan and forms the foundation from which we will grow the Group to realise the leading position contemplated in our vision by 2025. Extending the time horizon for achieving our revised vision points to the factors constraining our performance expectations and the pace at which we are able to implement our strategic plan. These factors include the ongoing reality of a sluggish global economy, weak demand for commodities, coupled with low investment in fixed capital formation in South Africa.

Despite the fundamental changes in the business over the past three years, reflected in the shift in revenue and earnings predominantly to the international Underground Mining and Oil & Gas businesses, the Group is still primarily viewed as a South African civil and building construction company.

PROPOSED DISPOSAL OF THE INFRASTRUCTURE & BUILDING BUSINESSES AND GENREC

Through the sale of the Infrastructure & Building platform, we expect that in the medium term, investor perception about Murray & Roberts’ risk profile will change and that market valuation could improve. The Group has over the past three years seen better quality earnings from the three natural resources-focused businesses. The Board has also decided to divest from Genrec, the only remaining manufacturing business in the Group’s portfolio.

The transaction will create a world-class black-owned construction business of scale, well positioned to capitalise on the need for public sector infrastructure development in South Africa and the rest of Africa.

Notwithstanding the challenging economic conditions in the domestic construction market, Government spending on public infrastructure projects is at a high. These projects are more accessible for companies with strong empowerment credentials, specifically with majority black ownership.

THE PROPOSED TRANSACTION DOES NOT INCLUDE THE GROUP’S BOMBELA INVESTMENTS NOR ITS OPERATIONS IN THE MIDDLE EAST, WHERE THE GROUP WILL COMPLETE CURRENT PROJECTS AND NOT BID FOR ANY NEW WORK. THE GROUP WILL RETAIN THE DUBAI INTERNATIONAL AIRPORT AND GAUTRAIN CLAIMS, AS WELL AS LIABILITIES RELATING TO THE GRAYSTON TEMPORARY WORKS COLLAPSE.


The I&B businesses was the historical operating base of the Group in South Africa, and we recognise the emotional attachment of our people to its legacy, most visibly expressed in the iconic infrastructure and building projects it has delivered over several decades. However, the careful consideration and planning that resulted in this decision informs our confidence that the proposed transaction is in the best interests of the long-term sustainability of both the Group and the I&B businesses. The capacity of this business will be retained in South Africa under a new shareholder and it has the opportunity and scale to continue to play an instrumental role in infrastructure development in this country.

In progressing the New Strategic Future plan, it has become necessary to clarify the role and capacity requirements of the corporate office. We are considering various models suited to a multinational group and this is work in progress that we aim to complete in the coming months. Our analysis indicates that the corporate office should remain close to the businesses to best serve the sustainable creation of value for our shareholders. Capacity requirements in the corporate office will be designed with our intention to efficiently reduce overhead costs to support the Group’s profitability in markets that are likely to remain tough for the next 18 months.

FINANCIAL UPDATE

Revenue from continuing operations increased by 9% to R26,1 billion (FY15: R24 billion) and attributable profit of R753 million was recorded (FY15: R881 million). Diluted headline profit per share from continuing operations decreased by 10% to 175 cents (FY15: 195 cents).

The Oil & Gas platform delivered an operating profit of R525 million (FY15: R838 million), a material decline from the prior year due to clients deciding to defer or cancel new greenfields projects and deferral of maintenance spend as low global energy prices persisted. The platform's operating margin declined to 5% (FY15: 7%).

The Underground Mining platform delivered an operating profit of R506 million (FY15: R411 million), an improvement of 23% on the prior year, with platform margin increasing from 5% to 6%. The increased activity in the Australian markets and continued strong results from the USA drove the increase in revenue and operating profit.

The Power & Water platform delivered an operating profit of R27 million (FY15: loss R152 million). Genrec has been reclassified to discontinued operations and the comparative statement of financial performance have been restated. The decrease in operating profit is as a result of the impairment of revenue taken on legacy contracts and a loss-making contract in Namibia. The power programme generated an operating profit of R216 million (FY15: R170 million).

The I&B platform's Southern African construction operations were reclassified to discontinued operations and the comparative statement of financial performance have been restated. The retained businesses of the platform consist of the investments in BCC, BOC and BCJV, as well as the Middle East operations. These businesses posted an operating profit of R6 million (FY15: R149 million). The decrease in operating profit is due to arbitration costs on the Dubai International Airport claim, weaker operational performance in the Middle East and lower fair value adjustment on the BCC investment of R156 million (FY15: R172 million).

The discontinued I&B platform's Southern African construction operations posted a R68 million profit (FY15: R56 million).

Net financing costs increased to R71 million (FY15: R68 million), as a result of servicing the debt requirements of the South African operations.

The effective taxation rate increased to 24,8% (FY15: 18,8%), due to the reduced utilisation of tax losses and profits made in higher tax jurisdictions. Deferred taxation assets were not raised on all taxation losses within the Group.

Income from associates are insignificant and increased to R8 million (FY15: R3 million), largely made up of the Group's investment in BOC.

The loss from discontinued operations for the year was R124 million (FY15: R82 million profit) and financial results were restated to include I&B’s Southern African construction operations and Genrec. The loss in the current year is attributable to impairment of property, plant and equipment, operating losses in Genrec, impairment of goodwill in Southern African construction operations and impairment of Clough’s discontinued properties. The operating loss for the current year included profit on disposal of business of R6 million (FY15: R11 million).

THE GROUP GENERATED CASH FROM OPERATIONS OF R1,1 BILLION (FY15: R1,1 BILLION). THE GROUP ENDED THE FINANCIAL YEAR WITH A NET CASH POSITION (AFTER THE DEDUCTION OF INTEREST BEARING DEBT) OF R1,8 BILLION (FY15: R1,4 BILLION).

FINANCIAL UPDATE

Capital expenditure for the year was R431 million (FY15:
R425 million) of which R332 million (FY15: R290 million) was for expansion and R99 million (FY15: R135 million) for replacement. The Underground Mining platform incurred the bulk of the capital expenditure.

The Group acquired two businesses in the financial year. The total purchase consideration was R22 million and the transactions generated goodwill of R21 million. The goodwill represents the value attributed to the workforce of the respective businesses. The Oil & Gas platform acquired Enercore Projects, which provides EPC management services to the Canadian oil and gas sector. Underground Mining acquired Merit Consultants, a project and construction management company in Canada, which provides support to mining and minerals industry.

The Group's order book at year end was R33,4 billion (FY15: R38,3 billion), including the discontinued operations of R4,7 billion. The reduction was due to a decrease in the Middle East order book, the Underground Mining platform not replacing the revenue consumed in Africa with new work and the impact of the current depressed market on the Oil & Gas platform’s order book.

STRATEGY UPDATE

Our New Strategic Future plan is underpinned by five strategic objectives, which in combination are intended to achieve our ultimate objective of enhancing shareholder value. Below we review our progress and plans in respect of these objectives, with further detail provided in the business platform reviews.

1. GROW PROFITABILITY AND CASHFLOWS

The most material factor affecting the Group’s profitability has been the significant and accelerated decline in the Oil & Gas platform’s earnings, as the full impact of the oil price collapse and global oversupply was felt in this market. A strong performance from the Underground Mining platform, despite facing even tougher market conditions than in the previous year, was not sufficient to compensate for this decline.

Project losses on legacy contracts impacted profitability in the Power & Water platform. The restructuring, completed during 2015, delivered a commercial turnaround and will enhance future returns. In a weak domestic construction market, the I&B platform achieved a marginal profit.

We continue to work on releasing the substantial value locked up in the Group’s uncertified revenues recognised prior to 2011, on the Gautrain and Dubai International Airport claims. Settlement of these claims will remove uncertainty and introduce capital to be applied towards acquisitive growth, considering the Group’s diminishing size, due to the disposal of non-strategic assets over the past four years.

Following the favourable arbitration ruling in favour of BCC on the merits and quantum of the Sandton Cavern claim to the value of R624 million, GMA served a motion in the High Court taking this award on review. In an additional claim against GMA, BCJV is claiming for additional costs incurred following design changes to the cantilever bridges over John Vorster and Jean Avenues in Centurion. This claim, on its merits, was ruled in favour of BCJV, with the quantum hearing scheduled for October 2016. GMA also served a motion in the High Court taking this award on review.

In respect of the Gautrain tunnel water ingress matter, BCJV is appealing an order of court awarded to Province, and matters between the parties relating to the earlier arbitration award remain unresolved. Based on an assessment by a panel of technical experts and design consultants appointed to perform a technical evaluation of the potential remedial work that may be required, the Group raised a provision of approximately R300 million in previous financial years for its 45% share of the potential costs to be incurred by BCJV. The amount of other potential financial compensation, if any, related to the matter cannot be determined at this time.

The arbitration on the delay and disruption claim against Province, the largest of the Gautrain claims, is progressing. The legal basis of this claim has been confirmed in arbitration. The merit and quantum hearings will be heard as from the second half of the 2017 calendar year.

In respect of the Dubai International Airport final payment dispute, the Dubai Airport City Corporation confirmed that it was the respondent to the claim. Arbitration will commence in January 2017.

To enhance profitability, the Board has decided to divest from Genrec, the only remaining manufacturing business in the Group. A strong cost reduction focus continues across all platforms. Corporate office costs have been further reduced, the Underground Mining platform closed its office in Chile and the Oil & Gas platform has made progress in restructuring its operations to reduce overhead costs.

2. FOCUS ON INTERNATIONAL NATURAL RESOURCES MARKET SEGMENTS

The long-term demand fundamentals in the global natural resources markets, which include global population growth, urbanisation and income growth, are compelling despite the expectation that weak demand for commodities will persist in the short to medium term. The sale of the I&B platform will enable the Group to focus attention and capital allocation in positioning the businesses in their target market sectors.

While turbulent global economic conditions and muted GDP growth forecasts make for an unpredictable short-term outlook, large developed and developing economies provide the greatest opportunities for growth. This is reflected in the Group’s primary focus on the USA, Canada, Australasia and South East Asia, followed by sub-Saharan Africa and other tertiary markets.

In the Oil & Gas platform, the volatility in the global energy market following the collapse of the oil price has continued to take its toll. Exacerbated by global oversupply, few new international capital project opportunities have come to market, as global energy producers delayed or cancelled major greenfields projects and deferred brownfields expenditure to shore up their financial positions. Although the platform had put plans in place to focus on commissioning, maintenance and brownfields opportunities to support the LNG facilities constructed over the last few years in Australia, competition has been fierce, resulting in margin pressure as competitors in some instances bid to win work at negative margins.

These market conditions will continue to affect the pace at which the Oil & Gas platform develops to become a focused multinational business with a significant presence in the regions offering the most attractive growth prospects. Despite these challenges, the platform continues to diversify its business into long-term international growth markets, particularly in Asia and the USA.

The acquisition of Enercore Projects has given the platform a permanent presence in Canada to support the delivery of projects across North America. In the coming year, we will continue our acquisition strategy to support the platform’s ability to win work and deliver EPC projects in these regions.

The platform will pursue commissioning, maintenance and brownfields opportunities on LNG projects in Australia and internationally. In addition, to mitigate against the limited oil and gas opportunities in the short to medium term, the platform will pursue selected civil infrastructure development projects in Australia. This does not represent a focus on general contracting, but is a tactical response to the prolonged downturn in energy markets. The platform has restructured its operations to ensure it is competitively positioned for smaller opportunities and to support its ability to trade through the current downturn in its market. Business development capacity in Australia and the USA has also been strengthened.

In the mining sector, with looming supply deficits in key commodities, expectations of a price recovery in the short to medium term are firming, although it is unlikely that commodity prices will reach the levels last seen in 2011. The pipeline for large capital projects is improving in certain regions, with major projects in the bankable, pre-feasibility and feasibility stages in the Asia Pacific region and the Americas. Although the outlook for capital projects across Africa is not as strong, sub-Saharan Africa remains a key mining jurisdiction.

With most key commodities represented in its project portfolio, and with a presence in the regions where mining activity is high and projected to grow, the Underground Mining platform is well positioned to capitalise on the expected upturn in the commodity cycle. To this end, the platform is sharpening its business development initiatives, in particular by leveraging its longstanding relationships with mining clients.

The acquisition of Merit Consultants International, based in Vancouver, establishes a permanent presence on the Canadian west coast, which is the base of many mining companies.

In line with global growth trends in energy and water demand, we have clarified the specific market segments and regional opportunities that the Power & Water platform will focus on in the future. The platform will seek to differentiate its service offering through its track record for project delivery, in tandem with partnerships established in the year with key technology partners.

Energy demand in Africa is projected to outpace the global average to 2035, driven by ongoing urbanisation and electrification, providing strong prospects for power generation projects on the continent. More broadly, with the fastest growth predicted for gas and renewable energy sources, power generation is expected to account for an ever-increasing share of primary energy consumption as the world continues on a long-term trend of electrification.

FOCUS ON INTERNATIONAL NATURAL RESOURCES MARKET SEGMENTS

In the power sector, the platform will initially concentrate on securing projects on new power generation plants to be built (coal, gas, solar, hydro and nuclear) in sub-Saharan Africa. Ultimately, the aim will be to develop a multinational footprint, and to this end, potential acquisition targets in the USA have been identified, which will enable the platform to enter this market. The platform’s technology partnerships with gas-to-power and solar technology leaders will also support its growth ambition.

In the water sector, global demand is set to outstrip supply in excess of efficiency improvements in existing infrastructure. The water sector provides various opportunities for entry, and covers a wide spectrum of services. Water is a new business to the Group, and the platform has identified focus areas where it can provide a differentiated service offering, through partnerships with technology providers. In desalination, the scale of projects is large and the platform’s partnership with Hyflux, the top global technology owner from Singapore, will focus on pursuing desalination projects in Africa, with two opportunities identified for major desalination plants in South Africa.

In wastewater treatment, the biggest demand is for treatment of sewage. The differentiation is again in the technology applied and the platform has secured a licensing agreement with Organica from Hungary. They provide an environmentally friendly technology that does not require large reticulation infrastructure and has significant decentralisation, geographic footprint and cost benefits for municipal sewage treatment. The focus for the rollout of these plants will initially be on South Africa.

The global emergency created by acid mine drainage presents another opportunity for the platform. With no established commercially viable technology available to deal with this challenge, the plan is to acquire a company that has developed technology and a pilot plant, providing a low-risk opportunity to commercialise this technology if it is found to work effectively at scale.

The platform’s final focus area will be on providing potable water treatment in rural areas across South Africa through a containerised modular solution using solar power, which will be marketed in partnership with a black women-owned company.

3. DIVERSIFY THE GROUP’S BUSINESS MODEL INTO HIGHER MARGIN SECTORS

DIVERSIFY THE GROUP’S BUSINESS MODEL INTO HIGHER MARGIN SECTORS

Our aspiration to deliver fit-for-purpose project solutions across the project lifecycle, is premised on developing a deep understanding of our clients’ needs. This requires that we develop specialised expertise and the capacity to deliver services which encompass project development, engineering, construction, commissioning, operation and maintenance, as well as decommissioning of projects.

In complement with our core project delivery capabilities, we continue to diversify our business model by expanding our services to all phases of the project lifecycle. These other phases yield higher margins and carry lower risk, albeit at lower volumes, than project delivery work.

The ability to provide comprehensive differentiated solutions enables our businesses to extract more value from opportunities and mitigate the risk associated with a portfolio of only construction work. It also provides the opportunity to strengthen relationships with clients.

The acquisition of bolt-on specialist companies in the Oil & Gas platform during the previous year has strengthened its specialist engineering and asset support capabilities, enabling the platform to secure front-end work on projects and to position it for full EPC services during project implementation.

Key to the Underground Mining platform’s growth strategy is its focus on early engagement with clients through upstream engineering work, and securing downstream contract mining work with the emphasis on developing ‘life-of-mine’ relationships with mining clients.
The platform has secured contract mining projects in all major regions in which it operates and will focus on growing its contract mining portfolio to generate annuity revenue.

In the Power & Water platform, the intention is to provide a more complete specialist project service to clients across the project lifecycle.

Consistent with our project lifecycle approach, and to secure longer-term annuity income, we are actively looking to invest in selected concession opportunities in which we will develop and operate projects, irrespective of whether we are involved in their construction.

In addition to our retained interest in BCC, we are in the process of securing the concession agreement for the George biomass renewable energy project in the Power & Water platform.

PROJECT VALUE CHAIN

4. ENHANCE THE SAFETY, PERFORMANCE AND DIVERSITY OF OUR PEOPLE

Safety performance is a differentiating factor for clients in all our business platforms. Our main safety goal is Zero Harm to our employees, service providers and communities where we operate.

It was a testing year for Murray & Roberts in terms of safety, given the tragic incident at the Grayston project site in South Africa, where a temporary structure collapsed over a busy motorway claiming the lives of two members of the public and injuring 19 others. This, together with the death of an employee and a subcontractor in two unrelated incidents, overshadowed the benchmark safety performance we achieved in the year. We are deeply saddened by these fatalities and injuries, and again extend our sympathy to the families and friends of those who died and were injured. Subsequent to year end, the Group experienced a fatality in its I&B platform. The investigation into this incident is underway.

In the aftermath of the Grayston temporary works collapse, we provided support to the families of the deceased and to the injured. We immediately instituted an internal investigation to establish the cause of the incident. We have since presented our report to the formal Section 32 Inquiry convened by the DoL to investigate the incident.

LOST TIME INJURY FREQUENCY RATEWe are cooperating with the DoL Inquiry, which is at an advanced stage.

Our management approach to health and safety includes setting stretch targets for operations and establishing Group expectations through policies and standards to guide operations in improving health and safety performance. We seek to continuously improve our health and safety programme and performance by better understanding our risk exposure, benchmarking our practices against those of clients and peers, and implementing lessons learnt from incidents and audits.

All our businesses are required to carry out self-assessments on the entrenchment of Group safety initiatives, and are subjected to independent assurance by internal and external experts. These assessments show a maturing level of compliance, especially with respect to fatal risk control standards, aimed at preventing major accident events. Safety performance, as measured through lagging and leading indicators, is integrated into management’s performance contracts to ensure the highest levels of accountability.

We continued to make improvements in our LTIFR and ended the year with a record-low rate of 0.68 (FY15: 0.79). Our LTIFR has improved by 76% over the past eight years. The TRCR, a broader indicator of safety performance, improved marginally during the year to 4.1 (FY15: 4.2).

 

 

To ensure that our safety performance does not plateau, we have continued to shift our focus to leading indicators to proactively manage our safety performance. These indicators provide information to focus management’s attention on addressing key risks before they lead to injuries. VFL engagements are the focal point of leadership’s commitment to safety. During the year we started to roll out the MAP programme, aimed at further preventing major accidents and fatalities on our sites. MAP ensures the implementation and verification of critical controls on high-risk activities that may give rise to major accidents and fatalities.

We continue to implement best people practices, including leadership development and succession planning, performance management, career development and ensuring ethical business practices, in line with our intention to be an employer of choice in all our markets. This is integral to our ability to compete effectively for scarce management and technical skills, and to manage our capacity requirements through the cycle, especially in responding to an upturn in business activity.

5. ENHANCE SHAREHOLDER VALUE

The business platforms have clear strategies for the next three-year planning period, aimed at fulfilling the objectives of the Group’s New Strategic Future plan. In particular, they will focus on strengthening their business development capacity, building and maintaining relationships with clients, and proactively offering fit-for-purpose project solutions to our selected market sectors. Where necessary, the platforms will remain flexible enough to pursue complementary growth opportunities outside the natural resources sector, based on their competencies and relationships.

To navigate the uncertain conditions we expect over the next 18 months, as the recovery in the global commodity cycle remains irregular, we will continue to efficiently reduce our cost base across the Group. The platforms will focus on operational excellence to limit project losses and preserve margins. Deepening their differentiation across all aspects of project delivery will be necessary to compete effectively.

Given macroeconomic constraints on the Group’s ability to grow organically, a large acquisition will be required to maintain and grow our earnings profile. To this end, we will continue to employ a rigorous process to identify potential targets that operate in the geographies and market sectors showing the highest growth potential.

As we look towards the year ahead, our commitment to Engineered Excellence, the guiding principle that underpins our strategy, will inform the detailed planning and execution of everything we undertake. Given the difficulties we will no doubt face, this will be especially important in ensuring we continue to advance our strategy and improve our performance.

We thank the Board, our executive team and all of our employees for their contribution to the progress we have made, in what has been both a momentous and a difficult year for the Group, in pursuit of our New Strategic Future.

HENRY LAAS
GROUP CHIEF EXECUTIVE
  COBUS BESTER
GROUP FINANCIAL DIRECTOR