COMMENTARY

FROM RECOVERY TO GROWTH

Murray & Roberts is a group of companies and brands aligned to the same purpose and vision, and guided by the same set of values. By 2020, the Group aims to be the leading diversified engineering and construction group in the global underground mining market and selected emerging markets in the natural resources and infrastructure sectors.

Murray & Roberts has a three year Recovery & Growth strategy. The Group ended FY2013 having successfully negotiated its Recovery year in FY2012 and accomplished significant milestones in the first of its two Growth years. In FY2013 the Group returned to profitability, signalling more robust and sustainable levels of revenue and profit.

To support long term growth the Group has focused on its core competencies of engineering & construction and identified the energy (oil & gas and power) and mining & minerals market sectors as presenting the best medium- to long term growth opportunity.

Structurally, the Group began the year with five operating platforms which, by the end of the year, had reduced to four platforms, following the sale of the Construction Products Africa businesses, which was classified as discontinued at year-end. Further detail on this disposal is provided in this announcement. Two of the four platforms now represent the Group’s regional businesses (with an African focus) and the remaining two, the international businesses (with a global focus).

PROPOSED ACQUISITION OF CLOUGH

Murray & Roberts announced its intention to acquire all of the outstanding ordinary shares in Clough Limited (“Clough”), in which it is a 61.6% shareholder, on 30 July 2013 (“Proposed Acquisition”). The Group has had a long association with Clough since initially acquiring a shareholding in 2003. Clough is listed on the Australian Stock Exchange and is a leading engineering and construction company in the Australasian oil & gas market sector and an integral part of the Group’s strategy. The Proposed Acquisition is strategically compelling and consistent with the Group’s long term growth plans.

The Proposed Acquisition holds a number of key benefits for the Group:

The Proposed Acquisition, a Category 1 transaction in terms of the JSE Limited Listings Requirements, is subject to various conditions precedent being met, including approval by both Murray & Roberts and Clough shareholders. The Proposed Acquisition should be concluded towards the end of the 2013 calendar year. Shareholders are referred to a separate Category 1 transaction announcement regarding the Proposed Acquisition released on the Stock Exchange News Service (“SENS”) today and to be published in the press on Thursday, 29 August 2013.

HEALTH AND SAFETY

The Board of Murray & Roberts (“Board”) deeply regrets the death of two (2) employees (2012:4) who sustained fatal injuries while on duty. We are saddened by the occurrence of these incidents despite the significant reduction in our injury rates. The Board extends its heartfelt condolences to the families, friends and colleagues of the deceased.

Murray & Roberts achieved a record low LTIFR of 0.82 (June 2012: 1.14) for the year under review, which is better than our target of 1.0. This outcome was made possible by the continuous commitment to safety by all Murray & Roberts employees.

Good progress has been made in implementing the Zero Harm through Effective Leadership programme which is aimed at establishing a high performance culture that will ensure sustainable improvement in health and safety. During the year under review, we also developed an integrated employee health and wellness programme which includes initiatives for the prevention, early identification and management of all occupational health and wellness conditions which may impact on employees’ health and productivity. This programme will be implemented during the FY2014.

COMPETITION COMMISSION

The Board regrets and rejects any form of anti-competitive behaviour in the Group.

In June 2013 the Group entered into a settlement agreement with South Africa’s Competition Commission in terms of its Fast-Track Settlement Process (“FTSP”) relating to historical anti-competitive practices in the construction industry and was fined R309 million.

There are five (5) remaining historical incidents of collusive conduct (excluded from the concluded FTSP) still to be settled with the Competition Commission. The Board is of the view that the potential penalties on these transgressions will not be material compared to the penalty paid on the conclusion of the FTSP and it remains committed to concluding this matter rapidly for the benefit of all stakeholders. The Group has provided for a potential penalty in the FY2013 accounts.

Murray & Roberts is a well-recognised name in South Africa and it has played a significant role in developing the country’s infrastructure for more than 110 years. The Company has a strong value system and it requires ethical business conduct from all its employees. While current management were not implicated in any anti-competitive practices, it has taken decisive action to ensure that such practices will not be repeated.

FINANCIAL YEAR TO 30 JUNE 2013¹

In the year under review, the Group completed the disposal of the business of Union Carriage & Wagon Company and the Steel Business. On 28 June 2013 the Group announced the sale of the remaining manufacturing businesses within the Construction Products Africa operating platform, with the exception of Hall Longmore, subject only to Competition Commission approval. Accordingly, these businesses have been recorded as discontinued operations during the year under review. The financial results of the previous corresponding reporting period have been restated on the same basis.

In the year under review, the Group generated revenue of R34,6 billion (June 2012: R31,7 billion) and reported attributable profit of R1,0 billion (June 2012: R0,7 billion attributable loss). This result includes an attributable profit of R223 million on the disposal of Clough’s investment in Forge Group Limited (“Forge”). Diluted profit per share was 245 cents (June 2012: 214 cents diluted loss per share) and diluted headline profit per share was 186 cents (June 2012: 246 cents diluted headline loss per share).

At June 2013, the Group’s net cash position was R4,3 billion (June 2012: R1,2 billion). The net cash proceeds from disposals equalled R2,2 billion. All term debt was repaid in the year under review.

The Group is pleased to report an order book of R46,1 billion (June 2012; R45,3 billion).

The Group experienced the financial impact of the industrial and labour unrest during the year under review, specifically at the Medupi and Kusile project sites and in the mining sector. The state of industrial relations in South Africa remains of grave concern. The growing tendency for unprotected strikes and unrealistic wage demands impacts on contractors’ abilities to execute work on time, within budget and safely. It also acts as a strong disincentive for private investment in infrastructural development.

UPDATE ON THE GROUP’S MAJOR CLAIM PROCESSES²

Uncertified revenue, representing outstanding claims, remained largely unchanged at R2,1 billion (June 2012: R2,0 billion).

During the year under review the Group continued to pursue its entitlements in terms of its major claims. Following the successful arbitration ruling on the principle of design change at Gorgon Pioneer Materials Offloading Facility (“GPMOF”) and favourable interim award on quantum, the respondent, Boskalis, withdrew its objection against this interim award. The quantum will now be determined in arbitration, due to commence in the first half of FY2014. It is expected that the legal and commercial processes on the Dubai International Airport and the Gautrain project will be closed out towards the end of FY2016.

The Board and management remain committed to the resolution of all contractual disputes and the collection of proceeds from claim settlements, while recognising that this will continue to be a challenging and protracted process.

OPERATING PERFORMANCE**

Construction Africa and Middle East:

Revenues decreased 16% to R6,8 billion (June 2012: R8,1 billion) with an operating loss of R28 million (June 2012: R1 317 million). The order book decreased to
R 8,7 billion (June 2012: R9,0 billion).

Commercial conditions in both southern Africa and the Middle East this year continued to be demanding. Civil construction work on the Eskom power programme was negatively affected by significant and ongoing industrial action.

Notwithstanding some challenging projects, the buildings business secured a sizeable order book with a number of awards towards the end of the year. The margins remain low, but are market-related.

The risks associated with this platform’s historical over-reliance on spend by the South African and United Arab Emirates (“UAE”) economies is being mitigated by a stronger focus on selected countries in sub-Saharan Africa. Increased capital expenditure, needed to unlock Africa’s minerals resources is expected to lead to extensive upgrading of infrastructure across the continent.

Our detailed analysis of engineering and construction opportunities from the publicised government budget, generally reported to be in the region of R800 billion, indicates that much of this consists of funds that have either already been committed, funds that have been earmarked for the manufacturing sector or projects that are already under construction.

The platform has right-sized its Middle East business and is focussing on closing out commercial issues on completed projects.

Engineering Africa:

⁶ Murray & Roberts Projects power programme contracts and Genrec.
⁷ Includes Wade Walker, Concor Engineering, Murray & Roberts Water and Murray & Roberts Projects non-power programme projects.

Revenues decreased 3% to R5,0 billion (June 2012: R5,2 billion), whilst operating profit reduced to R137 million (June 2012: R200 million). The order book decreased marginally to R6,5 billion (June 2012: R6,8 billion). Certain businesses in the platform were reorganised, resulting in a well-resourced specialist engineering competence that offers engineering and construction solutions in the fields of power & energy, water and mining & metals.

Work on the Eskom power programme returned acceptable financial results despite a challenging labour-relations environment. The commercial arrangement with Hitachi entered into in FY2011 lessened the negative financial impact from these disruptions.

Murray & Roberts Projects, which this year accounted for some 70% of platform revenue, is currently repositioning itself for growth opportunities outside of the current South African power programme which completes circa 2017. The platform aims to benefit from the growing African oil & gas opportunities.

Concor Engineering and Wade Walker performed poorly, but are both expected to significantly improve their contributions to platform profit in FY2014. Concor Engineering is increasingly active in the mining and minerals processing sector.

Construction Global Underground Mining:

Revenues decreased 20% to R7,9 billion (June 2012: R9,9 billion), while operating profit declined to R318 million (June 2012: R605 million). The order book increased to R9,9 billion (June 2012: R8,8 billion).

The platform experienced trying and fundamental challenges during the year under review.

In its African operations this platform experienced a significant decline in financial performance mainly due to the mutually agreed termination of the Aquarius contract and through underperformances on some of its projects.

However, as from FY2014, Murray & Roberts Cementation will benefit from its participation in De Beers’ new Venetia diamond mine project. This investment by De Beers potentially represents the Group’s largest single opportunity since the Eskom power build programme. Sub-Saharan Africa represents a very material opportunity for the platform as a whole, as mining activity in the region gains increasing momentum. The business continues to win work with mining majors in the region.

While the North American and Australian operations returned satisfactory financial performance, the immediate outlook for these businesses was clouded by deferments of new projects and termination of existing projects. After several years of strong growth, Cementation Canada and Cementation United States are facing more challenging market conditions. With little upturn expected in the Australian market, RUC Cementation is expanding its reach into the Asia-Pacific region.

The pooling of resources within the Global Underground Mining Platform represents a sizeable competitive advantage. Within a number of emerging markets, the Global Underground Mining Platform is today well placed to win and execute work for its clients.

Construction Australasia Oil & Gas and Minerals:

⁸ Operating profit includes R681 million profit on sale of Forge and R821 million relating to trading profit.

Clough performed exceptionally well this year. Revenue and operating profit increased to R14,8 billion (June 2012: R8,5 billion) and R1,5 billion (June 2012: R0,3 billion) respectively, aided by a weakening Rand exchange rate and profit on disposal of Forge of R681 million. The order book increased to R20,6 billion (June 2012: R19,4 billion).

The restructuring of the business, which commenced during FY2012, was successfully completed. The four business divisions – Engineering, Capital Projects, Jetties & Near-Shore Marine, and Commissioning & Asset Support – are all profitable and contributing to Clough’s overall profitability.

During the year under review, Clough established a joint-venture with South Korean manpower and logistics company Coens Energy and launched Clough Coens Commissioning and Completions, a business that will provide specialised commissioning and completions services to onshore and offshore oil & gas facilities. Clough is the major partner at 55%.

In January 2013 Clough acquired the specialised commissioning, completion and hazard area inspections contractor, e2o. Although a small acquisition, it strategically positions Clough in the growing LNG plant commissioning market. In the short to medium term, commissioning is envisaged to be a particularly lucrative field for those possessing the required systems and knowhow as several large Australian LNG projects move from the construction phase to the operations phase. This is a growth market which is expected to largely counter the impact of an expected decline in the Australian LNG capital-build programme as from 2017.

Full details of Clough’s financial results for the full year and its prospects have been published on its website www.clough.com.au.

Disposal of non-core assets:

⁹ Includes Hall Longmore, Rocla, Much Asphalt, Technicrete, Ocon Brick and UCW.

On 29 January 2013 the Group announced the disposal of Union Carriage & Wagon Company to a black-owned consortium. The Group realised fair value in the sale price, which exceeded book value.

The disposal of the Steel Business became unconditional following Competition Commission approval.

On 28 June 2013 the Group announced the successful conclusion of the disposal of the balance of its Construction Products Africa operating platform (excluding Hall Longmore), comprising the Group’s manufacturing businesses. The group of businesses included Much Asphalt, Rocla, Technicrete and Ocon Brick. The total cash consideration in respect of the transaction was approximately R1,3 billion before transaction costs. This transaction is subject to Competition Commission approval. Negotiations with potential buyers for the sale of the remaining Hall Longmore business are ongoing and shareholders will be advised in due course of the outcome thereof.

DIVIDEND

The Board has resolved not to declare a dividend for the full year, in order to preserve cash to fund its strategy and growth plans.

BOARD OF DIRECTORS

During the year under review, Mr. Tony Routledge, Dr. Namane Magau and Dr. Sibusiso Sibisi retired from the Board. Subsequent to year-end, Ms.Thenjiwe Chikane resigned from the Board. Dr. Orrie Fenn resigned from the Board, due to his appointment as platform executive for the Construction Global Underground Mining platform. Our sincere appreciation is extended to all of these directors for their valued contribution.

Effective 1 March 2013, Adv. Mahlape Sello succeeded Mr. Roy Andersen as non-executive chairman, following his planned retirement, as announced in August 2012. The Board thanks Mr. Andersen for his valued counsel.

Ms. Ntombi Langa-Royds joined the Board in June 2013 as a non-executive director, chairman of the Social & Ethics Committee and member of the Remuneration and Human Resources Committee.

APPRECIATION

We would like to thank our stakeholders for their ongoing support, in a year in which distressing legacy issues have taken their toll on the Group’s reputation. We look forward to restoring trust and earning the support of all our stakeholders, as we continue to bring the lessons of the past to bear on ensuring a brighter future for the Group.

PROSPECTS STATEMENT

The Board is pleased with the significant improvement in the Group’s financial results and expects the Group’s positive earnings trend to continue in the medium- to long term, driven mainly by its international operations.

The information on which this prospects statement is based has not been reviewed or reported on by the Group’s external auditors.

On behalf of the directors

Bedfordview
28 August 2013