Murray & Roberts - Interim Results

Murray & Roberts has a long and proud heritage of more than a century and is a multinational engineering and construction project lifecycle group, which delivers its capabilities into three global market sectors: oil & gas; metals & minerals and power & water. Murray & Roberts is a group of world-class companies and brands aligned to the same purpose and vision, and guided by the same set of values. More information is available at www.murrob.com.

Murray & Roberts is largely exposed to the cyclical global natural resources sector which has still not recovered from a period of prolonged weakness. This is reflected in the financial results recorded for the period under review.

The Group regularly reviews and adjusts its cost structures in line with the decline in revenue in a market which is likely to remain tough for the short to medium term, whilst it continues to focus on commercial and project management excellence.

Revenue and profit from continuing operations were R10,7 billion (December 2015: R13,0 billion) and R119 million (December 2015: R389 million) respectively. After a loss from discontinued operations of R179 million, the attributable loss was R60 million (December 2015: R376 million profit). Diluted continuing headline earnings per share (“HEPS”) decreased to 27 cents (December 2015: 93 cents). This result reflects a reduction in earnings from the Oil & Gas platform of R172 million, a cost increase to close out projects and the business in the Middle East (R130 million), a negative exchange rate movement of R244 million and a once-off charge of R170 million for the agreement entered into between all listed construction companies and the South African Government.

Capital expenditure for the six months was R371 million (December 2015: R190 million) of which R136 million (December 2015: R86 million) was for replacement and R235 million (December 2015: R104 million) for expansion, mainly in the Underground Mining platform, which is an encouraging sign of a possible recovery in the mining sector. The Group recorded cash net of debt of R1,1 billion (December 2015: R1,0 billion).

The order book for continuing operations decreased to R24,5 billion (December 2015: R35,2 billion).

The Group’s order book and project pipeline is outlined below.

• Near orders: Tenders where the Group is the preferred bidder and final award is subject to financial/commercial close – there is more than a 95% chance that these orders will be secured.
• Category 1: Tenders the Group is currently working on (excluding Near orders) – projects developed by clients to the stage where firm bids are being obtained – chance of being secured as firm orders a function of final client approval as well as bid strike rate.
• Category 2: Budgets, feasibilities and prequalification the Group is currently working on – project planning underway, not at a stage yet where projects are ready for tender.
• Category 3: Opportunities which are being tracked and are expected to come to the market in the next 36 months – identified opportunities that are likely to be implemented, but still in prefeasibility stage.

In terms of the Group’s dividend policy communicated at the release of the Group’s FY2015 results on 26 August 2015, the board of directors of the Company (“Board”) will consider paying an annual dividend of between three and four times earnings cover.

OIL & GAS

The Oil & Gas platform works with some of the largest energy and resources companies to engineer, construct, commission and maintain a comprehensive range of infrastructure for energy, chemical, mining and mineral projects.

The most material factor impacting the Group’s profitability is the substantial decline in earnings from the Oil & Gas platform following the significant drop in the oil price during the second half of calendar year 2014. Since then, few new capital projects came to market and the large energy companies are still delaying or deferring expenditure to preserve cash. In Australasia the decade long major investment in new Liquefied Natural Gas (“LNG”) projects came to an end and the platform will be very active in the commissioning market for the next 12 to 18 months. Brownfields operations and maintenance opportunities are expected to be the main source of earnings from this region until at least 2021.

Revenue reduced to R3 billion (December 2015: R6,1 billion) and operating profit to R103 million (December 2015: R275 million) reflecting lower margins on a smaller revenue base. The order book decreased to R4,9 billion (December 2015: R9,1 billion) as all large construction orders have been delivered and the order book now largely comprises smaller value and shorter duration orders.

The composition of earnings has changed over time and currently excludes large contributions from construction work, with income from commissioning work dominating. The Wheatstone hook-up and commissioning project for Chevron was a major contributor to earnings during the first six months of the year. The recently acquired businesses, Booth Welsh (Scotland) and CH-IV (USA) are small, but profitable. The business is focusing on securing a prominent share of the commissioning and emerging Brownfields and asset support market on LNG facilities in Australasia and new re-gas opportunities associated with the gas-to-power programme in Indonesia.

Meaningful earnings growth from this low base is expected only when global energy producers again start to invest in new projects, which is envisaged to be in the short to medium term. The tendering department is very busy and a number of key prospects are awaiting adjudication, as evident in the category 1 pipeline prospects. The first new major Greenfields opportunities are expected to be in Papua New Guinea, as energy producers are progressing work associated with new LNG facilities, to be ready for production by 2022 and 2023.

UNDERGROUND MINING

The Underground Mining platform continues to perform well in a soft global commodities market. The platform’s geographic footprint is extensive and its service offering spans the project lifecycle from specialist engineering, shaft construction, mine development, other specialist mining services such as raise boring, to contract mining. Contract mining projects are being undertaken in all main geographic regions, providing a more stable long-term baseload of work.

Revenues reduced marginally to R4,1 billion (December 2015: R4,2 billion) and operating profit to R198 million (December 2015: R219 million). The order book was R12,9 billion (December 2015: R16,3 billion).

The Australian business is experiencing increased demand, although the businesses in the USA and Canada are under pressure as new project awards are being delayed. The African business continued to achieve good results in Zambia. The tender validity on the Kalagadi project was extended and the commencement date of the project is still uncertain.

There are significant tenders awaiting adjudication in South Africa, including the new Platreef mine and scope growth at Venetia and Booysendal. There are few new major category 1 prospects in the Americas and Australia, although several smaller opportunities are awaiting adjudication.

The platform is well positioned in the world’s main mining regions; Africa, Australasia and the Americas and is a contractor of choice to blue chip clients. It is expected that the backlog in mining investments will support commodity prices in the medium term and that new Greenfields projects will bolster the current Brownfields opportunities available in the market.

POWER & WATER

The Power & Water platform’s service offering spans the full project lifecycle, from project development to engineering, procurement and construction, with a focus on traditional mechanical, electrical and instrumentation services, as well as operations and maintenance services.

The Medupi and Kusile power station projects remain the main source of income for this platform. The current scope of work on these projects is expected to be largely completed by June 2018. Continuing construction work post hydro-testing, albeit at a smaller scale, to continue over a longer period. Maintenance opportunities will come to market thereafter. Although the projects are progressing well, final commercial close out is likely to be complicated and challenging.

Revenues increased to R3 billion (December 2015: R1,9 billion) mainly from acceleration on Medupi and Kusile and an operating profit of R66 million (December 2015: R28 million operating loss) was recorded. The order book decreased to R5,8 billion (December 2015: R7,6 billion). The operating profit is net of a loss of R116 million on the Wet Flue Gas Desulphurisation project at Kusile. Claims on this project are not sufficiently advanced and hence have not been accounted for in the current reporting period.

The prospects for new power projects in South Africa are positive, and the platform is well positioned for opportunities in the coal, solar and future gas-to-power sectors. The announcement towards the end of the 2016 calendar year of two new IPP coal-fired power stations (Khanyisa – 306MW and Thabametsi – 557MW), as well as the gas-to-power programme (LNG Power Producer Procurement Program: Coega – 1 000MW, and Richards Bay – 2 000MW), present significant replacement work opportunity for Medupi and Kusile. This market remains very competitive as more companies are targeting this sector. Near-term opportunities include the George Biomass project, as well as the Duvha boiler rebuild for Eskom.

The platform also services complementary markets, such as the petrochemical sector. Construction and shutdown opportunities for Sasol Limited at Secunda and Sasolburg are key focus areas. Efforts are continuing to establish a meaningful water business, with a focus on desalination, innovative municipal wastewater treatment technologies, industrial modular water treatment plants and acid mine drainage. A recently established partnership with RMB offers industrial users a water security and re-use solution at a predetermined cost for treated water. The partnership will design, own, operate, maintain and fund the water plants and a keen interest has been expressed by potential clients.

BOMBELA AND MIDDLE EAST ENTITIES

(Retained post the discontinuation of the Southern African Infrastructure & Building businesses)

The Group’s Gautrain-related businesses include its investments in the Bombela Concession Company, Bombela Civils Joint Venture and the Bombela Operating Company. The Bombela Concession Company continues to perform well and delivers great value.

All Gautrain development period claims have been settled with the Gauteng Provincial Government. This was an all-inclusive settlement and the settlement value achieved supported the uncertified revenue previously taken against claims, net of the provision for potential future Gautrain tunnel water ingress work. In terms of this agreement no further work is required to be undertaken in the tunnel.

In the Middle East current projects are expected to be completed by December 2017 and no new projects are being pursued. Close-out of the business in the Middle East continues to present major risk, as reflected by the loss incurred of R173 million in this first half of the year.

DISCONTINUED OPERATIONS

The Southern African Infrastructure & Building businesses and Genrec were reclassified to discontinued operations as at 30 June 2016 and the comparative financial results have been restated. The R170 million net present value charge of participating in the Voluntary Rebuild Programme between the listed construction companies and the South African Government, as previously announced on the Stock Exchange News Service of the JSE Limited (“SENS”), was recorded under discontinued operations.

Direct Corporate Office costs in the Group have reduced from R256 million in 2011 to circa R130 million. The Corporate Office sets the strategic direction and provides support to our local and international businesses.

The Group accomplished three significant strategic initiatives in the first six months of the 2017 financial year:

Settlement of all Gautrain development period disputes – In November 2016, the Bombela Concession Company (on behalf of the Bombela Civil Joint Venture of which Murray & Roberts is a 45% shareholder) and the Gauteng Provincial Government agreed to a comprehensive settlement of all disputes relating to the development period (construction period) of the Gautrain Rapid Rail Link Project. This brings to an end a multi-year protracted legal process. In terms of the agreement, the Gauteng Provincial Government paid an upfront amount of R980 million and a further payment to be received over a two-year period of a capped amount of R294 million – these values are inclusive of Value Added Tax and the Group’s share in the settlement value is 50 percent. This is a final settlement of all construction-related disputes and in the best interest of all stakeholders.

Sale of the Southern African Infrastructure & Building businesses – On 1 November 2016, Murray & Roberts announced on SENS the purchase of its Southern African Infrastructure & Building businesses by a consortium led by the Southern Palace Group of Companies Proprietary Limited. The fully-funded transaction consideration is R314 million. The sale remains conditional, and Competition Commission approval is the only material condition precedent still to be met. This transaction should be completed before the end of the current financial year.

Voluntary Rebuild Programme agreement with the South African Government – In October 2016 Murray & Roberts, and six other South African engineering and construction companies, reached an agreement with the South African Government, mitigating the companies’ risk to claims for damages from identified public entities, arising primarily from the fast track settlement process launched by the South African Competition Authorities in February 2011.

The Board deeply regrets the death of Ditebogo Phuduhudu (27), who sustained fatal injuries whilst on duty on the Infrastructure & Building platform’s Noupoort Wind Farm Project in the Northern Cape.

The Group’s overall lost time injury frequency rate reduced to a record-low level of 0.56 (December 2015: 0.78). Our goal is zero harm to our employees, service providers and communities where we operate. Good safety performance is not only a moral obligation but also a differentiating factor for all our business platforms.

As at the end of December 2016, the Group’s uncertified revenue totalled R1 billion (December 2015: R2 billion), and is primarily represented by the Group’s claims on projects in the Middle East. All claims are diligently pursued and stakeholders will be kept informed as to their progress.

The arbitration regarding the Dubai International Airport claim is progressing with hearing dates scheduled for April to May 2017 and October to November 2017. Subject to a change in hearing dates, an award is expected by February 2018.

In November 2015, the Department of Labour instituted a Section 32 Inquiry (“the Inquiry”) into the incident to determine the cause or causes for the collapse of the temporary works structure. This is a formal inquiry conducted under the provisions of the Occupational Health and Safety Act, 1993. The Inquiry is due to resume on 27 March 2017.

All costs incurred to date have been expensed. The direct financial impact of this incident on the Group is not expected to be material considering its comprehensive insurance cover.

Approval was obtained in January 2017 from the Department of Labour to commence construction over the M1 highway. The project is expected to be completed during the latter part of the calendar year.

On 30 November 2016, Murray & Roberts announced on SENS that Cobus Bester has decided to retire after five and a half years as Group Financial Director, but will continue in his current role until his successor is appointed, which is expected to be before June 2017.

Michael McMahon and Royden Vice retired from the Board effective from 30 September 2016 and 30 November 2016 respectively, having reached the mandatory retirement age for Board members. The Group thanks Michael and Royden for their contribution to the Board since 2004 and 2005 respectively.

It is the Group’s vision to be a leading multinational group that applies its project lifecycle capabilities to optimise fixed capital investment.

Post the sale of the Southern African Infrastructure & Building businesses and Genrec, the Group’s strategic direction is firmly focused on selected global oil & gas, metals & minerals and power & water market sectors. The three key drivers supporting long-term sustainable growth in these natural resources market sectors are: global economic growth, global population growth and continued urbanisation.

The Company has received approval to transfer its sub-sector listing on the JSE from Heavy Construction to Diversified Industrial. The Diversified Industrial sub-sector most closely describes the nature of the Company’s current businesses and the change in sector will be effective from Monday, 20 March 2017.

The global markets in which the Group operates have been depressed for the last few years and the Board expects difficult trading conditions to continue in the short to medium term. As shared in updates to the market in November and December 2016, the current financial year is turning out to be even more challenging than the past year.

The natural resources market sectors are cyclical and the Group is well positioned for the upcycle. The outlook for metals and minerals is improving and it is expected that the Underground Mining platform will in the short term benefit from new investment in the mining sector. A recovery in the Oil & Gas platform will take longer as the LNG market is expected to remain well supplied until 2022.

The Group’s businesses are respected for their capabilities and services and all platforms continue to focus on operational excellence, cost reduction and efficiency in order to trade through this difficult period.

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

Shareholders are referred to the SENS announcement released by the Company on 22 February 2017, relating to the acquisition by ATM Holding GmbH, Munich, a company registered in accordance with the laws of Germany, of a material beneficial interest in Murray & Roberts.

Bedfordview
22 February 2017