Murray & Roberts - Annual Results

POSITIONED FOR GROWTH AND VALUE CREATION
Murray & Roberts is a multinational engineering and construction group, with a focused portfolio of businesses providing services primarily to the natural resources market sectors of metals & minerals, oil & gas and power & water. The Group is listed under the Diversified Industrials subsector of the JSE Limited (“JSE”).

The Group’s Statement of Financial Position and robust cash position provide capacity for growth initiatives to bolster the Group’s earnings potential. The Group’s organic and acquisitive growth plans are focused on positioning its businesses in key growth sectors in developed markets, as well as higher-margin segments of the project life cycle.

FINANCIAL RESULTS
Revenue from continuing operations increased by 10% to R11,8 billion (FY2017 H1: R10,7 billion) and attributable earnings increased by 283% to R110 million (FY2017 H1: loss of R60 million). Diluted continuing headline earnings per share (“HEPS”) increased by 104% to 55 cents (FY2017 H1: 27 cents). Cash, net of debt, increased to R1,3 billion (FY2017 H1: R1,1 billion).

Capital expenditure for the six months was R178 million (FY2017 H1: R371 million) of which R151 million (FY2017 H1: R235 million) was for expansion and R27 million (FY2017 H1: R136 million) for replacement. The order book for continuing operations declined by 10% to R22,1 billion (FY2017 H1: R24,5 billion).
The reducing order book is reflective of current market conditions and ongoing project delays in the oil & gas and power & water sectors.

DIVIDEND UPDATE
In terms of the Group’s dividend policy, the board of directors of the Company (“Board”) will consider a full-year dividend post year-end with a cover of between three and four times earnings.

ORDER BOOK, NEAR ORDERS AND PROJECT PIPELINE
The Group’s order book is of a high quality given the stringent processes applied at tendering stage to mitigate project risk. The lower order book in the Oil & Gas and Power & Water platforms is reflective of market conditions. The increase in Category 1 and 2 values is a leading indicator that market conditions may be improving with more projects being tendered.

• 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 submitted or 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 win probability
• 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 pre-feasibility stage

OIL & GAS PLATFORM

Revenue increased to R4,7 billion (FY2017 H1: R3 billion), predominantly due to scope growth on the Wheatstone and Ichthys commissioning projects, which are nearing completion. Notwithstanding revenue growth, operating profit reduced to R99 million (FY2017 H1: R103 million), reflective of lower margins in a very competitive market. The order book decreased to R3,8 billion (FY2017 H1: R4,9 billion), comprising smaller value and shorter duration orders, as all large value orders have been delivered. The platform regularly reviews and adjusts its cost structures.

The platform is expanding its international footprint, although earnings are still largely derived from Australasia. The Group is pleased to note the stabilisation in the crude oil price around US$60 per barrel and the improved market outlook for LNG demand. However, earnings growth from project services to the Australasian oil and gas market is only expected in the medium term, whilst brownfields developments will be the main source of earnings from this sector for the next few years.

In the context of a slow oil and gas market, greater emphasis is placed on complementary growth markets such as Australia’s metals & minerals and infrastructure markets, previously well serviced by Clough. The platform is positioned to pursue selected opportunities in these markets.

The platform’s international operations outside Australasia comprise small niche engineering and consulting businesses. Progress is being made with a potential small acquisition of an oil and gas engineering and construction company in the USA, which will serve as a basis for the platform to extend its construction services to the growing oil and gas sector in the USA.

UNDERGROUND MINING PLATFORM

The Underground Mining platform delivered a strong financial performance and is the largest contributor to Group earnings for the period under review. Revenue was maintained at R4,1 billion (FY2017 H1: R4,1 billion) but operating profit increased to R239 million (FY2017 H1: R198 million). The order book also increased to R15,3 billion (FY2017 H1: R12,9 billion) against the background of improving market conditions.

Based on market research guidance, the Group expects the improvement in commodity prices and increased investment by mining companies to present long-term growth potential for this business. Tendering teams in all geographies are currently experiencing high levels of activity. Market conditions are improving in all jurisdictions, including the USA and Canada, which have been lagging compared to Australia and Africa.

Murray & Roberts Cementation has been notified by Northam Platinum that it will take over the mining operations as an owner-miner at Booysendal, when the current contract runs out at the end of June 2018. The Kalagadi contract mining project has commenced and will partly offset the loss of income from Booysendal.

There are substantial near orders and a large pipeline of underground mining projects in regions where the platform operates.

POWER & WATER PLATFORM

Financial results and order book are declining as the Medupi and Kusile power station projects near completion. Revenue decreased to R2,6 billion (FY2017 H1: R3 billion) and operating profit to R51 million (FY2017 H1: R66 million). The order book decreased to R2,7 billion (FY2017 H1: R5,8 billion). The platform regularly reviews and adjusts its cost structures.

The platform’s financial results continued to be underpinned by Medupi and Kusile, where work is expected to be largely completed towards the end of calendar year 2018. The power sector in South Africa is presenting very little opportunity as new power station projects have all been delayed, with no other large alternative opportunities identified for the short to medium term.

While the water treatment sector in South Africa is presenting increasing opportunity, it is not yet of sufficient scale to materially and positively impact the platform’s financial performance. Our service offering includes desalination, municipal wastewater treatment technologies, industrial modular water treatment plants and acid mine drainage.

Overall, market conditions remain challenging and highly competitive. Smaller maintenance opportunities are expected at Medupi and Kusile in the short to medium term and efforts are ongoing to replenish the order book with a particular focus on prospects in complementary markets such as mining, pulp and paper, chemicals and energy. Opportunities are emerging in refined product terminals in South Africa, Ghana and Mozambique, which the platform is actively pursuing in collaboration with the Oil & Gas platform. The platform is also providing structural, mechanical, electrical, instrumentation and piping construction services to Sasol.

INVESTMENTS

The acquisition of an additional 17% in BCC was concluded on 8 December 2017 and a subsequent increase in the fair value of this investment was recorded. This investment is yielding strong returns and the Group continues to explore investment opportunities that could secure project work for its three business platforms.

BOMBELA & MIDDLE EAST

MIDDLE EAST BUSINESS

In line with the Group’s strategy to exit the civil engineering and buildings market, the Board resolved to close the business in the Middle East. The four residual projects are expected to be completed by the end of FY2018. No further material project losses are envisaged from this business. Costs during FY2018 should be limited to a significantly reduced overhead cost and legal fees on the Dubai Airport dispute, for which an award is anticipated in early November 2018.

DISCONTINUED OPERATIONS

Genrec recorded an operating loss of R90 million, primarily due to its high fixed cost base and low levels of revenue. The sale of Genrec is well advanced and should be concluded by the end of the third quarter of FY2018. The Infrastructure & Building businesses disposed of in FY2017 recorded an operating loss of R42 million, due to an updated view on the forecast cost to close out the retained assets and liabilities.

The Board deeply regrets the death of Hendry Munardi (49), a RUC Cementation (Australia) employee, on 17 October 2017. Hendry passed on due to asphyxiation while performing his duties at the Big Gossan mine in Freeport (Indonesia).

The Group’s LTIFR deteriorated to 1.19 (FY2017 H1: 0.56). This is largely attributable to the exclusion of statistics from the business in the Middle East, which is in the process of closure and a less than satisfactory performance in a now completed underground mining project in South Africa.

The Group’s uncertified revenue as at the end of December 2017 remained at R1 billion (FY2017 H1: R1 billion), largely represented by claims on projects in the Middle East. All claims are diligently pursued and stakeholders will be kept informed as to their progress.

Further to the update shared on SENS on 2 February 2018, the Dubai International Arbitration Centre extended its deadline for the award on the Dubai Airport dispute from May to November 2018. This is a large and complex dispute and the arbitration Tribunal requested more time within which to deliver its award.

The Department of Labour instituted a Section 32 Inquiry (“the Inquiry”) in November 2015 into this incident to determine the cause or causes of the collapse of the temporary works structure. The Inquiry was recently paused, but is due to resume again in July 2018. The Board is disappointed by the slow progress that is delaying closure of this distressing incident for all parties involved.

Emma Mashilwane and Diane Radley have been appointed to both the audit & sustainability and the risk committees, with Diane assuming chairmanship of the audit & sustainability committee. Alex Maditsi has been appointed to the health, safety & environment, remuneration and social & ethics committees. Xolani Mkhwanazi has been appointed to the social & ethics committee and Ntombi Langa-Royds to the nomination committee with effect from 2 November 2017.

The New Strategic Future plan was designed with two phases in mind:

• optimising the Group’s portfolio of businesses; and
• positioning the Group for sustainable growth and value creation.

The first phase of this strategy has been largely completed and the Board is now focused on enhancing business performance and growing shareholder value. The Group’s robust financial position provides the capacity to support its organic and acquisitive growth plans.

The sustainable growth and value creation aspiration is based on the long-term demand for natural resources. The drivers of such growth include a growing global population, global economic growth and ever increasing urbanisation.

The Group is experiencing improved trading conditions in the Underground Mining platform, but the current market outlook for the Oil & Gas and Power & Water platforms remains challenging. In this context, the Group continues to focus on cost reduction and operational excellence to maintain and improve margins.

Any forward-looking information contained in this announcement has not been reviewed and reported on by the Group’s external auditors.

On behalf of the directors:

Bedfordview
28 February 2018