Commentary
Shareholders are referred to the cautionary announcement released through SENS on 28 January 2011 and are advised that caution is no longer required to be exercised when dealing in the Group’s securities.
Murray & Roberts is currently defined in terms of the long duration major project nature of its order book. These projects are primarily in the South African public sector. In every such project, Murray & Roberts and its joint venture partners have experienced significant changes in scope which have caused delay and disruption.
These significant changes in scope can present complex challenges to both contractor and client, the inevitable outcome of which is an increase in the cost of construction. Without pre-funding for these scope increases, working capital will increase significantly.
Dubai International Airport and Gautrain were the Group’s first major projects in recent times. Each project is in an arbitration process for the resolution of outstanding matters of dispute.
The Group has reviewed its statement of financial position against a backdrop of increased uncertainty in Middle East and a developing trend of delayed certification on the South African power projects, albeit these projects are still cash positive. In the context of these challenging times the Group has taken a R410 million impairment on contracts-in-progress and an exceptional charge of R385 million of current year expenses against which revenue recovery is not certain. This represents an exceptional item of R795 million in the half-year accounts.
Subsequent to the above impairment, uncertified revenues in the statement of financial position at 31 December 2010 is R1,25 billion (30 June 2010: R1,4 billion) for major projects. Depending on the outcome of various arbitration proceedings relating to complex claims on major projects, the possibility of a material recovery exists which the Group at this stage is unable to confidently quantify.
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The Group has recorded an attributable loss of R636 million (2009: R576 million profit) in the six months to 31 December 2010, including exceptional items of R795 million and a loss on discontinued operations of R326 million primarily relating to the rationalisation of the Group’s reinforcing steel operations and operating losses in Johnson Arabia.
For continuing operations, revenue for the six months to 31 December 2010 has increased by 2,5% to R15,8 billion (2009: R15,4 billion) with operating profit excluding exceptional items reduced by 25% to R715 million (2009: R959 million) at an operating margin of 4,5% (2009: 6,2%).
Excluding exceptional items, diluted headline earnings per share for continuing operations is down 37% at 133 cents (2009: 211 cents) and earnings per share for continuing operations is down 31% at 142 cents (2009: 206 cents).
The Group Order Book at 31 December 2010 was steady at R50 billion with an embedded margin within the Group’s strategic range of 5,0% to 7,5%. This compares to R49 billion at 30 September 2010 and R42 billion at 30 June 2010 and bodes well for the future prospects of the Group.
The Project Opportunity Pipeline, which records opportunities of interest to the Group and that have already been filtered through the Opportunity Management System, stood at R59 billion at 31 December 2010 (30 June 2010: R68 billion). There were 239 opportunities in the pipeline at the half-year and the data indicates that more work is entering the market. However, there are fewer new major projects.
For the period under review:
Construction SADC: Revenues declined 28% to R3,2 billion (2009: R4,5 billion) with EBIT at R98 million (2009: R3 million after a R220 million revenue deferment on Gautrain) and a margin of 3,0%. Order Book is R7,6 billion (June 2010: R7,4 billion).
Engineering: Revenues increased 70% to R1,8 billion (2009: R1,1 billion) with a decline in EBIT to R38 million (2009: R62 million). No operating profit has been taken on the Power Program pending resolution of outstanding matters with the main contractor. Order Book is stable at R17,3 billion (June 2010: R16,7 billion).
Construction Products: Revenues declined 13% to R2,7 billion (2009: R3,1 billion) with a decline in EBIT to R122 million (2009: R268 million). UCW is now recorded in this cluster. This decline in performance is largely attributable to difficult trading conditions in the sector.
Middle East: Revenues declined 8% to R1,3 billion (2009: R1,4 billion) with a 63% decline in EBIT to R69 million (2009: R184 million), which reflects a conservative view of tighter market conditions in the region. Order Book is at R3,3 billion (June 2010: R4,4 billion).
Cementation Group: Revenues increased 43% to R3,5 billion (2009: R2,5 billion) with a 34% increase in EBIT to R290 million (2009: R217 million) at a margin of 8,2%. Order Book increased significantly to R12,9 billion (June 2010: R7,0 billion) primarily in South Africa.
Clough Limited: Revenues increased 15% to R3,0 billion (2009: R2,6 billion) but a 51% reduction in EBIT to R128 million (2009: R259 million) is primarily as a result of a soft marine construction market in the half-year. Order Book increased substantially to R8,7 billion (June 2010: R6,7 billion). Full details of the Clough financial results for the half-year and its prospects are published on its website www.clough.com.au.
The current market value of the Group’s investment in Clough is approximately R3,0 billion, which exceeds the Group’s investment in the company by more than R1,4 billion.
Corporate & Investments: Revenue of R134 million (2009: R147 million) was recorded in Tolcon, Concessions and Properties at an EBIT of R101 million (2009: R91 million). This has been offset by Group corporate costs of R111 million (2009: R110 million) and IFRS 2 share-based expenses amounting to R20 million (2009: R15 million).
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A slowdown in EBIT generation, funding of working capital on Gautrain and utilisation of advance payments during the half-year has led to a decrease in the Group’s cash balances at 31 December 2010. Cash less bank overdraft is R1,7 billion (R2,6 billion: 30 June 2010) and net debt is R1,0 billion (R437 million net cash: 30 June 2010). In South Africa, net debt is R2,4 billion (R1,6 billion: 30 June 2010).
The Group’s South African banking headroom at 31 December 2010 is in excess of R1,0 billion, with operating cash flow expected to be positive and net debt levels anticipated to remain steady for the remainder of the year.
In South Africa, the Group is geared to a higher level than desirable and is engaged in a number of strategic initiatives to reduce debt on the South African statement of financial position, including but not limited to the disposal of discontinued operations.
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Taking into consideration the expected timing for resolution of major project disputes, the Board has not declared an interim dividend for the period under review. The Board will continue to review the financial position of the Group and is committed to the continuation of dividend payments as soon as conditions allow, which include progress with the resolution of major project disputes. In line with its policy, there is no interim dividend declaration from Clough.
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Bombela Concession Company (Pty) Ltd (Bombela) holds the 19,5 year concession from Gauteng Provincial Government (Gauteng) for the construction and operation of the Gautrain System (Project). Bombela successfully delivered Phase 1 of the Project ahead of the 2010 FIFA World Cup and passenger utilisation continues to exceed expectations.
Murray & Roberts is positive on the future value prospects of the concession and has committed about R190 million to Bombela’s equity which includes an increase in its shareholding from 25% to 33% (subject to required approvals).
Murray & Roberts has a 45% share in the underlying infrastructure joint venture (BCJV), has committed about R2,0 billion of working capital requirements in BCJV over the past 18 months, and committed a further R150 million in an agreement with its partners to fund the acceleration of Phase 2 construction for completion by the end of the financial year.
There are nine active arbitration proceedings, all of which involve highly complex legal and commercial argument. The first of these arbitrations has recently been determined, with important rulings in favour of Bombela and BCJV in respect of the delay and disruption claim associated with late access to and procurement of land by Gauteng.
The Group believes in the validity and merits of the BCJV and Bombela claims, but cannot predict with certainty the timing of the resolution of the disputes and payment of claims.
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Murray & Roberts is involved in five contracts for the construction of Eskom’s Medupi and Kusile Power Stations. The first three listed below are directly with Eskom and the latter two are as the main subcontractor to a consortium of Hitachi Power Africa and Hitachi Power Europe (Hitachi).
- Medupi Civil Works in a 67% joint venture with a contract value of R2,9 billion.
- Medupi Chimneys and Silos in a 40% joint venture with a contract value of R830 million.
- Kusile Chimney in a 40% joint venture with a contract value of R690 million.
- Medupi Boiler House structural and mechanical works with a contract value of R6,7 billion.
- Kusile Boiler House structural and mechanical works with a contract value of R6,5 billion.
Based on the above original contract values, the Group Order Book at 31 December 2010 includes R19 billion of outstanding value on these five projects.
First access by Murray & Roberts and its partners to both the Medupi and Kusile projects in respect of these contracts was and remains delayed by about 12 months. In the case of the Civil Works Contract at Medupi, a 14,5 month extension to the time for completion of the works has been awarded to date.
Work completed on the Civil Works Contract at Medupi exceeds its original contract value and scope of works while only 50% complete. The majority of all work being performed at present relates to variations in scope and acceleration of the works.
The joint venture continues with the works as required by the contract, but is utilising its advance payment to fund the uncertified value of scope increases and acceleration.
Murray & Roberts and Hitachi are engaged in a voluntary mediation process to attempt resolution of the many issues that have arisen between the parties concerning the design, fabrication and complexity of structural steelwork for the Medupi and Kusile Boiler House structures. It is expected that the parties will be capable of reaching an agreement on a new way forward.
The Boiler House projects remain cash positive for now and Murray & Roberts believes in the validity and merits of its claims under the various contracts.
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Murray & Roberts was one of the first construction sector companies to have engaged proactively with the Competition Commission. A decision and actions were taken by management in 2000 to end collusive industry practices, which was followed in 2006 by a further initiative to root out any remaining collusive practices.
All improper conduct that was identified and which, based on legal advice, was considered prosecutable in terms of the Competition Act, was proactively brought to the Commission’s attention. Murray & Roberts has cooperated fully with the Commission and this has been recognised by the Commission.
Following the recent media statement by the Competition Commission and a subsequent meeting by management with the Commissioner, Murray & Roberts has intensified its internal investigations, including forensic interrogation of its contracting operations, in a further effort to uncover past acts of collusion. This includes further internal forensic investigation into the Greenpoint Stadium, the results of which, if warranted, will be provided to the Commission on completion.
Murray & Roberts will continue to work with the Competition Commission in the best interests of the Group and to eliminate any possible collusion from the construction industry.
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The Group previously informed shareholders of its intention to close and/or dispose of underperforming assets. These include Johnson Arabia, BRC Arabia, all or part of the Group’s reinforcing steel business and outstanding properties in Clough. These businesses have been reported on and disclosed as discontinued operations (refer note 3).
Buyers have been identified for all of these assets other than some of the Clough properties and the Group is in negotiations that should lead to completion of the disposals within the remainder of the current calendar year. Other than the Group’s reinforcing steel business, in reclassifying these assets and liabilities as held-for-sale, the Group has not yet identified or recognised any potential impairment losses to date or in the half-year accounts.
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The Group, its directors and management regret and are concerned at the loss of 10 (ten) employees in the period as a result of fatal accidents in the South African workplace. These incidents have occurred primarily in the Group’s mining operations, where there has been a further fatality subsequent to the half-year.
Stop.Think is the primary branding for health and safety awareness in Murray & Roberts. The Group recently partnered with DuPont Sustainable Solutions in its South African operations, which is currently busy with a comprehensive safety diagnostic analysis.
A key safety indicator is the lost time injury frequency rate (LTIFR) per million hours worked, which continued a four year downward trend, finishing the half-year at 1,44 towards the Group threshold target of 1,0.
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The Board is well advanced with its Group Leadership Succession Plan and expects to announce the appointment of a chief executive successor before the end of the current financial year. The Chief Executive and Financial Director will continue to lead the Group through to retirement on 30 June 2011 after eleven years at the helm of Murray & Roberts.
Over this period, Murray & Roberts established itself as South Africa’s leading construction and engineering group, with a global footprint serving key natural resources markets. This was during a period defined by global socio-economic volatility and in South Africa, Government’s infrastructure investment plan, including for the 2010 FIFA World Cup.
Mr Bill Nairn joined the board as an independent non-executive director on 30 August 2010. He brings extensive local and international experience in the mining and resources sectors.
Mr Malose Chaba has resigned as a director and executive effective 14 February 2011 after seven years in the Group. The Group wishes him well in his future endeavours.
Mr Henry Laas has been appointed executive chairman of the Engineering Cluster where he has assumed the responsibilities of Mr Chaba and Mr Keith Smith who retires at end-March 2011.
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The second half of the financial year is projected to show an increase in revenues in Middle East and Cementation with no growth projected for the South African Construction and Construction Products clusters and Group Investments.
The primary opportunity for the Group in the second half-year is to support the work in BCJV to secure its payment rights on the Gautrain Project. The Group is hopeful that delays in certification within the Power Program will reverse. It is unlikely that the final account arbitration on Dubai International Airport will be completed before year-end.
While there is still weakness and margin pressure in the construction markets of Middle East and South Africa, the Group expects the Budget to reinforce Government’s commitment to the acceleration of its infrastructure program.
The Group has invested over some time in the development of its strategy to re-engage the growing potential of new investment opportunity that will flow from the development of resources and infrastructure markets in the Rest of Africa.
The information on which this prospects statement is based has not been reviewed nor audited by the Group’s external auditors.
On behalf of the directors
Roy Andersen
Chairman of the Board |
Brian Bruce
Group Chief Executive |
Roger Rees
Group Financial Director |
Bedfordview
23 February 2011
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