COMMENTARY

FINANCIAL REPORT FOR THE SIX MONTHS TO 31 DECEMBER 2011**

For the six months ended 31 December 2011, the Group generated revenue of R16,7 billion (2010: R15,1 billion) and reported an attributable loss of R528 million (2010: R636 million). This loss is primarily as a result of additional cost provisions, amounting to R831 million, on GPMOF and Middle East contracts. The Group remains exposed to potential additional costs until the completion of GPMOF, Gautrain and Middle East contracts.

For the six months to 31 December 2011, the Group recorded a diluted headline loss per share of 210c (2010: 177c) and diluted loss per share of 178c (2010: 215c).

RECOVERY & GROWTH

Murray & Roberts embarked on the 2012 financial year with new leadership, a renewed focus on risk management and health and safety, a sound order book and a determination to grow the business while reducing debt.

The Group’s Recovery & Growth Plan, which aims to return the Group to profitability as soon as practicably possible, was communicated to shareholders on 31 August 2011. In implementing this plan during the six months ended 31 December 2011 the:

Order book increased to R57,0 billion (June 2011: R55,4 billion). The operating margin contained in the order book is within the Group’s targeted range of 5,0% to 7,5%.

Liquidity & Debt Restructuring

In order to improve the Group’s liquidity, Murray & Roberts successfully completed the restructuring of its South African term debt and banking facilities during November 2011. The new debt package of approximately R4,3 billion (previously R3,4 billion) includes facilities ranging from on-demand to four-year facilities, achieving the objective of extending the average tenure of the Group’s debt structure. This better aligns the debt repayment tenure with the timing of anticipated proceeds to be derived from the settlement of the Group’s major claims.

The Group’s net debt position at 31 December 2011 was R21 million, compared to a net debt position of R1,0 billion at 31 December 2010. Debt levels in South Africa remain high, with significant amounts of restricted cash held offshore and in joint ventures.

Rights Offer

The Board has given due consideration to the continued implementation of the Group’s Recovery & Growth Plan; the expected funding requirements of the order book, optimal balance sheet structure, debt repayment tenure and the protracted nature of the claims settlement process. The Board is of the view that it is prudent to raise additional equity capital from shareholders and proposed a rights offer to raise approximately R2,0 billion.

While the Board believes that the steps taken above have been essential to solidifying the Group’s operating and financial position, it has also sought to retain strategic flexibility and to preserve and grow long-term shareholder value, particularly in light of the current global economic and financial markets.

OPERATING PERFORMANCE

Although the business environment continues to be impacted by the uncertain global economic and financial markets, the Group maintains a strong order book and is experiencing improved trading conditions in all operating platforms, other than Construction Africa and Middle East and Construction Products Africa.

Construction Africa and Middle East: Revenues declined 14% to R4,4 billion (2010: R5,1 billion) with an operating loss of R779 million (2010: operating loss of R432 million). The losses are primarily due to additional costs on GPMOF and projects in the Middle East. Further detail on GPMOF is included under Challenging Projects. The order book is R10,7 billion (June 2011: R10,0 billion).

In the medium to longer term, the outlook for Construction Africa remains positive, given the major – and growing – infrastructural backlog in South Africa and the recent commitment and focus on infrastructure spend announced in the State of the Nation address and budget speech. Government approved expenditure for infrastructure plans to the amount of R845 billion in the Medium-Term Expenditure Framework.

The platform will have a particular focus on opportunities in the road, rail, power, renewable energy and water sectors and through partnerships with other organisations to access major project opportunities. However, in the near term the construction industry in South Africa is expected to remain muted, and the platform is actively pursuing opportunities in Africa.

Conditions in the United Arab Emirates remain challenging and the Group made additional provisions of R231 million against subcontractor final accounts and other completion costs on various projects. The Middle East business is shifting focus to Qatar which, in the medium term, is expected to present opportunity for civil and building works, particularly associated with the 2022 FIFA World Cup.

Processes to settle the Group’s claims on GPMOF, Gautrain and Dubai International Airport projects are ongoing. Based on current information, there is no requirement to impair the claims taken to book as uncertified revenues valued at approximately R2,2 billion. This is marginally up from the R2,0 billion previously reported, primarily due to foreign exchange movements. These claims have been taken to book in compliance with IAS 11 (Construction Contracts) and following engagement with independent legal, commercial and claims consultants. The Group’s uncertified revenues are significantly lower than the estimated value of its claims and variation orders. The Board and management remain committed to the resolution of all contractual disputes and collection of resultant claims, while recognising that the settlement will be challenging and protracted.

Johnson Arabia was sold in the period under review for R109 million.

Construction Global Underground Mining: Revenues increased 34% to R4,7 billion (2010: R3,5 billion) with a 16% increase in operating profit to R335 million (2010: R290 million). The order book decreased marginally to R16,1 billion (June 2011: R16,7 billion).

The mining business is performing well as a result of the strong global demand for commodities, and continues to secure significant contracts globally with major international mining houses. However, the local platinum sector is being impacted by the lower platinum price.

Construction Global Underground Mining will continue to pursue opportunities globally which may include acquisitions to further strengthen and diversify the platform’s order book and accelerate revenue growth in key markets, such as Western Australia.

Construction Australasia Oil & Gas and Minerals: Revenues increased 24% to R3,6 billion (2010: R2,9 billion) with a decrease in operating profit to R82 million (2010: R154 million) primarily as a result of losses on a completed contract and fee adjustments pertaining to two fixed fee contracts. The order book increased substantially to R15,4 billion (June 2011: R11,4 billion). Full details of the Clough financial results for the halfyear and its prospects have been published on its website www.clough.com.au.

The sale of Clough’s Marine business was concluded in December 2011, with proceeds of R654 million received, net of borrowings.

The construction market in Western Australia remains buoyant due to strong global demand for commodities and significant investment in oil & gas and mining infrastructure. The Group continues to consider how best to optimise its investment in this key growth area.

Engineering Africa: Revenues increased 77% to R2,3 billion (2010: R1,3 billion) with an increase in operating profit to R103 million (2010: R103 million loss). The order book is marginally lower at R13,6 billion (June 2011: R14,2 billion) due to progress on the Medupi and Kusile power station projects.

Through its current contracts, this operating platform will continue to be actively involved in Eskom’s power programme until 2016. The platform is poised to further develop its market presence in the power market locally and into Africa, whilst growth opportunities in the minerals processing markets are being actively pursued in sub-Saharan Africa.

Murray & Roberts Projects is also active in a number of other projects and is seeking further opportunities in minerals, water and industrial projects and recently secured an engineering contract for Exxaro’s Hillendale project.

In the short to medium-term, Engineering Africa will maintain its focus on engineering and construction services in Southern Africa with new potential opportunities including nuclear and renewable energy, water, minerals and oil & gas market segments.

Construction Products Africa: Revenues declined 26% to R1,7 billion (2010: R2,3 billion) with a decline in operating profit to R105 million (2010: R199 million).

Much Asphalt continues to perform well on the back of ongoing work on the Gauteng Freeway Improvement Project, despite a national bitumen shortage. Technicrete is benefiting from improved trading conditions and efficiency gains. Hall Longmore’s spiral pipe manufacturing capacity for the remainder of the financial year will be fully utilised, whilst the Electric Resistance Welding pipe mill utilisation remains low.

UCW remains well positioned to benefit from Transnet’s and PRASA’s capital renewal programmes, whilst Rocla continues to face tough trading conditions.

The sale of two operations of the Steel Business have been successfully concluded for a consideration of R94 million. Negotiations are ongoing for the disposal of the remaining Steel Business (the rebar distribution business and Cisco mill) at acceptable value.

CHALLENGING PROJECTS

Gorgon Pioneer Material Offloading Facility: The Group encountered late site access, material scope changes and continued adverse weather conditions at its GPMOF project in Western Australia. Costs to complete increased by R600 million during the period under review. Subsequently, the project experienced further weather delays, as well as unexpected safety related stoppages. The impact of these delays is currently estimated at R220 million, which will be accounted for in the second half of the financial year. The Group is in the process of evaluating the recoverability of any costs incurred as a result of these delays.

Project completion is now scheduled for the second half of the current financial year. It is not expected that any significant part of the claims will be settled before the end of the current financial year.

Gautrain Rapid Rail Link: The project is 96% complete. However, the Group is still engaged in completing the water ingress rectification work in the section between Park Station and Rosebank Station. The effectiveness of the work will be reviewed during March 2012, and may require additional work subject to water ingress measurements. Bombela Concession Company submitted its Statement of Case in August 2011 in connection with the delay and disruption and related disputes on the project. Gauteng Province has received a further extension to May 2012 to submit its Statement of Defence. The Gautrain arbitration will be a protracted process and finalisation of the arbitration is now expected during 2014 (previously 2013).

Medupi Civils: Murray & Roberts Construction, in a joint venture, is undertaking the majority of the civil works at Medupi Power Station. The contract is progressing satisfactorily despite significant increase in project scope. Negotiations are in progress with Eskom to resolve outstanding claims related thereto.

RISK MANAGEMENT

The Group’s revised operating structure now groups businesses with similar markets and core competencies into five operating platforms. Each operating platform is led by an operating platform executive reporting to the Group Chief Executive. Each operating platform is being resourced with commercial and financial executives, allowing for improved risk management and decision-making across each platform.

The Group’s risk management processes and systems, including its bespoke Opportunity Management System, continues to be enhanced to drive a greater level of risk management closer to each operating environment.

Improved processes and systems include the implementation of additional procedures designed to increase the commercial, operational, financial and reputational scrutiny of future clients, partners and subcontractors, as well as an increased focus on managing contractual and other arrangements proactively in order to address design and specification changes, access delays and project disruptions that occur over the span of projects, which can negatively impact profitability.

HEALTH AND SAFETY

The Board extends its condolences to the families, friends and colleagues of the three employees who lost their lives while at work in the Group’s operations during the period under review.

The safety of all people who work for or with the Group is of paramount importance. The Group’s health and safety vision is “Together to Zero Harm” with the stated goal of having zero fatalities and disabling injuries and achieving a LTIFR of less than one per million man hours by June 2012. The LTIFR as at 31 December 2011 was 1.04.

In an effort to achieve this vision, the Group has put in place a clear health and safety policy; a two-tiered structure that combines a high-level health and safety framework with programmes designed to foster learning and create an involved and competent workforce at all levels. The health and safety policy emphasises the Group’s commitment to the adoption of the highest safety standards at all of its operations.

We remain committed to addressing safety in the work place with an initiative primarily focussed on attitudes to safety and safe behaviour across the organisation.

COMPETITION COMMISSION

The Competition Commission (Commission) engaged the construction industry on applications submitted through the April 2011 Fast-Track process. As previously reported, the Fast-Track process might highlight further transgressions, unknown to the Board. The Commission has subsequently presented unreported projects falling into this category for the Group to investigate. Based on current information, the Board is of the view that an increase in the penalty provision raised in the previous financial year is not necessary.

Notwithstanding the Group’s efforts to identify and disclose all anti-competitive matters to the Commission, there may be certain residual matters which have not yet come to the Group’s attention.

DIVIDEND

The Board has resolved not to declare a dividend until the Group’s liquidity and trading position has improved further.

BOARD OF DIRECTORS

Alan Knott-Craig resigned as non-executive director from the Board on 17 January 2012. The Board wish Mr Knott-Craig well in his future endeavours and thank him for his contribution over the past three years.

PROSPECTS STATEMENT

It remains the Group’s objective to return to profitability as soon as practically possible. The level and timing will depend on the conversion and completion of the Group’s challenging projects. 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
29 February 2012