COMMENTARY

The Group restored financial stability, returned to profitability and resumed the payment of dividends, during the last three years of its Recovery & Growth Strategy.

The board of directors of Murray & Roberts (“Board”) and executives have defined the market sectors, project value chain segments and geographies that in the long-term will present the greatest opportunity for the Group to unlock value by applying its core competencies of engineering and construction. These target markets are specifically in the oil and gas, mining, energy and industrial sectors, where the Group aims to increase its engineering, commissioning, operations and asset support activities. Africa, South-east Asia and North America offer opportunities for growth.

The net cash position was R0,9 billion (December 2013: R2 billion). The decrease is due to the funding of acquisitions (R162 million) and utilisation of advances from customers of approximately R1,3 billion.

The Group’s order book reduced to R37,8 billion (December 2013: R44,9 billion) mainly due to the Oil & Gas platform order book transitioning to smaller and shorter term contracts and fewer new projects secured in the Infrastructure & Building and Energy & Industrial platforms.

Operational excellence, to optimise project profitability is a Group-wide focus. An update per operating platform is presented in this announcement.

Financial Performance: The global oil and gas sector has entered a turbulent period, following a declining oil price at the end of the reporting period, which will accelerate the slow-down of the liquefied natural gas (“LNG”) investment boom. The completion of the greenfield capital projects is creating opportunities for Clough to secure new contracts for commissioning, brownfields and maintenance services on the projects it contributed to constructing. Consequently, the order book reflects this transition and comprises smaller volume and shorter term contracts.

Clough has adapted well to the changing business environment and has recorded an acceptable FY15H1 financial result. Revenue and operating profit reduced to R6,8 billion (December 2013: R9,6 billion) and R446 million (December 2013: R468 million) respectively. The order book decreased to R12,2 billion (December 2013: R20,4 billion). However, the operating margin increased to 7% (December 2013: 5%). This margin improvement reflects a shift towards higher margin engineering and commissioning projects, a focus on operational excellence and the benefit from on-going cost efficiency programmes. The platform has near orders of R1,6 billion and a pipeline (top 10 target projects) of R33,6 billion.

Operational Performance: e2o, a specialist commissioning company acquired by Clough during 2013, is currently the largest commissioning company in Australia. Revenue and profit from this business continued to grow strongly during the period under review. e2o is executing work across four commissioning projects.

The Ichthys material offloading facility project was completed in July and work continued on several other marine projects. Clough continued its work on every LNG project currently underway in Australia. Both CH-IV (United States of America) and Booth Welsh (Scotland), which were acquired during the period under review, performed in line with expectations and began to pursue joint project opportunities with Clough and other Murray & Roberts entities.

Prospects: Market conditions are challenging as the oil price decline is forcing oil and gas companies to cut capital expenditure programmes. This has resulted in delayed investment decisions, implementation of project cost reduction measures and increased competition between service providers in what is currently a soft market.

Gas will continue to be a growth sector globally and the market is expected to improve in the medium term. Clough remains well positioned in the LNG and coal seam gas market sectors. In the coming year, Clough will continue to implement its global expansion strategy to diversify earnings regionally and create a global network of specialised engineering and operating centres, underpinned by
Murray & Roberts’ global presence.

UNDERGROUND MINING

Financial Performance: Although greenfields capital expenditure in the mining sector remains at low levels, the anticipated growth in the underground mining platform is reflected in a stronger order book.

Revenues remained relatively flat at R3,5 billion (December 2013: R3,4 billion) and operating profit decreased to R84 million (December 2013: R93 million). The order book strengthened to R13,8 billion (December 2013: R9,5 billion). The platform has near orders of R9,4 billion and a pipeline of R30,9 billion.

Operational Performance: Considering the recent subdued state of the global commodity cycle, the platform is showing strong growth potential and has increased its order book in most main geographic areas off a relatively low base. In Murray & Roberts Cementation, the Zambian operation continues to perform well. Work has commenced at the multi-billion Rand contract mining project at North-am’s Booysendal platinum mine and work at De Beers’ Venetia diamond mine is progressing on the two vertical shafts and one decline shaft. Final award of the multi-billion Rand Kalagadi Manganese contract is expected before the end of the current financial year. Cementation USA continues to hold a full order book with work on existing projects progressing well. Ce-mentation Canada is participating in increased tender activity and has signed a contract with Compass Minerals to upgrade the shafts at the Goderich mine at a value in excess of one bil-lion Rand. In Australasia, tender activities have increased and RUC Cementation Mining has secured a number of smaller new mine development projects.

Prospects: In the medium term, an upturn in the global underground mining sector is expected. Most key commodities are represented in the current portfolio of projects, and significant opportunities for organic growth exist when mining activity picks up. Markets in Africa, Australia and the Americas are showing signs of growth. Several substantial prospects are being pursued in Botswana and Ghana.

ENERGY & INDUSTRIAL

Financial Performance: Revenues remained stable at R2,2 billion (December 2013: R2,3 billion), whilst an operating loss of R21 million (December 2013: R47 million operating profit) was recorded. The decrease in earnings, outside the power programme, is primarily due to development costs incurred on long-lead contract opportunities, as well as an increase in the cost to complete a project in Namibia. The order book reduced to R5,4 billion (December 2013: R6,2 billion). The platform has near orders of R0,4 billion and a pipeline of R9,3 billion.

Operational Performance: The Medupi and Kusile power station projects remain the largest contributors to revenue and profit, with few new opportunities coming to market in the period under review. The platform is focused on establishing a position in the broader local petrochemical, industrial engineering and renewable energy sectors and is also targeting the industrial water sector. Aquamarine Water Treatment was acquired in the period under review and Murray & Roberts Water is undertaking engineering work on a new water opportunity in Ghana for a blue chip mining company.

Prospects: The power programme continues to offer longer term opportunities for most of the businesses in this platform and accessing these opportunities remains a priority. Operations and maintenance opportunities exist in the petrochemical, minerals handling and processing sectors and maintenance opportunities in the power sector. The platform is also well positioned for opportunities in the renewable power sector. Delays in securing sufficient grid connections has, however, deferred a significant solar opportunity by about nine months.

INFRASTRUCTURE & BUILDING

Financial Performance: The platform remained profitable in a challenging local infrastructure and building market.

Revenues decreased marginally to R3,5 billion (December 2013: R3,6 billion), while operating profit decreased to R66 million (December 2013: R101 million) due to a reduced fair value adjustment on the Bombela Concession. Core construction operations delivered a marginal improvement in profitability. The order book decreased to R6,4 billion (December 2013: R8,6 billion). The platform has near orders of R3,6 billion (of which R2 billion was awarded subsequent to the period under review) and a pipeline of R29,1 billion, including selected opportunities in the Middle East.

Operational Performance: Murray & Roberts Infrastructure has delivered a stable performance and is active in the South African roads and civils market. It has been appointed the civils subcontractor on three wind farms, which have recently achieved financial close.

Concor Opencast Mining has delivered an acceptable operational performance, but is faced with a constrained market environment with a scarcity of new prospects.

The Buildings business operates in a low margin environment. The Matlosana Mall and Dainfern Shopping Centre projects have been successfully completed and work is continuing on a further six shopping centres in South Africa and Namibia.

Prospects: The South African construction market remains depressed and spending on new infrastructure halved in 2014 compared to 2013, largely due to reduced Government spending.

Included in the near orders is a residential development east of Pretoria, with a potential project value in excess of R1 billion. Several building opportunities in Africa are being developed with a South African blue chip financial services firm and renewable energy opportunities are being pursued in Ghana.

DISPOSAL OF NON-CORE ASSETS

For the period under review, the lost time injury frequency rate improved to 0.77 (December 2013: 0.82). This demonstrates the Group’s commitment to a safe working environment for all its employees.

Gautrain Sandton Cavern Claim – This arbitration claim, on its merits, was ruled in favour of the Bombela Civil Joint Venture (Murray & Roberts shareholding 45%) in October 2013. The quantum hearing is scheduled for May 2015.

AGAINST THE GROUP:
Gautrain Water Ingress Dispute – In November 2013, in the dispute between Gauteng Province and the Bombela Concession Company, the arbitration panel ruled in favour of Gauteng Province. The Company recorded a R300 million provision in FY14 for its share of potential construction costs to be incurred by the Bombela Civil Joint Venture. The extent of any other potential financial impact, if any, related to the matter is yet to be determined.

IN ARBITRATION:
Gautrain Delay & Disruption Claim – The legal process in this multi-billion rand claim is progressing well and an interim arbitration hearing will commence in March 2015. The claim is not expected to be settled sooner than the 2016 calendar year. Any award will attract interest dating from 2009 to the date of award.

Dubai International Airport – The arbitration process for the Dubai International Airport claim is ongoing and the claim is expected to be resolved during the 2015 calendar year.

Implementation of the Group’s strategic plan progresses. It is uncertain if the anticipated short term reduction in the Oil & Gas platform’s earnings (resulting from the low oil price) will be offset by earnings growth in other platforms.

Opportunities to increase the Group’s exposure to the more sustainable engineering and asset support/maintenance segments of the project value chain will continue to be pursued.

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

Bedfordview
25 February 2015