Chairman's statement

Mahlape Sello

Mahlape Sello

Chairman's
Statement

“AS THE BUSINESS PLATFORMS
IMPLEMENT THEIR PLANS, THE
BOARD IS OF THE VIEW THAT
THE GROUP’S FINANCIAL
PERFORMANCE MAY STEADILY
IMPROVE NOTWITHSTANDING
AN OPERATING CONTEXT THAT
ON BALANCE WILL REMAIN
CHALLENGING.”

An outcome of the New Strategic Future, which the Board approved in 2014, is a significantly different Murray & Roberts.

The Group has transformed from a predominantly South African construction business, to a multinational engineering and construction Group focused on the natural resources market sectors, with most of its income derived from international markets.

The strategy was implemented across two phases. Firstly, optimisation of the business platforms and secondly to position the Group for sustainable growth and value creation, based on the positive long-term demand drivers for natural resources. These include global population growth, urbanisation and economic growth, as well as environmental concerns that are stimulating investment in water security and clean energy sources.

The reclassification of the Group’s listing to the Diversified Industrials index on the JSE Limited marks this successful repositioning. The strategic position the Group has achieved and the progress that has been made in addressing the legacy issues that have burdened its investment case for many years, are expected to lead to a rerating of its market value in time.

The Group’s strategic focus on natural resources means that it is subject to cyclical dynamics. In mitigation, the business platforms are diversifying across geographies that show growth potential, as well as higher margin segments of the project life cycle.

Their ability to diversify successfully, requires that the business platforms progressively deepen the competitiveness of their value propositions to clients.

Amid persistently difficult market conditions, the Group’s business platforms performed respectably in the year. This enabled the Board to declare an annual dividend of 45 cents per share, in line with the Group’s dividend policy.

While the outlook for the natural resources market remains uncertain, we anticipate an upturn in the metals and minerals sector in the short term for which the Underground Mining platform is well positioned. The Oil & Gas platform is pursuing work in complementary markets, while its international expansion gathers momentum, given our medium-term expectations of a recovery in its markets. In the Power & Water platform, as the Medupi and Kusile power station projects near completion, concerted effort is being made to re-establish the business as a contractor of choice with new clients in the broader power and water sectors.

Consensus forecasts predict sustained global economic growth, at around 3%, supporting a recovery in demand for most key commodities to 2021, which bodes well for the mining sector. The current oversupply in global LNG markets should begin to moderate by 2022, although certain regions like the USA are buoyant in new supply capacity. In Africa, power generation and distribution and the escalating need for wastewater treatment solutions provide good opportunity. Geopolitical risks and rising economic protectionism, monetary and fiscal policies, regulatory risks and domestic political shocks will continue to be the major uncertainties affecting economic outcomes in our targeted regions.

The Board is confident that as the Group implements its strategy through the business platforms, its financial performance may steadily improve, despite the challenging operating context. In this respect, the Group’s governance framework is clear and well-functioning, and each of the business platforms have strong management teams focused on operational excellence and growth opportunities.

DEEPENING CORPORATE CITIZENSHIP

As a multinational Group, our reputation as a responsible corporate citizen in each of our markets is fundamental to our strategic ambitions. This pertains to retaining our commercial and social licences to operate by being responsive to domestic regulatory and contracting requirements, maintaining a competitive edge through industry-leading HSE performance, and attracting and retaining the local talent needed to deliver specialised services. Excellence in every aspect of what we deliver to clients, and how we conduct ourselves, is as critical to the Group’s profitability as it is to its sustainability.

Together to Zero Harm

Underpinning the Group’s strategic journey is the progress it has made towards Zero Harm, with its record-low safety performance delivered in the year. Sadly, the Group experienced a fatality in the Infrastructure & Building platform before the completion of sale in April 2017. Ditebogo Phuduhudu (27), an apprentice mechanic, was electrocuted while performing his duties in July 2016. The Board deeply regrets the death of Ditebogo and again offers its deepest sympathies to his family and friends.

Fatalities and injuries at work are unacceptable and avoidable, and the Group continues to focus on understanding and managing the complex interplay of factors required to ensure Zero Harm to our employees, service providers and communities. The Group’s safety programmes aim to empower employees to identify and report safety hazards, encouraging a culture of care that starts with each individual and extends to their colleagues. The Group’s health and wellness programmes offer support in preventing the underlying issues that may affect employees’ ability to work safely and productively.

Transformation and diversity

As the Group expands its operations across target geographies, the Board is cognisant of the importance of national and local requirements. This extends from localisation and diversity imperatives to fulfilling the expectations of the communities in which the Group operates, especially in respect of employing and developing local people.

In South Africa, in terms of the BBBEE generic codes, the Group was rated as a Level 3 contributor and the Board is focused on accelerating the Group’s transformation progress, especially in employment equity. Outside of South Africa, appropriate diversity targets within the context of their operations, are also required from the Group’s multinational business.

The Group’s people management practices support a high-performance culture and a value proposition that offers professional and intellectual challenges, and continuous learning and development opportunities for employees. The Group’s policies and procedures, which include a Code of Conduct and Statement of Business Principles, ensure consistency with the Purpose, Vision, Values and strategic goals of the Group. This alignment extends to the Group’s performance management and development processes.

LEADING THE TRANSITION TO A ‘NEW’ MURRAY & ROBERTS

To contextualise this seminal point in the Group’s strategic development, it is appropriate to look back briefly at the major developments that have characterised the Board’s work during my tenure as chairman. It would not be an overstatement to say that this period has required far more in-depth strategic counsel and robust decision-making from the Board than may be considered routine.

Portfolio optimisation

The transition to a focused multinational engineering and construction Group involved major corporate action, including the divestment of the Construction Products business platform; the sale of Clough’s investment in Forge; the acquisition of the minority shareholding in Clough and then the sale of the Infrastructure & Building platform. The Infrastructure & Building platform transaction was consistent with our intention, set out in the New Strategic Future, to exit the civil infrastructure and general building sector through a first-of-its kind empowerment transaction in this industry.

After this extended period of corporate activity, it was noteworthy for the Board that the three-year business plans we approved in July 2017, pertained entirely to value creation, the next phase of the New Strategic Future.

Legacy issues

Removing the commercial burden of the past and unencumbering the Group’s strategic flexibility, and indeed its reputation, has been most complex and time consuming for the Board. Stakeholders will be aware of the intricate and protracted legal processes related to settling the substantial claims associated with legacy projects over the past few years. Having settled the Gorgon Pioneer Materials Offloading Facility marine project in Western Australia in June 2014, the claims relating to the Gautrain disputes were finally settled in the year (detailed in the chief executive’s and financial director’s report on page 34). The lengthy legal process in respect of the Dubai Airport claim is finally in arbitration, with an award expected in FY2018.

The Group incurred substantial losses in the Middle East in the year under review. The decision to close the Group’s buildings business in the Middle East and to exit the region will be mainly implemented by June 2018.

Voluntary Rebuilding Programme
Voluntary Rebuilding Programme

Arguably the most damaging and protracted issue affecting the Group in recent years, and indeed the entire construction sector in South Africa, has been the historical anti-competitive behaviour which led to the fast-track settlement process launched in February 2011 and settled in 2013.

Following an extensive period of negotiation, the Government and seven construction companies concluded a further settlement agreement in October 2016.

This latest agreement settles any exposure to potential claims for damages from identified public entities arising from the collusive activities of the past. It acknowledges the opportunity to foster a better working relationship between the Government and the industry going forward, and to advance the transformation of the South African construction sector. The financial impact of the settlement agreement for Murray & Roberts is a charge of R255 million over 12 years, of which the present value of approximately R170 million has been accounted for in FY2017.

The sale of the Infrastructure & Building platform was consistent with the option in the settlement to dispose of an economic interest of not less than 40% in the South African civil engineering and general building construction businesses of the companies involved, to enterprises that were more than 51% black owned, managed and controlled. This has released the Group from this option in respect of the settlement agreement, while it retains the financial obligation.

It is vital that our South African businesses can contract successfully with the public sector, which holds considerable opportunities, specifically for our Power & Water business platform. The restoration of this relationship through the settlement will support our intention to participate in future infrastructure development in South Africa.

Acquisition by ATON of a beneficial interest in Murray & Roberts

A notable event in the financial year was the acquisition by ATON of a 25.5% beneficial interest in Murray & Roberts in February 2017. ATON is a private investment holding company headquartered in Germany, with a diverse portfolio of investments in the mining, engineering, aviation and health technology sectors. As advised at the time on SENS, discussions were held with ATON as a major minority shareholder, specifically regarding the Group’s interim results at the time. As of 30 April 2017, ATON’s beneficial interest in Murray & Roberts increased to 29.99% according to the Group’s analysis. We have not received any further guidance, correspondence or communication from ATON regarding its intentions in relation to its investment in the Group.

SUCCESSION PLANNING FOR THE NEW STRATEGIC FUTURE

I have had the privilege of serving on the Board as an independent non-executive director since 2009 and as chairman from 2013, and I will retire at the 2017 AGM.

Succession planning over the last three years, in view of impending retirements and in step with the New Strategic Future, has allowed the Board to systematically align its competencies to the strategy. The Board that takes the helm at the beginning of this new chapter in the Group’s growth story, is well constituted in its mix of local, international and market sector experience and relevant professional acumen.

Following on from the three non-executive director appointments made last year in preparation for the retirement of two non-executive directors, the nominations committee followed a consultative process in planning for my retirement and that of Dave Barber. Dave has served as an independent non-executive director since June 2008 and will also retire from the Board.

In terms of the chairmanship, the nomination committee considered the skillset that would serve the best interests of the Group at this juncture and was unanimous in appointing Suresh Kana to serve as chairman.

Suresh has been a member of the Board since July 2015. He was previously the chief executive officer and senior partner of PwC Southern Africa and PwC Africa, in which position he served on the PwC Global Board and its Strategy Council. He is the chairman of the Financial Standards Reporting Council of South Africa, and a member of the King Committee on Governance. He is also the chairman of Imperial Holdings and a non-executive director of the JSE Limited, and a professor of accounting at the University of Johannesburg.

Appointments made in the last year have culminated in a Board that will benefit from fresh thinking and new perspectives, and a considerably lower average age and length of term that will underpin its stability in the period ahead.

Daniël Grobler was appointed as Group financial director in April 2017. Diane Radley, Emma Mashilwane and Alex Maditsi were appointed as non-executive directors to the Board in August 2017. Emma and Diane have been appointed to both the audit & sustainability and risk management committees, where Diane will assume chairmanship of the audit & sustainability committee after the AGM. Alex has been appointed to the health, safety & environment; remuneration and social & ethics committees respectively.

In parallel with the succession process and similarly aligned to the Group’s strategy, the Board conducted an amended evaluation process. This yielded positive findings (as outlined in the nomination committee report available in the online report) which the new chairman will address. Suresh will also guide the Board’s full adoption of King IV to the extent that any changes are necessary. The Board has assessed the Group’s readiness for the new requirements and, besides the additional disclosure requirements, our view is that the Group already materially accords with the principles and practices of the revised standard.

I wish to make special mention of Cobus Bester, who retired as Group financial director in the year. Cobus held this position for nearly six years, after more than a decade of service to the Group. His financial leadership has been invaluable in addressing the legacy issues the Group has faced. Daniël Grobler, previously the managing director of Murray & Roberts Cementation, succeeded Cobus in April 2017.

IN CLOSING

It is gratifying that my retirement coincides with Murray & Roberts’ coming of age in its strategic development. The achievements over the past five years have been significant, with only one exception. That we were not able to complete the closure of the Group’s operations in the Middle East, and settle the associated legacy claims, is an item I would have preferred to have seen dealt with.

However, my time at Murray & Roberts has been both challenging and deeply satisfying. I am indebted to my colleagues on the Board, who have been exemplary in their duty of care and their respective contributions to positioning the Group for sustainable growth and returns for all its stakeholders.

On behalf of the Board, I convey our thanks to all our shareholders for their support, those that have walked this path with us and those that have bought into the Group’s growth story more recently. Lastly, to the Group’s executive teams and the business platforms, and all the people of Murray & Roberts, it is ultimately your talent and dedication that has delivered the Group to this point where the New Strategic Future is a visible reality, notwithstanding the profound changes you have faced and the challenges you have met.

I will watch the progress of the Group in the years ahead with much interest and great pride.

MAHLAPE SELLO
Group chairman

EXCELLENCE IN EVERY ASPECT OF WHAT WE DELIVER TO CLIENTS, AND HOW WE CONDUCT OURSELVES, IS AS CRITICAL TO THE GROUP’S PROFITABILITY AS IT IS TO ITS SUSTAINABILITY.

MESSAGE FROM THE INCOMING CHAIRMAN

It is my pleasure to accept the Board’s endorsement to succeed Mahlape Sello as independent non-executive chairman of the Group.

Mahlape knows the Group well and has proven herself to be a director of dedication and insight. I would like to take this opportunity to thank Mahlape for her contribution in chairing the Board over the past five years.

Murray & Roberts has a proud and distinct history and is today recognised as a multinational project life cycle contractor, with a large portion of its operations, assets and profits derived outside of South Africa. The Group has over the recent past transformed its strategic direction and entered a new era through the implementation of its New Strategic Future plan, with the sale of its Infrastructure & Building platform and focus on the global natural resources market sectors of metals & minerals, oil & gas, and power & water.

It is a privilege to be associated with Murray & Roberts and I am excited about the Group’s future. I am mindful of my duty as chairman, and collectively, with my fellow directors, will take great care in diligently discharging our obligations as a Board.

SURESH KANA