Financial director report

Roger W Rees Financial Director

Murray & Roberts has again proved resilient with an operating margin within the long term strategic framework.

Murray & Roberts has again proved resilient. While R32 billion revenue is marginally down on last year, an operating profit of R1,8 billion (2009: R2,8 billion) has been reported at an operating margin of 5,6%, after absorbing a R619 million charge in respect of the infrastructure joint venture for the Gautrain Project. This charge represents the Group’s share of the increase in estimated cost to completion of the project in excess of the position recognised in the previous financial year.

The operating margin is within the Group’s long term strategic framework of 5,0% to 7,5%. Excluding the charge for Gautrain, the operating margin for the year is 7,5%.

During a challenging year with a 36% reduction in EBIT and a R0,9 billion increase in working capital, the Group has ended the financial year in a positive net cash position after debt, with R1,2 billion of cash generated by operations in the second half-year.

The total order book of R42 billion at 30 June 2010 (2009: R40 billion) represents 176% of contracting & engineering revenue, while the one year order book is 85% of contracting & engineering revenue.

Statement of financial performance

Clough and Construction Products SADC have reported revenue increases over the prior year of 37% and 14% respectively. Clough’s results are underpinned by a growing order book and Construction Products SADC by a strong performance from the steel piping division. Clough’s operating profit increased by 15% while the operating profit of Construction Products SADC decreased by 10%, primarily due to under-performance in Steel trading which operated in a volatile market. Clough’s results include R660 million revenue and R20 million operating profit from property disposals. This is the run off of the discontinuance of the property division.

Revenue of R5,3 billion (2009: R6,0 billion) of the Cementation Group declined by 10% due to weak market conditions in Canada. However, operating profit of R447 million showed a 4% increase on the prior year.

Excluding Gautrain, the R6,7 billion revenue (2009: R6,5 billion) of Construction SADC increased by 4% on the prior year and operating profit of R582 million (2009: R515 million) was achieved, representing an increase of 13% on the prior year. Gautrain reported revenue of R1,2 billion and an operating loss of R619 million.

Middle East revenues and operating profit declined primarily due to exchange rate translation with the average Rand exchange rate against the Dirham strengthening by approximately 20%. On revenues of R2,9 billion, a R300 million operating profit was achieved.

The R1,9 billion revenue of Engineering SADC decreased by R808 million against the prior year. While revenue continues to increase on the South African power projects there has been a R745 million reversal in Wade Walker whose order book was significantly impacted by the global economic crisis. Operating profit of R112 million (2009: R447 million) declined compared to the prior year primarily due to Wade Walker’s reversal.

Net interest expense of R193 million compares to R20 million in the prior year. Increased working capital funding primarily for major projects and utilisation of advance payments further increased working capital demand. The Group’s significant international cash holdings generated relatively lower interest income as global interest rates remained low.

The Group’s effective tax rate was 27,9% (2009: 22,2%). The increase in the effective rate was primarily due to a conservative position taken on Gautrain losses. The Group continues to benefit from a zero tax regime in the Middle East markets. With the benefit of a tax loss brought forward, Clough Limited reported an effective tax rate of 12,7% (2009: 9,7%). Clough Limited has a A$107 million tax loss carried forward.

Non-controlling interest of R131 million (2009: R320 million) is down on the prior year due to the buy-out of non-controlling interests in Murray & Roberts Cementation and Wade Walker.

Statement of financial position

The Group invested R1,1 billion in capital expenditure during the year (2009: R2,4 billion), in line with the commitment given in the 2009 annual report.

Capital expenditure in mining of R193 million was primarily project related. R218 million was invested in Construction Products SADC to ensure ongoing efficiencies in production facilities. Concor invested R216 million primarily to support the open cast mining division, while Engineering invested R181 million to support the power projects.

Cash generated by operations was R1,4 billion (2009: R2,6 billion). Operating cash flow was R691 million (2009: R1,6 billion). Working capital recorded an increase of R0,9 billion. Major projects uncertified revenue and increased utilisation of advanced payments were the primary reason for the increase.

The Group ended the financial year with R3,8 billion cash on hand and a R1,2 billion bank overdraft, giving a net cash position of R2,6 billion. After deducting R0,6 billion in short term loans and R1,6 billion in long term loans, the Group reported a net cash position of R0,4 billion at 30 June 2010. Although this is a R0,7 billion decrease compared to 30 June 2009, it is a R0,4 billion increase over the half year at 31 December 2009.

Interest bearing long term liabilities increased to R1,5 billion (2009: R770 million) with the Group utilising medium term facilities while pursuing the resolution of claims on the major projects.

Total goodwill in the Group’s statement of financial position at 30 June 2010 was R554 million (2009: R490 million) with Clough’s goodwill accounting for 63% of the total.

A substantial portion of the Group’s investment properties were sold in the second half-year for approximately R600 million, resulting in a R95 million fair value adjustment reported under exceptional profit. Final completion of the disposal process is expected in the first half of the 2011 financial year.

During the year, the Group disposed of its shareholding in the Bakwena N4 Concession for a cash consideration of R255 million.

Clough

The Group holds a shareholding in Clough Limited of approximately 62%, an increase of 3% over last year due to the conversion of convertible notes in December 2009. These were converted at approximately 36 Australian cents per share.

Clough’s net assets have increased to A$305 million (2009: A$167 million). At year end, Clough held A$141 million cash on hand.

On 6 July 2009, Clough completed the disposal of its 82% shareholding in Indonesian listed subsidiary, PT Petrosea Tbk for a cash consideration of US$83,8 million (R670 million). During the second half of the financial year Clough acquired a 31% strategic shareholding in Forge Limited at a cost of A$55 million. Forge Limited, quoted on the Australian Stock Exchange, is currently trading at a 60% premium to acquisition cost. A number of small strategic acquisitions have also been made.

At 30 June 2010, Clough, which is listed on the Australian Stock Exchange, traded at a closing price of 77 Australian cents per share. This compares to the Group’s average holding cost of 42 Australian cents per share. The Group holds approximately 478 million ordinary shares in Clough Limited.

Major projects

A cumulative total revenue of R1,4 billion, being amounts due from contract customers, has been recognised in the statement of financial position at 30 June 2010 (2009: R1,1 billion) as the Group’s share of uncertified revenue in respect of claims and variation instructions on the Group’s three major projects. Recognition of these assets is supported by the Group’s contract partners and by independent experts and advisors. Adjudications of these extremely complex legal and financial claims and variation instructions have yet to be finalised, and may be subject to arbitration and/or negotiation. This could result in a materially higher or lower amount being finally awarded compared to that recognised in the statement of financial performance at 30 June 2010.

Earnings and dividend

The Group reported diluted headline earnings per share of 340 cents, compared to 675 cents in the prior year.

The total dividend for the year has been declared at 105 cents with a final dividend of 53 cents per share.

The Group’s dividend policy is to declare a dividend within a cover range of 2,8 times to 3,2 times based on diluted headline earnings excluding Clough. In addition, the dividend received from Clough is passed through to Murray & Roberts shareholders.

Roger W Rees
Financial Director