Group chief executive’s and financial director’s report

DEAR STAKEHOLDER

HENRY LAAS GROUP CHIEF EXECUTIVE COBUS BESTER GROUP FINANCIAL DIRECTOR

One year ago we shared the Group’s Recovery & Growth strategy with stakeholders. The year to June 2012 was defined as the Recovery year and the following two years as the Growth years. The past year, our Recovery year, has been an exceptional one for the Group in the context of the Recovery year objectives. It was a year in which we took difficult decisions and made substantial progress in establishing a firmer financial footing for the Group and laying a solid basis for growth.

Our strategy for Recovery & Growth is aimed at establishing Murray & Roberts as the leading construction and engineering group in its selected markets. This strategy is underpinned by maintaining integrity through disciplined leadership and a focus on financial, operational and governance excellence as well as establishing and maintaining sound relationships with all stakeholders, winning the confidence of the investment community and establishing positive energy throughout the Group. Our commitment to these principles stood us in good stead in the year, despite the complex issues and difficulties that we faced.

REORGANISING, RE-ENERGISING AND REALIGNING

The transition to the new leadership team has been successful. The leadership team realigned employees by creating a new commitment to our purpose, vision and values, and also worked hard to enhance operational focus and engage openly and proactively with stakeholders. We have been encouraged by the level of endorsement received and will continue to deepen our partnerships with all of those with an interest in our business.

The reorganisation of Murray & Roberts into five operating platforms and the strengthening of their financial and commercial leadership have created clear strategic focus in each of the platforms. Furthermore, the reorganisation has improved decision-making and risk management, while ensuring that the appropriate capacity is in place to grow our business. The net result of these actions has been an improvement in morale and an enhanced team spirit. This reorganisation has also assisted those within Murray & Roberts, as well as many of our stakeholders, to develop a greater understanding of the Group.

DEBT RESTRUCTURING AND LIQUIDITY

Landmark achievements this year included the successful restructuring of the Group’s debt. The new debt package of R4,3 billion (previously R3,4 billion) created better alignment between our debt repayment tenure and the timing of anticipated proceeds from the settlement of the Group’s major claims.

Another important achievement was the successful conclusion of the oversubscribed R2,0 billion rights offer in April, which represents a great vote of confidence in the Group, management and our strategy. We appreciate the confidence and support of our shareholders and the broader investment community.

As was communicated at the time of the offer, the proceeds of the rights issue were earmarked to reduce the Group’s debt. In June 2012, R1 billion of long term debt was repaid, with the balance of the R1,9 billion net proceeds being used to reduce short term debt. Long term debt will be reduced by a further R500 million and R650 million in September 2012 and March 2013 respectively.

Cash generated from operations this year was negatively impacted by increased losses sustained at the Gorgon Pioneer Materials Offloading Facility (“GPMOF”) in Western Australia and the closure of legacy contracts in the Middle East, whereas the sale of various discontinued operations and assets identified for disposal realised approximately R0,9 billion.

Initiatives to reduce overhead costs included consolidations within both the Construction Africa and Middle East and Engineering Africa operating platforms, Corporate Head Office headcount optimisation and the closure of the Isle of Man and London offices (the latter scheduled for June 2013). Together these are expected to result in overhead savings in excess of R60 million a year.

DEVELOPMENTS ON MAJOR PROJECTS

This year our commitments on GPMOF were discharged, although later and at a greater cost than had been anticipated. The cash outlay of more than R2,0 billion on GPMOF over the past 16 months represents one of the Group’s largest single cash losses in recent times. Completing the work under extreme conditions to a revised specification underscored the fact that Murray & Roberts honours its obligations, and underlined a costly learning experience. We are pleased to announce that the arbitration ruling on the first three disputes on this project, relating primarily to scope changes from the tendered design, has been awarded in the Group’s favour. The value of these claims will be determined through a second-stage arbitration scheduled for the final quarter of this calendar year. It is expected that the commercial process on this project will be closed out by December 2013.

Closer to home, the achievement of Operating Commencement Date 2 (“OCD2”) on the Gautrain Rapid Rail Link (“Gautrain”), with the opening on 7 June 2012 of the final section of the system between Rosebank and Park Stations was profoundly important, removing substantial risks associated with a delayed OCD2. OCD2 was certified by the Independent Certifier after the remedial work to address water ingress in the Rosebank to Park Station section of tunnel was completed. However, disputes around Gautrain are by no means resolved, with the Gauteng Provincial Government (“Province”) disputing the terms and proper interpretation of the concession agreement and the resultant completion of the water ingress remedial work (if any). This dispute is scheduled to be heard in arbitration during the final quarter of this calendar year. Depending on the outcome, further costs may have to be incurred in the Rosebank to Park Station section of tunnel. Resolution through arbitration of the major delay and disruption claim against Province is expected by December 2014. The fact that this world-class transport system is now fully functional is of great credit to Murray & Roberts and its partners.

An equally pleasing achievement this year was the resolution of all major commercial issues with Eskom relating to the civil engineering contract at the Medupi power station. The agreement settled all commercial disputes on the project to date, with the remaining R3,0 billion of civils work on this project carrying no more than normal construction risks at acceptable margins. The agreement clearly signals a much improved relationship with the national power utility.

PRIORITISING SAFETY AND PRODUCTIVITY

In the previous year, 12 employees lost their lives in work-related incidents whereas this year we record, with the utmost sadness, four fatalities. Mr Monyemane Molotha, Mr David Sebulela and Mr Tomas Ubisse died in fall-of-ground incidents at Impala 20 Shaft, Everest Platinum Mine and Kroondal Simunye Shaft respectively, and Mr Brandon Gray was fatally injured in an equipment-related incident at Hecla’s Lucky Friday mine in the United States of America. To the loved ones of the deceased we extend our heartfelt sympathy.

We shall not celebrate our safety performance until such time as we are able to report zero fatalities, but we must acknowledge the hard work that has gone into ingraining a safety culture at all of our operations. We believe the improvement in our safety performance is in no small degree due to the visible and committed involvement of senior management in achieving our ultimate objective of Zero Harm in the conduct of our business.

Our human resources are, in every respect, our greatest asset and we fully appreciate the importance of investing in our people. This year Group spend on training and development totalled R133 million – a 15% increase on the previous year. Of particular significance is the very real contribution the Group has made in addressing South Africa’s potentially crippling shortage of artisan skills.

MANAGING OUR RISKS

Among our major achievements are the significant strides made on risk management. This year, the internal audit function was strengthened and a regulatory compliance function established, which together with risk management form the three pillars of integrated assurance. This will enhance policies, procedures and controls to minimise risk exposures in pursuit of Group objectives and to avoid or mitigate the impact of unforeseen events.

After the 2008 global financial and economic downturn, dispute resolution became much more difficult, requiring us to adapt our risk tolerance and contracting principles to address a new, often more adversarial or even litigious contracting environment. Shortcomings in our control systems are now being rectified with a strong integrated assurance team and governance processes.

The Murray & Roberts Limited risk committee has witnessed a considerable increase in activity, meeting more regularly during this past year than in previous years. This is consistent with the enhanced risk management culture in the Group.

OBJECTIVES NOT MET within the recovery year

The Group failed to achieve two of its objectives for the Recovery year.

The first of these was that we did not achieve the disposal of the discontinued Steel Business by the proposed deadline of December 2011. The disposal has now been accomplished, after year-end, through two separate transactions.

Secondly, the Group did not reach finality with the Competition Commission regarding the transgressions and potential penalty relating to historical anti-competitive practices. We are of the view that the provision held at the end of the financial year is adequate. We are also confident that with the new culture prevailing throughout the organisation, as well as with improved controls, the risk of such behaviour being repeated in future has been significantly reduced.

REALISING UNCERTIFIED REVENUES

It became apparent during the year that we would not achieve substantial closure of the large project claims processes within the initial timeframes. These are drawn-out processes and a favourable outcome is an important element in our Recovery as it will realise some R2 billion of uncertified revenues. Principally, this uncertified revenue was taken against major claims on GPMOF, the Dubai International Airport and Gautrain.

The claims resolution process is ongoing and, while it is being pursued with vigour by all concerned, is clearly going to be more protracted than was previously envisaged. The favourable ruling received on the initial arbitration gives us confidence that at least the uncertified revenue portion of the total GPMOF claims will be settled in our favour.

A possible UAE Supreme Court decision by December 2012 on the question of which Dubai Government entity is the contracting party, settlement through arbitration on both the airport final account and the Gautrain delay and disruption claims is not expected before the end of calendar year 2013 and 2014 respectively.

OPERATIONAL OVERVIEW

Two of the five operating platforms which largely depend on the South African construction sector, continued to experience challenging market conditions. However, the diversity of the Group’s operations and markets underpinned its resilience.

Construction Africa AND Middle East

Depressed markets in both South Africa and the Middle East constrained the operating platform’s ability to win work at reasonable margins. Adding further financial strain, significant losses incurred on GPMOF and losses on completed projects in the Middle East were fully accounted for.

In the year, the operations of Concor and Murray & Roberts Construction were successfully merged and two chief operating officers were appointed, one to oversee the Civil Engineering businesses and another for the Building businesses. Performance on safety was uniformly excellent.

The Group was pleased to announce the appointment of Jerome Govender as the new platform executive for the Construction Africa and Middle East operating platform. Jerome has been the managing director of Bombela Concession Company (“BCC”) since 2007, having joined Murray & Roberts in 2002. Jerome has successfully led BCC through challenging processes, including the successful negotiation of the concession agreement with Province, the successful delivery of the system and currently the successful operation of Gautrain. We wish Jerome every success in leading the Construction Africa and Middle East operating platform.

The Civil Construction businesses performed most creditably but a lack of projects and heightened competition negatively impacted Concor Roads & Earthworks, Murray & Roberts Buildings and Murray & Roberts Marine. Concor Opencast Mining’s good performance was impacted by one loss-making project.

While most businesses performed well, despite depressed market conditions, the effects of GPMOF and a deterioration of the financial position in the Middle East accounted for the year’s loss. The contractual loss on GPMOF reached R1,8 billion at completion, of which R582 million was accounted for the previous year. The Middle East had to account for losses of R454 million related to the close-out of subcontractor accounts on completed projects, an increase in costs to complete a project in Abu Dhabi and weak market conditions.

Construction Global Underground Mining

This operating platform reported solid financial results. The mining business continues to secure significant contracts globally with major international mining houses. Operations in Australasia, the Pacific Rim, Canada and the United States of America all achieved exceptional growth and overall, margins were in excess of the Group’s strategic target range. However, the local platinum sector is being impacted by the declining platinum price and industrial unrest.

A significant development during the financial year was the mutual decision to terminate the contract mining agreement between Aquarius Platinum South Africa (“Aquarius”) and Murray & Roberts Cementation. Murray & Roberts Cementation agreed to provide the necessary support to Aquarius with the take-over of all resources to ensure a smooth transition to the owner-operator model. This support could extend to December 2012. The termination of this agreement will entail a decline in revenue of some R2,5 billion per annum for our African operations but will have the positive effect of improving the operating platform’s overall operating margin.

Despite the loss of income resulting from the end of our contract mining agreement with Aquarius, the platform will continue to pursue opportunities globally, which may include acquisitions to further accelerate revenue growth in key markets, such as Western Australia.

We are also optimistic that the introduction of the Canadian shaft-sinking methodology in the South African market will have positive implications for our safety record, further differentiating Murray & Roberts from its competitors.

Construction Australasia Oil & Gas and minerals

Clough, in which Murray & Roberts has a 62% share, reported another solid operational, financial and safety performance. The new leadership of the company implemented a successful restructuring process, which will position Clough to maintain and extend its market share of infrastructure projects in Australasia’s energy, chemicals, mining and minerals sectors.

Execution of current projects delivered solid results, and several landmark contract wins meant that, at year-end, Clough’s order book for the current financial year and beyond was extremely strong.

The sale of Clough’s Marine business was concluded in December 2011, realising net proceeds of R591 million. Forge Limited returned another strong performance and, during the year, Clough’s investment in Forge increased from 33% to 36%, following the exercise of a put option by previous executives.

Engineering Africa

The operating platform returned a very pleasing result, having disappointed the year before. This improvement is primarily as a result of the new commercial arrangement with Hitachi on the Medupi and Kusile power stations boiler contract. Work at Medupi progressed exceptionally well with the successful and well-publicised pressure testing of Boiler 6, reflecting the quality of work being done on the coal-powered power station programme. This year project execution at the Kusile power station gathered momentum after being consistently delayed by factors beyond our control. Agreements concluded with Hitachi and the cementing of an improved relationship with ultimate client Eskom place our power programme contracts on a much firmer footing. This will mean greater predictability to work that will continue until 2018.

Genrec operated at full capacity this year, fabricating steel for the power programme. Murray & Roberts Projects was similarly kept busy on boiler erection work at Medupi and increasingly Kusile. Both companies achieved most commendable safety records. A key achievement for Murray & Roberts Projects was the successful delivery of Transnet’s New Multi-Product Pipeline (“NMPP”) tank farm at Heidelberg, Gauteng. Wade Walker enjoyed a successful year and began to cement its entry into the West African market.

Construction Products africa

Overall, the operating platform had a successful year although, operational performances were divergent given the variety of products and sectors. Most businesses depend heavily on public sector work, which continued to be of limited scale.

Much Asphalt managed the increasing bitumen shortage exceptionally well, while Rocla continued to report reasonable results, although it did not achieve historical margins. Technicrete and Ocon Brick succeeded in containing costs and, despite some rationalisation, marginally increased market share.

UCW performed well in the face of scarce opportunities, but remains well positioned to benefit from Transnet’s and the Passenger Rail Agency of South Africa’s (“PRASA”) capital renewal programmes. Hall Longmore under-achieved, primarily due to intense competition and a shortage of orders, especially for its electric resistance welded products.

Notably, Rocla began the process of establishing a presence in Tete, Mozambique this year. It is envisaged that other businesses within the platform will use this infrastructure and market presence to cement opportunities in the petrochemicals and mining sectors in northern Mozambique.

FINANCIAL PERFORMANCE

Revenue from continuing operations increased by 16% to R35,4 billion (2011: R30,5 billion). An attributable loss of R736 million (2011: R1 735 million) was incurred, of which R208 million was recorded for the second half of the year.

This result is after accounting for the following losses:

• R1 189 million GPMOF contract completion costs
• R454 million in the Middle East, of which R387 million primarily related to close-out costs on legacy projects

On discontinued operations, R55 million in respect of impairment of assets held in businesses to be sold or closed was recorded, net trading profits of R38 million for these businesses.

The Group recorded a diluted headline loss per share of 246 cents (2011: 454 cents) and a diluted loss per share of 214 cents (2011: 528 cents) for the year to 30 June 2012, representing a material reduction of the loss reported for the previous financial year.

Notwithstanding significant funding requirements for the completion of the GPMOF project, the Group completed the year with a substantially improved net cash position of R1,2 billion (June 2011: R0,8 billion).

A total of R959 million was invested in capital expenditure for continuing operations (2011: R832 million). Some R390 million was spent on expansion and R569 million on replacement.

Cash utilised in operations was R1 580 million (2011: R872 million generated from operations) and operating cash outflow was R2 290 million (2011: R334 million cash inflow).

The Group’s order book declined to R45,3 billion (2011: R55,4 billion), mainly due to the termination of the Aquarius agreement at year-end, which reduced the order book by R7,5 billion, as well as the de-scoping provisions in the settlement agreement reached with Hitachi in June 2011, resulting in an additional reduction of some R6,2 billion. The order book for the Australian-based entities increased by R8,2 billion or 66% year on year.

The Group’s order book is inclusive of R1,7 billion from the Middle East and R7,6 billion from the civils and mechanicals major contracts on Eskom’s power programme. There are no other major projects remaining in the order book. The average margin in the order book is within the Group’s strategic range of 5,0% to 7,5%.

ON COURSE FOR GROWTH

We are pleased with the Group’s overall performance given the extremely demanding conditions most operating platforms faced, and the scarcity of infrastructural projects in our main southern African markets.

We are satisfied that the Recovery process has been largely and successfully concluded. Towards the end of the year the Board approved the Group’s growth strategy, which we look forward to sharing with all stakeholders during the 2013 financial year.

The Group’s focus on growth aims to enhance shareholder value through a return to profitability as soon as practically possible. It envisages aligning the Group’s portfolio of businesses selectively with market segments and geographies that present sustainable growth potential and simultaneously expanding its offshore revenue base.

Any growth in the next year resulting from a turnaround in the South African construction economy, which we do not anticipate at present, would come as a welcome boost. We take the view however that significant fixed investment in South African infrastructure is sorely needed and work is being undertaken to position the appropriate operating platforms to engage in such opportunities.

Our strategy for expanding into Africa is a cautious one, but it is on track and will be accelerated during the coming year. The first steps have been taken to establish a presence in Ghana (through the Engineering Africa operating platform), Zambia (utilising the capacity of the Construction Global Underground Mining operating platform) and Mozambique (through the Construction Products Africa operating platform). Growth into Africa will be pursued organically, using the model of first establishing hubs – a process that is already well underway – and then exploring opportunities in neighbouring countries via these hubs. African penetration will be guided by the understanding that each country is unique, with its own specific risks and opportunities.

In the engineering and construction sectors, significant new opportunities exist within alternative energy, the water sector and operations and maintenance primarily in the power sector. Entry to the water sector will better equip Murray & Roberts to contribute to finding solutions to South Africa’s looming water shortage, one of the country’s key sustainability risks, as well as the challenging question of acid mine drainage. Potential acquisitions being considered are aimed at aligning the Group’s asset base with opportunities to maximise shareholder value. To this end, acquisitions are being actively explored in sectors including mining and oil & gas.

APPRECIATION AND CLOSING

We thank the leadership team and our colleagues across the Group for their support and commitment to making this a year of effective Recovery.

Our thanks are also due to our Board of directors and especially to our chairman Roy Andersen, who takes his leave of Murray & Roberts in March 2013, after nine years of inspirational leadership. We have valued Roy’s counsel and wish him well in his future endeavours, and look forward to working with his successor, Mahlape Sello.

Finally, we acknowledge our stakeholders whose faith in our business has been most gratifying. This faith we fully intend repaying as we cement the gains of the past and build a thriving Group that is the recognised leader in the fields in which it operates.

looking to growth INVESTMENT MARGINS AND ASPIRATIONS

CRITERIA		METHOD		RANGE
MARGIN		EBIT1 Revenue		5% – 7,5%
GEARING		Total Interest Bearing Debt Ordinary Shareholders’ Equity		20% – 25%
RETURN ON EQUITY (ROE)		Net Profit Attrib utable to Ordinary Shareholders Ordinary Shareholders’ Equity		17,5% THROUGH CYCLE
RETURN ON INVESTED CAPITAL EMPLOYED (ROICE)		Taxed EBIT + Income from Associates Total Capital Employed*		WACC2 plus 3% – 4%
FREE CASH FLOW PER SHARE		Operating Cash Flow – CAPEX3 + Proceeds on disposal of property, plant and equipment Number of shares		CASH POSITIVE
RETURN ON NET ASSETS (RONA)		Taxed EBIT + Income from Associates Total Net Assets (ExclUDING Tax and Cash)		18% AFTER TAXED EBIT
TOTAL SHAREHOLDERS’ RETURN (TSR)		increase in share price year on year + Dividend per share Share price at start of period		RELATIVE TO OTHERS

KEY RATIOS USED BY ANALYSTS TO COMPARE MURRAY & ROBERTS TO ITS PEERS