Murray & Roberts exercises caution
24 February 2010
In releasing its interim results for the six months to 31 December 2009, South Africa's leading engineering and contracting group Murray & Roberts, has signalled a cautious note on its short-term prospects for the year ahead.
This caution follows a five year period of significant growth in a buoyant construction sector that has been severely impacted over the past twelve months by the global economic crisis.
Group chief executive Brian Bruce stated, "Murray & Roberts has over recent years, taken full advantage of positive conditions in the global construction economy. Strategic investments in new business acquisition, capital expansion and major project procurement have created a comprehensive performance platform for access to and engagement of developing market trends."
"The Group order book has increased by 10% to R44 billion over the past quarter and more than R60 billion of new opportunity has been entered into our project pipeline over the past six months," Bruce adds.
Compared to the previous half year to December 2008, revenues declined slightly to R16 billion, but operating profit was down by 37% to R918 million in the period at an operating margin of 5,7%. However, underlying profitability was higher at about R1,2 billion and a margin of 7,4% when taking into account a decision by the Group to defer certain revenue rights due to ongoing under-payment by key public sector clients.
Says Bruce, "The Group has recognised about R1,25 billion of non-cash profits in its financial accounts to date and to limit further risk to its balance sheet, has exercised caution in its recognition of revenue entitlements on some of its major projects such as Gautrain and the power program."
The Group has stated that a key objective for the period ahead is to pursue the resolution of contract and cash entitlements on three major projects.
- Dubai International Airport - final account;
- Gautrain Rapid Rail - delay and disruption claims; and
- Medupi and Kusile Mechanicals - change in scope variations.
The Group's international operations are recovering faster than in South Africa and remain cash positive. However, working capital has increased overall in the period and the interest cost of serving South African short-term borrowings has impacted diluted headline earnings per share which are down by 34% to 200 cents per share.
Bruce has warned that the cash flow and risk experience in the construction sector globally has changed and that there are lessons to be learned from recent troubles in the consumer products sector, particularly the automotive industry.
"Society inexorably seeks increased access to improved quality products and services, but at lower prices. This is the consumer products model, particularly the automotive industry.
So too with our capital project clients, most of whom seek from us safer, higher quality, more efficient and faster delivery of bigger and more complex projects, often with inadequate specification and design certainty, and generally procured through a process of lowest tender.
Our industry contracting model is outdated for this circumstance, particularly in the public sector, where restrictions on decision capacity make it inevitable that without change, we will increasingly be faced with the risk or reality of negative funding on our projects."
"Murray & Roberts is a resilient company with a strong balance sheet, backed by a deep skills base and quality market access in all its clusters." says Bruce, adding "We see the current situation as short-term in nature and have confidence that demand in South Africa will in due course follow the strong recovery already evident in our international markets."