A NEW STRATEGIC FUTURE
Murray & Roberts has embarked on a process to determine a New Strategic Future that could fundamentally alter the course of the 112 year old construction and engineering organisation.
The three year Recovery and Growth plan which restored Murray & Roberts’ financial stability, returned it to profitability and established a foundation for growth will end in June this year, and Group Chief Executive Henry Laas says that a process is underway to map out a New Strategic Future for the Group.
“We have achieved most of the Recovery and Growth milestones we set ourselves in 2011 and are now exploring what we want Murray & Roberts to be in 15 or 20 years and what we should be doing now to achieve that future. We have to create better value for our shareholders.”
Murray & Roberts has appointed a leading global strategy consulting firm to assist it in a process of rigorous analysis and assessment of different strategic hypotheses. While Laas hopes to have determined the broad principles of the New Strategic Future strategy by the time the Group concludes its business and strategic planning process in the next few months, he accepts that it may take longer to reach the right decision.
“Murray & Roberts is in a far stronger position now than it was three years ago. The Recovery and Growth plan established a solid foundation with a much stronger balance sheet and four operating platforms that have the capacity to compete effectively in their markets and continue generating value for the Group. We are thus not in need of an urgent intervention as we were in 2011, but we know that when businesses stop moving forward they stagnate, so we have set ourselves a deadline to have the New Strategic Future well defined by no later than June 2015.”
Taking Murray & Roberts into a new era
Laas does not only envisage an incremental plan to improve operational efficiency – although important, that is the responsibility of the executives leading each of the four operating platforms – but rather a new future which may introduce the possibility of a quantum leap requiring bold corporate actions to take Murray & Roberts into a completely new era.
There are a number of factors that explain why the Group wants to redefine its future. The most significant of these are evident in a simple analysis of where the Group generates most of its value.
In February this year, the market capitalisation of Murray & Roberts – the value the market assigns to its shares in issue – was R11,5 billion. This includes Murray & Roberts’ 100% ownership of Clough, which had a market cap of approximately R10 billion just prior to its delisting in December 2013. This implies that the market values the rest of Murray & Roberts at only R1,5 billion. Furthermore, contribution to Group profits is heavily weighted in favour of the international operations with more than 80% of earnings before interest and tax attributable to the two international operating platforms of Construction Global Underground Mining and Construction Australasia Oil & Gas and Minerals.
Another consideration – which is reflected in the decline in foreign shareholders from about 40% of the Group’s shareholder base three years ago to approximately 20% this year – is the higher perception of risk associated with investment in emerging markets, including South Africa.
Laas says the process to define a New Strategic Future involves looking at the world through three different lenses to determine what Murray & Roberts should focus on and how it should position itself to deliver optimal value. These include:
- Selecting growing market segments: Which market segments offer the greatest future potential to an engineering and construction business? Will oil & gas, power and energy, mining and minerals and water continue to be major growth segments because they meet the basic needs of growing populations and economies? Are there other attractive growth segments that Murray & Roberts has not yet explored? Does it have the capacity, knowledge or skill to compete in new segments or does it need to acquire these?
- Positioning in the value chain: In construction and engineering, the value chain progresses from project development to engineering, construction and finally operations and maintenance. Murray & Roberts generates about 90% of its profits in the construction phase, has limited exposure to engineering and operations and maintenance and does not participate in project development. Yet, businesses primarily positioned in the construction phase of the value chain trade at significantly lower earnings multiples than those in the other phases of the value chain. What does that imply for the future of Murray & Roberts? A key consideration for the selection of future segments and position in the value chain is whether Murray & Roberts has sufficient engineering capability, intellectual property or research and development capability to differentiate itself and to compete in its chosen segments. If not, how will it obtain the required capability?
- Geographic focus: Which geographic markets offer the best growth potential? Which markets present unacceptably high levels of risk? What implications will the choice of geographic markets have for where the company is domiciled?
“These are the issues we are grappling with but at the end of the day it’s all about creating value,” says Laas. “For any business to be sustainable and to create value, it has to succeed in the triple bottom line arena, although financial success remains the ultimate measure which enables sustainability.
“We do not necessarily have a fixed agenda to internationalise the organisation, but if our research shows that that is how we will be able to generate the greatest value, we have to take that into consideration in defining the New Strategic Future.”
Clearing the obstacles to growth
There is one significant obstacle in the way of implementing a new strategic direction, and that is the outstanding claims on the GPMOF, Dubai International Airport and Gautrain projects, which collectively lock up approximately R2 billion of cash (almost 20% of the Group’s market capitalisation).
“These outstanding claims are significant and the delay in settling these claims could impact the rate at which we are able to grow Murray & Roberts,” says Laas. “It is therefore increasingly important to settle these claims as a matter of urgency and to deploy the funds for strategic purposes.”
“Our legal position on all three claims is strengthening as time moves on. However, we are hoping to expedite settlement of the two international claims by attempting resolution outside of the legal processes,” he adds.
The financial performance of Murray & Roberts for the first six months of the year to 31 December 2013 reflects the full consolidation of Clough as a wholly owned subsidiary (as from mid-December 2013) and, in line with expectations, confirms that the Group is financially sound and is maintaining a positive earnings growth trend. This bodes well for an exciting new future.
“The Recovery and Growth plan established a solid foundation with a much stronger balance sheet and four operating platforms that have the capacity to compete effectively in their markets and continue generating value for the Group.”