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Despite commodity slump, M&R bets future on resources

Murray & Roberts CEO Henry Laas

Murray & Roberts CEO Henry Laas

Photo by Duane Daws

25th August 2016

By: Terence Creamer

Creamer Media Editor

  

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Murray & Roberts (M&R) CEO Henry Laas says the decision to sell its infrastructure and building unit, as well as Genrec, to create a multinational project company focused on oil and gas, underground mining, as well as power and water has created an entity that no longer fits neatly within the JSE’s ‘Heavy Construction’ categorisation – a reality that may, ultimately, even necessitate a transfer to a different subsector. Such a move, should it ever take place, would be remarkable, given that many South Africans still associated the firm with large civil engineering and building projects.

But for Laas, who describes the latest round of restructuring as being as fundamental as the 1967 merger of Roberts Construction with Murray & Stewart to form M&R, the disposals are the logical next step. Underground mining and oil and gas already contribute some 77% of revenue and 96% of earnings, while the revenue contribution from its home market, South Africa, has fallen to only 27%, with the country’s earnings contribution falling to a mere 5%. M&R reported revenue from continuing operations of R26-billion during the year to June 30, 2016, and attributable earnings of R753-million.

The decision to exit civil engineering, building and manufacturing arose from an intensive board review of the group’s strategy over the past two years. The analysis showed that, despite the cyclical nature of the natural resources markets being targeted, the repositioning should improve prospects for higher financial returns, which could eventually enhance the group’s market positioning and valuation.

In light of the current commodity cycle slump, such a transition carries risks, with the immediate outlook tainted by the weak oil and gas market, in particular.

The group’s order backlog for continuing operations has fallen to R28.7-billion from over R30-billion, with the oil and gas platform’s order book falling to R6.4-billion from R8.4-billion in June 2015. M&R also warns that operational earnings will fall during the 2017 financial year.

However, Laas is sanguine, noting that the new strategy embraces the full life cycle of projects in the chosen segments, from conceptualisation and building to operations, maintenance and even decommissioning. “There is a substantial project pipeline of R540-billion in these market segments,” he asserts, while acknowledging the timing of these opportunities is uncertain.

Despite the depressed market conditions for metals and minerals, its underground mining platform reported a rise in its operating profit and margin in 2016, to R506-million (R411-million) and 6% (5%) respectively. The unit has also consolidated its multinational character, with operations in Africa and North America now increasingly being supplemented from Australia, which grew its operating profit contribution to R125-million in 2016 from R61-million.

The objective is to replicate this globalised model across the oil and gas business, which is currently largely centred in Australia. The immediate intention is to expand operations to North America, where M&R is already in talks with an acquisition target.

Laas is also at pains to stress that it is exiting a market segment, rather than South Africa itself. The disposal, he adds, could result in the emergence of a leading black-owned contractor, with greater potential to grow than would have been possible from within the bigger M&R group.

“In terms of government procurement policy, a black-owned business would have a 20% pricing advantage over another business,” Laas avers, noting that Aveng appears to be pursuing a similar strategy with Aveng Grinaker-LTA.

He says discussions on the disposal of the infrastructure and building business, as well as Genrec are at an advanced stage, but refused to be drawn on a timeframe for the sales processes. “We are confident that we will be able to close these out, but you never know until you have a signed agreement.”

Edited by Creamer Media Reporter

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