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Murray & Roberts interims: Henry Laas – CEO, Murray & Roberts

How the company got into its current position.

ALEC HOGG: Well, it certainly is a share you’d be looking to perhaps trade – Murray & Roberts. Who would have believed it, David? It’s so volatile at the moment, down to R29/share. In fact, you could have bought it a year ago at R23, so it’s lifted its head a little, by 13%. But financial results out today for the six months to end-December. Henry Laas, the chief executive is with us in the studio.
    David, you’re an infrastructure man – I’ll give you the opportunity for the first question.

DAVID SHAPIRO: Well, the question I ask is: when’s the rights issue?

ALEC HOGG: That’s what the market wants to know – when they are going to recapitalise.

DAVID SHAPIRO: You know what was interesting, Alec? The share price went up. I think a lot of the bad news is already in the market, and there’s a lot of good news on the horizon in terms of infrastructural spending, in terms of infrastructural spend globally. I think that’s the good news. We’ve got to see the spend, and we’ve got to see a lot of the problems that Murray & Roberts have got on their balance sheet, that they are up to date, out the way.

ALEC HOGG: Well, for those who haven’t read the results yet on the Stock Exchange News Service, another half a billion rand loss attributable to Murray & Roberts for the six months. Henry, when are you going to recapitalise?

HENRY LAAS: Alec, yes, we went to the market and gave some indication a couple of weeks ago that the board proposed a rights issue, a rights offer. We had the AGM or the EGM this afternoon. All the resolutions were approved, and we are moving into the period that we want to give the market some time to respond to the half-year result, and then we will be applying our minds to the balance of the rights offer.

ALEC HOGG: You put the numbers on the table – you’ve said this is the situation, the reality of it we had to pay R1.1bn in Competition Commission fines and for the Gautrain issue – what do you call it? It’s a billion rand that’s gone on those two.

HENRY LAAS: Nothing in the current financial year.

ALEC HOGG: But it was last year. And now you’ve got another half a billion rand loss in this current financial period. Now you need how much?

HENRY LAAS: Well, if we raise about R2bn – that’s what we indicated to the market, approximately R2bn, we’d be in a  position to close the financial year with a  debt:equity ratio around 20%. And I think that’s a reasonable position for us to be in. We still have a number of initiatives to generate and to bring new cash into the organisation. We have communicated to the market that there were discontinued operations that we had to dispose of. We sold some of it in the first half of the year, but there are still some assets to be sold in the second half. And the high-value items are really in the steel business. We have not disposed of that yet.
    So that cash still needs to come in, and with the approximately R2bn rights offer and the cash that still needs to come in from the disposal process, we believe that we will have a balance sheet that is strong enough for…to move forward with.

ALEC HOGG: Is it something in the DNA of the company, and we were talking about this beforehand, where it’s just so turbulent? Certainly in the time I’ve been a financial journalist this is third time that Murrays has been in more difficult situations, losing lost of money, then you have to get a new management team in again, led by yourself in this instance, and then you work like crazy; the share price goes up; people like David, the clever people, go in, buy the shares once the rights issue has been announced, as he said earlier, have the ride up there and then somebody else comes and buys at R130, R140, and they take all the pain down. Is it something in the cycles or is it something in the DNA of the business?

HENRY LAAS: I think it’s maybe something more in the cycle than it is in the DNA of the business. What we find is when the construction cycle goes through a period of growth, and you get to the top of that cycle, companies enter into projects and maybe into projects that are maybe not the right ones for the company to take on. If the market then turns, you find yourself in a  position that all your advance payments that you received on earlier work during the boom time – you start to see those advance payments working through the system, and all of a sudden your cash position deteriorates quite rapidly.

ALEC HOGG: But some guys – Wilson Bayly, for instance – they seem to manage the cycles a lot better. Is there something in their DNA that isn’t in yours?

HENRY LAAS: I think when you look at Murray & Roberts it’s a completely different company than what Wilson Bayly is, and we have in our business, the way that we’ve restructured it now, we have five different businesses, which we refer to as operating platforms. Four of those are actually doing reasonably well. There’s only Construction Africa in the Middle East where we do have some difficulties that we still need to work through, and those difficulties – we’ve seen the impact of that in the first half, and over R600m on Gorgon Pioneer Materials Offloading Facility (GPMOF), the project in Western Australia that we do want to finish off as soon as possible.
    And then we had a R231m additional provision that we created in the Middle East against subcontractors that we still need to closeout.

ALEC HOGG: What happened to the guys who committed you to those projects? Do they stay there, do they still draw their salaries, or do they get fired?

HENRY LAAS: Well, let me say on the marine business, where we have this project in Western Australia, there we’ve made a change at the executive level in the company, and that change has been implemented already. That was necessary.
    As far as the Middle East is concerned, I think a lot of what we are encountering there is really as a consequence of where that market is. In the UAE there is very little activity at this stage, and you find yourself in a position that on some of the projects you need to close it out. You close it out in a market which is very different to what it was at the time that we entered into the contract. So you need to take positions during the construction phase of how you will close out subcontractors on multi-billion legacy projects, and when you convert that to rands it’s really major projects. The subcontractors on those, to close those out – a few percentage points either way – has got quite a significant impact.

ALEC HOGG: It’s a tough business, we’ve never denied that. What we would like to know from Murray & Roberts is, can we buy the shares now?

HENRY LAAS: Well, I think so. I must say, I was very encouraged by the way in which the share held up after the rights offer was sort of communicated to the market. The day the communication went out we were trading at R28/share. When we released our results today, the share closed at R29/share. I think we are moving into a period that we are positioning ourselves really for an opportunity of growth in the business. And, as I say, only in Construction Africa and the Middle East – all the other platforms or businesses in the group are really there. They are there and they are ready to benefit from the opportunity in the market and we see strong opportunity coming through.

ALEC HOGG: Dave, once again with Murrays now is your buying opportunity. Buy the shares, put them in the bottom drawer, wait three or four years and you’ll double, treble, quadruple your money.

DAVID SHAPIRO: I’m sure you’ll do that. I think the one thing that you have to understand is that if you look at the multiples now, they are low. And if you understand the problems, you’ll understand why they’ve always been low. I think this is the kind of price that would come into it. I’m not ready to go in, but…

ALEC HOGG: Longer term…

DAVID SHAPIRO: In the next few months, yes.

ALEC HOGG: If you take a two- to three-year view.

DAVID SHAPIRO: Absolutely, definitely.

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