M&R hit by client notice to draw down R745m in guarantees

But says it is close to resolving the issue.
A number of claims in the Middle East are in the process of being resolved – through ‘negotiation, expert assessment, arbitration and court’. Image: Moneyweb

A Murray & Roberts (M&R) client in the Middle East has issued a notice to the JSE-listed group’s Abu Dhabi-based company, to draw down on two guarantees worth R745 million for a completed project in the region.

The notice was issued after the end of M&R’s financial year to June by Musanada, an Abu Dhabi general services company, for the $1.3 billion (R21.8 billion) Sheikh Shakhbout Medical City project in Abu Dhabi.

However, M&R stressed: “In the unlikely event that the claim is successful, based on our current assessment of the status and likely outcome of the final account position, this will not have an income statement impact [on M&R].”

M&R gave notice several years ago about its intention to exit the Middle East.

Read: Murray and Roberts to exit Middle East (May 2017)

M&R Group investor and media executive Ed Jardim said this week there is no basis for these guarantees to be called.

Jardim said one is an advanced payment guarantee and the other a performance guarantee.

Hospital has been in use for months

“The takeover certificate was issued in July 2019 and the hospital has been in use for some 18 months. There is a very short list of minor defects that we are attending to.

“They [Musanada] have requested that the defects liability period be extended and this may be at the core of their motive – namely to have the contractor around for a further period under the contract terms,” he said.

Jardim said M&R is a 30% partner in a joint venture with HLG Contracting, an Abu Dhabi-based construction company, and that the joint venture will defend its position through the courts in Abu Dhabi and Dubai.

He added that in order for Musanada to make claims under the guarantees, a trigger event under the contract must necessarily have occurred, such as a failure to perform.

“Absent such a trigger, and there has been no such event, there is no basis on which Musanada could demand payment in terms of either the guarantees,” he stressed.

Jardim subsequently advised that the group is “incredibly close” to resolving and concluding this issue.

Performance guarantee issues not unusual

Two other JSE-listed groups, Group Five and the Aveng-Stabag Joint Venture (ASJV), have experienced difficulties with performance guarantees in recent times.

For Group Five, which is in business rescue and delisted from the JSE in June 2020, this related to the $410 million Kpone power plant in Ghana.

For the ASJV, this related to the Mtentu River Bridge project on the Wild Coast for the SA National Roads Agency (Sanral).

Exit on track

M&R CEO Henry Laas said last week that exiting the Middle East is one of M&R’s focus areas for the new financial year.

“We have been trying our best for so long to get out of that region. We have now completed all the projects and we do not have any construction ongoing in that market.

“It’s now about closing out all the financials, and that is a major task. In the Middle East you fight tooth and nail for every cent,” said Laas.

“It is a difficult process but I think we are well in control of what we are doing there,” he said.

Laas added that M&R commercial director Ian Henstock is actively involved in all the initiatives the group has in the Middle East to successfully close out M&R’s commercial positions in the region.

“But having said that, I don’t want to create any concern with anybody that there is potential bad news coming out of the Middle East.

“We are confident that the accounting position that we have adopted in the Middle East has been a prudent position and we should be able to close it out within those positions which we have adopted,” he said.

M&R during its financial results presentation last week highlighted the strength of its balance sheet and that it has cash net of debt of R700 million.

The resolution of a number of unresolved claims has delayed its exit from the Middle East. Jardim said less than 10 claims are in process in relation to a number of completed projects in the Middle East and that M&R will resolve them through “negotiation, expert assessment, arbitration and court”.

He declined to provide an estimated value for these outstanding claims, adding that M&R has not individually disclosed these claims.

“However, the accounting position adopted in relation to these claims is considered to be prudent and we do not expect any adverse outcomes,” he said.

Jardim said M&R hopes to finalise all these claims through arbitration or other processes “within the next calendar year, but we are targeting June 2021”. He said the finalisation of the commercial issues are the last element of M&R’s exit from the Middle East.

Dubai International Airport

One of the unresolved claims relates to a 2008 contract awarded by the United Arab Emirates department of civil aviation to the HMRT joint venture, in which M&R had a 40% stake, for the development of Concourse 3 at Dubai International Airport.

The joint venture was awarded the contract after previously completing Concourse 2 and Terminal 3 at the airport and constructed the Sheikh Rashid Terminal (Terminal 1).

M&R reported in April 2019 that an arbitration award was issued in relation to the airport dispute.

The group said the tribunal, in its award, made a number of determinations dealing with the many claims and counterclaims of HMRT and the client.

“In order to bring this matter to conclusion, the client now has to prepare and issue a final account for the project, taking into consideration the determinations and guidance of the tribunal in its award, and the client and HMRT have to agree to the final account,” it said.

M&R’s board decided in the group’s 2016 financial year to close the business in the Middle East.

The group confirmed in its financial results for the year to June 2020 that the final four projects have been completed and that the Middle East operation is classified as “a disposal group that was abandoned and as such has been classified as a discontinued operation”.

In an item in the 2020 financial results under the heading ‘Liquidity risk management’, M&R reported that R145.3 million was transferred to Murray & Roberts Middle East during the financial year.

Luister na Ryk van Niekerk se onderhoud met M&R uitvoerende hoof Henry Laas:

M&R last week reported an earnings before interest and tax (Ebit) loss from continuing operations of R17 million for the year to June compared to the R847 million profit in the previous year.

This translated into a diluted continuing headline loss per share of 88 cents compared to the 114 cents profit in the previous year.

Covid-19-related issues had a R622 million negative impact on M&R’s Ebit in the year.

Read: M&R takes R197m earnings knock from low Gautrain ridership

Shares in M&R at 11.45 on Thursday were trading 0.18% higher on the day at R5.70.

M&R share price over the past year

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