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M&R JV awarded R18bn contract

In Australia, significantly boosting its future earnings potential.
The group also has R40bn in pending contract awards. Image: Moneyweb

JSE-listed engineering and construction group Murray & Roberts (M&R) has received a significant boost to its potential future earnings.

An equal joint venture between Clough, the Australian subsidiary of M&R, and global Spanish infrastructure and concessions group Elecnor has been selected as the contractor for an about Au$1.5 billion (R17.9 billion) contract for TransGrid’s Project EnergyConnect.

The award follows M&R reporting in June 2020 it has a significant, quality order book of R54.2 billion, which includes several multi-year contracts.

R40bn in ‘near orders’

In addition, M&R said then it has four near orders and “Category 1 opportunities” with a combined value of about R40 billion that it is negotiating on a sole-source basis.

M&R said on Monday that the TransGrid project is however not one of the three energy, resources & infrastructure platform projects and single mining platform projects mentioned in its annual results announcement.

M&R group investor and media executive Ed Jardim said on Monday these four projects are on different paths and timelines because they are all still in the commercial negotiations phase/reaching final investment decision.

“We hope to be in a position at the announcement of our half-year results in March 2021 to provide a report back on all these projects.

“If however we achieve a final investment decision on any of the projects before that timeline, we will announce them to the market as we did with TransGrid today [Monday],” he said.

M&R said ElectraNet and TransGrid are partnering to deliver an energy interconnector between the power grids of South Australia and New South Wales, with an added connection to Victoria.

It said the joint venture will deliver the engineering, procurement and construction of TransGrid’s portion of the project, which includes four substations and about 700km of 330kV transmission line.

“Elecnor has an enviable track record globally in delivering high voltage transmission projects such as this, and combined with Clough’s Australian project delivery expertise, they form a formidable joint venture.

“The project has been strongly supported by the New South Wales government, which has declared it Critical State Significant Infrastructure,” M&R said.

Perspective

Marc Ter Mors, global head of equity research at SBG Securities, said on Monday the way he looks at project announcements is that it’s obviously always positive to gain new contracts but it is important to remember that these contracts also need to replace existing revenues.

“It’s positive, but we don’t know what the margin is going to be and it replaces existing revenue from projects delivered,” he said.

Ter Mors added that since M&R has already said there will very likely be another R40 billion of additional contract wins in the short term that were not part of this Au$1.5 billion project, of which half or R9 billion will be Clough’s portion, “it’s very likely the order book is going to be at an all-time high at the next reporting period for the interim period to December 2020”.

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

M&R said the value of the group’s order book is “a lead indicator of future earnings potential, and our multi-year project pipeline categorises the opportunities expected to grow this value”.

Return to profitability 

“The resilience of the group’s business model, and the strategic positions achieved by the business platforms in high-potential market sectors, supports a return to profitability in the 2021 financial year and a path to earnings growth beyond,” it said.

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

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

The group took a R197 million earnings knock in the year to June from low ridership levels on the Gautrain because of Covid-19 and expects low passenger numbers to continue negatively impacting the group until June 2021.

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

M&R CEO Henry Laas said at the time that the balance of the R622 million impact on earnings from Covid-19 resulted from the group being unable to work on projects because the lockdown restrictions and regulations and costs it had incurred to hold onto resources and the cost of the idle assets it had for projects.

Read: Two M&R contracts affected by virus outbreak

Laas said M&R results were also negatively impacted by a vendor loan impairment of R80 million related to the sale of its steel fabrication and erection contracting business, which has gone into business rescue; a goodwill impairment of R63 million; and an uncertified revenue impairment of R46 million after reassessing the recoverability of one of the group’s claims.

“All of these items coming together at the same time created the perfect storm for us and has resulted in the loss that we have reported for the year,” Laas said.

Shares in M&R rose 7.26% on Monday to close at R6.80.

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