M&R takes R197m earnings knock from low Gautrain ridership

Expects lower passenger numbers as a result of Covid-19 to negatively impact the group until June 2021.
The Gautrain was transporting about 55 000 passengers a day before the pandemic, but this has dropped to around 7 000. Image: Shutterstock

Murray & Roberts (M&R) 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.

M&R CEO Henry Laas said on Thursday the group’s investment in the Bombela Concession Company (BCC) accounted for about a third of the R622 million negative impact on the JSE-listed multinational engineering and construction group’s earnings before interest and tax in its 2020 financial year.

Due to Covid-19, the ridership levels on the Gautrain are significantly below the threshold level at which the government subsidy kicks in, he said.

“As long as ridership is below that threshold, that shortfall is impacting the value of the investment in the Bombela Concession Company. We expect by June 2021 we should be approaching ridership levels again that will be at the level of the [subsidy] threshold,” he said.

Revenue gap guarantee

The BCC carries the risk on actual Gautrain revenue up to a certain level. The revenue gap from this level up to the guaranteed level is covered by the Gautrain Management Agency’s (GMA) “patronage guarantee”. Laas said the Gautrain was transporting about 55 000 passengers a day before Covid-19 but this has dropped to about 7 000 passengers a day.

M&R has a 50% shareholding in the BCC, the special purpose vehicle established for the design, partial financing, delivery, operation and maintenance of the Gautrain. The BBC holds the 15-year concession for operating and maintaining the Gautrain.

The group believes the impact of Covid-19 on its investment in the BCC is lessened by a business interruption policy taken out by the concession company.

It said management has taken a view, based on the opinion of senior counsel, that it is probable the policy will be honoured.

However, Laas acknowledged that many of the insurance companies are resisting acceptance of liability on business disruption.

“There are numerous court cases playing out this moment in time but we do have business interruption insurance as far as the investment in the [BCC] is concerned and we have taken a strong view on the success of a business interruption claim,” he said.

Additional factors

Laas said 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 these projects.

He said the group’s clients have largely agreed to extend the completion dates of projects but it is a rare exception where clients were prepared to contribute to the holding costs M&R incurred during the time when it could not progress the work.

In addition, M&R results were negatively impacted by a vendor loan impairment of R80 million related to the sale of a steel fabrication and erection contracting business that 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.

M&R on Wednesday reported an earnings before interest and taxes 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.

Revenue from continuing operations rose 3.5% to R20.8 billion from R20.1 billion.

It did not declare a dividend.

Shares in M&R dropped 6.4% on Thursday to close at R5.70.

Murray and Roberts share price

Laas said the highlight in the results is the order book of R54.2 billion and the group’s balance sheet position, and the fact that it has cash net of debt of R700 million.

“We haven’t seen an order book this high in M&R for the past 15 years and are proud and confident it is a quality order book,” he said.

The order book for the energy, resources and infrastructure platform is at R34.4 billion, a record for this platform.

Laas added that the group’s three platforms have R121.3 billion in category one pipeline opportunities, which represent tenders they are working on and competing to win.

But Laas said what is of significance is that this includes four projects valued R40 billion where M&R has been asked by clients to develop these projects for them.

“So we are not tendering in the open market in competition with other companies. This work has essentially been allocated by the clients to the M&R group and they will like us to develop and execute the projects for them. But those projects have not reached the final investment decision point yet.

“We are hopeful that by the end of December at least half of that R40 billion which we are negotiating on a sole-source basis would have worked its way into the order book,” he said.

Confidence

Laas said despite all the market uncertainty, the fact M&R has a R54.2 billion order book and such a good position in near orders and category one pipeline opportunities gives the group a lot of confidence moving into the new financial year.

Marc Ter Mors, global head equity research at SBG Securities, said they were initially concerned that the project losses on two problematic contracts in the energy business would result in question marks about the quality of M&R order book.

However, Ter Mors said that after speaking to M&R management they are much more confident about the recovery potential of the group and the outlook for 2021.

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