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New-look Murray & Roberts upbeat about mining

Share price drops further from R17 Aton offer.
M&R CEO Henry Laas. Image: Moneyweb

The share price of global engineering group Murray & Roberts (M&R) dropped by 1.16% to R16.13 on Thursday, following the announcement of the group’s annual results shortly before market close the previous day.

This is well short of the R17 per share German group Aton is offering shareholders in its mandatory offer that could expire in March next year.

At a results presentation on Thursday, independent advisory board member Diane Radley confirmed that this board stands by its own July 2018 valuation of M&R at between R20 and R22.

In its first financial year outside of the local construction industry M&R recorded a 2% increase in revenue to R21.8 billion and a 56% increase in diluted headline earnings per share (heps) to 112c (FY2017: 72c).

The gross annual dividend increased by 11% to 50c per ordinary share, compared to 45c in the previous financial year.

The oil and gas platform contributed R8.5 billion in revenue and R209 million in operating profit at a 2% operating margin, reduced from 3% in the previous financial year.

M&R CEO Henry Laas said: “The group has transformed from being a predominantly South African civil and building contractor, to a multinational engineering and construction group focused on the natural resources market sectors.”

In its results presentation, M&R said conditions in the oil and gas market remain challenging, but there are huge opportunities thanks to big spend in complementary markets in Australia – the infrastructure spend on the Australian East Coast is expected to be bigger than the liquefied natural gas (LNG) boom of the previous decade. Most opportunities will be in transport and water infrastructure.

The looming LNG supply deficit is expected to materialise in 2020/21, earlier than previously anticipated, with Qatar, the US and Russia expected to expand their production. Until then however, the market is expected to remain in oversupply, Laas said.

Laas emphasised the need for M&R to establish a presence in the US to capitalise on this opportunity and said the group is looking at possible acquisitions in that market.

The oil and gas order book increased by more than R1 billion to R6.4 billion, including some significant projects with BHP and Alcoa in Australia and Rio Tinto in Mongolia.

The underground mining platform contributed R8 billion in revenue, virtually unchanged from the previous year, and R471 million operating profit at an unchanged margin of 6%.

The African operations doubled its 3% operating margin in the previous financial year while the Australasian operations gave a “reasonable performance” after its high-margin Saracen contract was not extended and new projects were slow to get going. The market in the Americas is improving, M&R said.

The group hopes to grow its underground mining footprint in Africa beyond Zambia by leveraging its Ghana office and expanding in central Africa. It also plans to further develop the Asia Pacific Rim market, including India, Indonesia, New Zealand, the Philippines and Mongolia, and aims to increase its penetration in Canada.

The underground mining order book at the end of June was R22.1 billion. M&R said the lead indicators in the mining industry show a turn in cycle with exploration at its highest level in six years. “The group expects continued improvement in commodity prices and increased investment by mining companies,” M&R stated.

The power and water platform saw a drop in revenue of more than R1 billion to R4.8 billion and maintained its operating margin at 3%. Laas said this is the result of Eskom’s Medupi and Kusile coal power stations nearing completion. The expected further two coal power stations to be built for independent power producers have not yet been realised and the group will develop its offering in repairs and maintenance.

The platform’s order book has shrunk from R3.7 billion in the previous financial year to R1.4 billion.

The investment in the Bombela Concession Company (BCC), which operates the Gautrain, delivered a R277 million operating profit, while the remnants of the Middle East business recorded a R34 million loss.

The group has increased its stake in BCC from 33% to 50% and expects a contribution of about R220 million from that source annually, which would mitigate the cyclical nature of the natural resources market, Laas said.

M&R’s total order book stood at R30.1 billion at June 30, compared to R26.9 billion. About 41% of the work is situated in the southern African region and the rest, including all the oil and gas work, is international – R12.9 billion is scheduled for the current financial year and R9.4 billion for FY2019/20. The balance is scheduled beyond that.

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