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Two M&R contracts affected by virus outbreak

Sappi project in Umkomaas and mining JV in Mongolia affected.
The group’s ability to maintain the skills of specialist welders from Thailand on its Sappi project is a challenge. Image: Moneyweb

The coronavirus has impacted two projects being undertaken by JSE-listed engineering and construction services group Murray & Roberts (M&R). One is in South Africa and the other in Mongolia.

M&R group chief executive Henry Laas said on Thursday the affected project in SA is a contract for the rebuilding of a boiler at Sappi’s Saiccor Mill in Umkomaas in KwaZulu-Natal where it is using specialist welders from Thailand.

“With travel restrictions [because of coronavirus] it’s a bit problematic to maintain that skill on the project,” he said.

Laas said M&R still needs to work out and understand the exact impact of this on the project but doesn’t think it will mean more than a slowdown in its implementation.

He said this impact has not yet been quantified but the roughly R600 million contract should be completed by the end of June, which means the risk is limited.

Rio Tinto project

Laas said the second project that has been impacted is a contract for Rio Tinto at its Oyu Tolgoi copper and gold mine in Mongolia. He said M&R’s oil and gas and underground mining platforms have a 66% stake in a joint venture with a local partner in this project.

Peter Bennett, chief executive of M&R’s oil and gas platform, said the coronavirus has impacted the supply chain side of this contract, with a lot of owner-supplied equipment being quarantined at the border and some of M&R Clough’s shaft sinking equipment also impacted.

Bennett said the bigger challenge is around the movements of their personnel because of limited access routes.

“If you travel through Korea, there is a 21-day self-quarantine requirement through Bangkok and through just about any route there is some element of that.

“Our ability to maintain our supervision on site is being impacted. We are working with the client there to consolidate our work areas into some more defined space such that we can manage that more effectively.

“But at this stage we don’t know what the long term impacts will be,” he said. “There will be a slowdown in work on site but that is about as definitive as we can be at this point.”

Laas said the challenge for M&R under circumstances where it is impacted by the virus is to come to some sort of arrangement with the client because they do not want to incur the cost impact of the delay. He said this is still subject to negotiation.

Impact assessment

He added that M&R is aiming to conclude its internal work on the coronavirus impact by Friday next week and by then should have a better feel of what the potential impact might be.

Laas said the impact on M&R in Australia is very minimal at this stage even though the supply chain links back to China.

Webster Mfebe, chief executive of the SA Forum of Civil Engineering Contractors (Safcec), said on Thursday he has not received any reports from Safcec members about them being impacted by the coronavirus. “That does not mean they have not, but they have not reported it,” he said.

Order book sees good growth

M&R on Wednesday reported a 60% increase in its order book to R50.8 billion in the six months to December from R31.7 billion in the previous corresponding period.

Laas said the growth in the order book was the highlight of this reporting period.

“The significance of this is that only once before in the history of M&R was the order book higher than that.

“It was R60 billion in December 2008. Then the global financial crisis impacted the business and then it very quickly dropped down to R40 billion by June 2009.”

Laas said M&R believes the R50.8 billion is a quality order book and highlighted that the previous high of R60 billion included a lot of projects in the Middle East, which was “a bitter experience for the group”.

However, Laas said this strong order book will not present M&R with growth potential in the current financial year but will support growth in its 2021 financial year.

He said M&R expects the group’s financial results for the full year this year to be in line with what it reported in the previous year.

He said the oil and gas business has established a meaningful presence in the US and will again become a meaningful contributor to group earnings while the underground mining business is expected to maintain its earnings at current levels.

“In time to come, North America will be a very big part of this group and it may even be a bigger contributor to earnings than the Australasia region is at this stage.”

Laas said R2.2 billion of the R6.4 billion of M&R’s near orders, which are projects that have essentially been secured by the group but the contracts have not been signed, are now in the group’s order book.

Project pipeline

There are projects valued at R70.5 billion in M&R’s ‘category one’ project pipeline, which are projects where it has already tendered or is busy tendering.

“The success rate that we have on our tenders on the various platforms varies but overall a reasonable expectation is that at least R30 billion to R35 billion of that R70 billion should be secured and find its way into M&R’s order book once the adjudication process has been concluded,” he said.

Read: M&R anticipates new offer from Aton before the end of 2020

M&R on Wednesday reported a 12% decrease in attributable earnings to R163 million for the six months to December from R186 million in the prior period following an increase in interest expenses, which was caused by the funding of acquisitions, the implementation of IFRS 16, and a cyclical increase in working capital.

Shares in M&R rose 1.13% on Thursday to close at R9.85.

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