Murray & Roberts sees an opportunity to recover

Henry Laas: Murray & Roberts CEO

M&R is close to completing contracts that have caused recent problems: GPMOF, the Gautrain and Medupi.

Murray & Roberts’ decision to issue a rights offer will give the debt-hobbled construction company the opportunity to recover from a dismal performance in the past few years. That’s the view of CEO Henry Laas, who took over the reins in June.

M&R’s shareholders approved a R2bn rights offer last week, allowing it to reduce its debt, fund its order book and pursue growth. How soon the rights offer may unfold has not yet been revealed by M&R’s management.

This forms part of the “recovery and growth” strategy Laas launched soon after he took over from former CEO Brian Bruce. H e says the strategy cannot be engaged with a balance sheet that is so highly geared. The rights issue, he says, recapitalises the firm without forcing it to sell assets.

Laas and chairman Roy Andersen have reassured investors that the strategy will “preserve and grow shareholder value”. Andersen admits M&R has not been able to extract value for shareholders in the past, even during the construction boom.

A rights offer, Laas adds, will also help the firm withstand the impact of uncertain global markets.

M&R incurred a loss of R600m on the beleaguered Gorgon Pioneer Materials Offloading Facility (GPMOF), an Australian marine project. Design changes and cyclones caused costs to soar and by the end of the financial year to June the project’s loss will go up to about R800m, according to financial director Cobus Bester.

M&R has not been able to dispose of its entire steel business yet and losses on the Gautrain have made the situation worse.

But Laas says M&R has R2,2bn in uncertified revenues that it will pursue through arbitration. He says the figure is conservative, relative to what M&R believes it is entitled to. Arbitration, however, may take some time.

M&R hopes to resolve claims against Hitachi at Eskom’s Medupi power station and GPMOF during this financial year. However, a claim against Dubai International Airport is only expected to be resolved next year and resolution on the Gautrain project is only set to happen in 2014.

In addition to the rights offer, M&R has restructured its debt — it has a combined facility from six banks amounting to R4,3bn.

M&R’s results for the interim period to December clearly indicate its dire situation and are in line with general depressed conditions in the construction sector. Revenue rose 11% to R16,7bn, but the firm reported an attributable loss of R528m. This compares with a loss of R636m in the first half of 2011 .

Its headline loss per share widened from 109c to 189c .

But Laas says M&R is close to completing three contracts that have caused its recent problems. GPMOF, the Gautrain and its work at Medupi should be completed this year and the group has an order book of R57bn. The operating margin contained in the order book is between 5% and 7,5%, within the group’s target range.

Part of M&R’s growth strategy is a more focused expansion into Africa. Laas names Ghana, Zambia and Kenya as countries in which the firm may pursue opportunities. A decision on whether to expand or scale back Western Australian operations has yet to be taken.

M&R’s shareholders won’t feel the benefits of its turnaround strategy immediately, but the firm appears to have taken steps towards recovery. For now, investors should err on the side of caution when considering buying this share.