The construction sector of the JSE looks a lot different from the glory days when it was propelled by the 2010 Soccer World Cup.
The share prices of those companies that have survived show the dismal performance of the domestic economy from 2010 until now, with prices of the survivors down as much as 90% over this period.
The share price of Murray & Roberts (M&R) is now trading at a paltry 65c at time of writing, with a market capitalisation of just R289m. Many long-term investors in this business will now be wishing they could turn back the clock to 2018, when German-based Aton made a R17 a share offer for M&R. Unfortunately, time moves on and the question now is whether all hope is now lost for this once global leader. The group’s recently released set of financials makes for some brutal — yet honest — reading.
Group liquidity, as indicated in the results for the year ended June 2023, is under pressure and there is now limited margin for error. This is not a great position for any business to be in, given global economic uncertainty. Time will tell if M&R needs to increase its debt levels and/or approach the market for fresh capital. But, for now, management is hoping to trade through what it refers to as “the most challenging period since the 2008 global financial crisis”. It does, however, believe cash flow forecasts in the medium term should meet the group’s commitments.
On the plus side, debt levels have been reduced from R1.1bn to R300m from the proceeds of the disposal of its investment in the Bombela Concession Company (operating as the Gautrain). But even this reduced debt level is still more than its market capitalisation, and further focus may be needed on this area of the balance sheet.
It does seem though that the group is aware that action is needed here. Most of its debt is held by lenders in South Africa, whereas from a cash flow perspective the group is only somewhat cash generative in the country. The majority of cash is generated in Canada and the US; as a result, the group is looking to reduce its debt exposure to South African lenders and offset this in regions where interest rates are potentially lower and where the majority of its cash is generated. This should hopefully reduce future debt costs.
The group is confident that R10.6bn of revenue for the 2024 financial year has been secured and that revenue is expected to exceed R13bn, slightly more than the R12.5bn reported this year
After selling off its Southern African building and infrastructure business in 2016, the business’s main focus has been on providing engineering and contracting services to underground and open pit mining and, to a lesser degree, providing the same services to the power and water economic sectors. Due to Covid-related pressure on its business, its holding company in Australia and Clough Group were both placed under voluntary administration.
Despite this, M&R still has significant global exposure in its mining services-related business in the Americas and Africa. The group has lost control of its RUC cementation business in Australia, but is hoping to regain it to maintain a presence in the Asia-Pacific region. Should this not happen, other plans are afoot to maintain trading in the region.
Its business servicing the power, industrial and water sectors remains small and predominantly in Sub-Saharan Africa. There is, however, strong potential upside in these areas, especially in its power-related business as a result of South Africa’s constrained power transmission, which is in urgent need of infrastructure investment. This should benefit M&R if the South African public sector buys local instead of looking to imports from China. The group is also benefiting from infrastructure spend in the renewable energy (wind) sector.
So though the recently released set of results paints a grim picture, the group’s order book at the time of the June results release was R15.4bn. This is not too bad compared with the R17.6bn reported in June 2022, considering all the recent turmoil. The group is also confident that R10.6bn of revenue for the 2024 financial year has been secured and that revenue is expected to exceed R13bn, slightly more than the R12.5bn reported this year. All the company needs to do now is pull this through to the bottom line.
There is opportunity at the present share price, but shareholders may need patience and a strong stomach to endure the ride.
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