Brave punters who scooped up Murray & Roberts shares last year at a low of about 60c have enjoyed multibagger returns as it rallied to a 52-week high of 331c in late August. Since then, however, the share price has more than halved as profit-taking and a weak trading update took its toll.
It’s been a risky investment proposition since the 2022 loss of its Covid-hit Australian engineering and construction business, Clough, which previously provided much of the group’s cash flows. Reduced to a smaller group focused on the underground mining sector in Africa and North America, as well as energy infrastructure in South Africa (OptiPower), it has had to reduce debt and overhead costs while trying to protect the long-term sustainability of the business.
The share price rally this year was fuelled by corporate restructuring efforts that reduced overhead costs, partially repaid local debt with offshore cash and made the business more tax efficient. It also managed to attain a net cash position of R400m at group level. However, pressure from local banks to settle the remaining R409m of gross debt has caused liquidity constraints to hamper the business.
Fortunately, mining services produce relatively predictable income streams, at least from a contracting standpoint, because the industry’s variable operating conditions force clients and contractors to share risks. So unless there’s gross negligence, projects are less likely to incur losses. This is in stark contrast to a business such as Clough, where fixed-price contracts made Murray & Roberts carry most of the project risk, even for a black swan event such as Covid. And mining typically involves less complex projects, which also reduces risk.
Of course, other construction risks remain, chief among them client concentration and the loss of revenue as large projects wind down. In South Africa, this is especially pronounced because more than half the order book is generated by De Beers’s Venetia diamond mine. As luck would have it, De Beers recently had to cut back on underground mining expansion because of a weak global diamond market, prematurely ending a reliable income stream for Murray & Roberts.
The group’s other local business, OptiPower, announced disappointing news in the recent trading update. Burdened by fixed-priced contracts (unlike mining) and hamstrung even more by liquidity constraints, the subsidiary focused on renewable energy projects and has incurred unnecessary and substantial losses despite an improving market environment. It will be a pity if this business can’t realise its full potential due to a cash crunch.
Other construction risks remain, chief among them client concentration and the loss of revenue as large projects wind down
It’s not all doom and gloom. Anticipating reduced income at Venetia, given the well-documented woes in the diamond industry, Murray & Roberts has set its sights on the burgeoning Zambian copper mining industry. Boasting strong African credentials and an extensive fleet of mining equipment, it is well placed to benefit from copper’s long-term fundamentals if it can capitalise on this opportunity. Navigating a strained balance sheet during the transition period will be the biggest challenge.
The North American mining operations are undergoing a similar evolution as new contracts in Mexico and the US offset the closure of old projects. With work ramping up more slowly than expected, according to the recent business update, cash flows will be pressured in the short term. It’s also bidding for new work in Indonesia.
The group is committed to disposing of noncore assets, to reduce the R409m South African debt and restore liquidity. It’s also seeking to raise a working capital facility. Cutting its corporate office space in South Africa by 50% and negotiating new lease terms will provide up to R100m of annual cost savings, substantial for a company with a market cap of only R600m at the time of writing. Also, several unresolved and long-outstanding claims in favour of the group could be settled within the next 12 months.
Considering Murray & Roberts’s short-term liquidity constraints but solid long-term prospects, the approach of Austrian majority shareholder Aton (44%) will be interesting. A previous attempt at a takeover was thwarted by competition authorities due to Aton’s stake in rival underground mining group Redpath. However, if Murray & Roberts moves the bulk of operations to Zambia and is able to show financial distress and potential job losses in the remaining local business, a takeover proposal might be viewed more favourably.
For Aton, such a move makes a lot of sense. Even at a hefty premium to the current share price, the takeover consideration will be a fraction of what it originally planned to pay. It will also protect the value of the investment and create potential synergies with Redpath.
Given small profit margins, susceptibility to volatile economic conditions, project execution risks and unfavourable contract terms, construction firms have never been viewed as a good long-term investment. Picked at the right point in the cycle, though, returns can be juicy for those willing to take the risk.
If Africa is on the verge of a mining boom spurred by the need for new energy metals, Murray & Roberts is well placed. It just needs to survive its short-term liquidity crunch first.
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