Cover story - Finding the Silver Lining

Murray & Roberts has not been untouched by the economic turmoil sweeping across the world. But, a solid foundation built in recent years will not only offer survival during the downturn; it may even enable the Group to prosper

In a sombre Christmas message in 2008, Murray & Roberts group CE Brian Bruce warned staff that 2009 would be a time of great economic turmoil and uncertainty in the world, the likes of which had not been experienced by anyone since our grandparents and great-grandparents during the Great Depression of 1929 to 1935.

But the message also carried the prospect of hope, suggesting that few companies in the construction sector were better placed than Murray & Roberts to not only survive the downturn, but to prosper during it.

The global liquidity constraints caused by the economic crisis and reduced oil prices have cost the Group contracts to the value of about R10 billion in recent months, but this has been more than compensated for by successful bidding for contracts worth approximately R28 billion.

In addition, the Group has a pipeline of potential new work that is currently estimated at about R100 billion, of which almost R20 billion is for projects where the Group is already selected as preferred bidder, but has not finalised negotiations and signed formal contracts. Brian notes that most of these contracts are with South African and Middle East public sector clients and reputable global resources groups.

Underpinning this optimism are positive statements by South African Finance Minister Trevor Manuel regarding government’s determination to continue the infrastructure roll-out in the 2009/10 Budget, especially additional investment in the 2010 Soccer World Cup, Gautrain, Transnet’s locomotive recapitalisation and multi-product pipeline, Eskom’s thermal and nuclear power stations, SANRAL’s rehabilitation and new road construction, and others.

Murray & Roberts is in advanced negotiations in Middle East to secure additional infrastructure work in the region. It has, for instance, recently been awarded the contract for Concourse 3 at Dubai International Airport, at a value to the Group of R6 billion.

Strong order book

Even after the completion of project work valued at about R13 billion over the past half year, Murray & Roberts expects the project order book to be roughly similar to its R61 billion level at end-September 2008, offering a solid operational foundation for the period up to 2012 and beyond.

This contrasts starkly with some global and domestic construction groups that have seen their order books collapse within a few months. There’s an old maxim that tough times separate the men from the boys, and this is being seen across all sectors of the economy. During such times, business tends to fall back on wellknown brands that offer reliable service and a strong balance sheet.

The Murray & Roberts project order book is similar to its R61 billion level at end-September 2008, offering a solid operational foundation for the period up to 2012 and beyond.

That’s not to say the Group will be untouched by the global crisis. Although the order book currently looks healthy, Brian echoes the widely held view that the worst is yet to come. Certain contracts are still under review, but fewer cancellations are expected in the January-March quarter.

“Although not material to the current financial year, project cancellations can have medium-term consequences as we engage a slowing market to rebuild order stock,” says Brian. “That is why we embarked on an organisational restructure late last year in response to these circumstances. We could not take our growth organisation into this phase of the economic cycle. Nonetheless, given that the long-term cycle remains one of prolonged growth, we will be careful not to take decisions that impair our future ability to grow,” Brian adds.

He notes that Murray & Roberts is better positioned to ride out the economic crisis than many of its competitors, because of strategic decisions taken over the past decade. “You cannot even think of survival if you have not prepared for it. Murray & Roberts is well prepared.”

Aiding this process are the strategic decisions of Rebuilding Murray & Roberts and a 107-year genetic blueprint for the organisation, which has survived tougher times in the past. Brian quotes the lessons of the past when he says: “In the 1970s, our CE, Des Baker, developed the organisation through the latter part of the post-war upcycle, teaching us never to tender at the bottom of a cycle, but at the top.” Murray & Roberts has continued to apply this philosophy and it accounts to a large degree for the health of its order book, with projects secured at good margins and enough baseline work to keep the Group busy for several years.

“We’re in a position to tender for the mega contracts which bridge the intermediate boom-or-bust cycles of construction. Smaller firms cannot directly access these big orders, and their order books tend to run out during a single cycle, forcing them to cut their margins on future opportunities and potentially threatening their solvency,” says Brian.

“Clients return to competitive blue chip companies with credentials and a track record of integrity – and it is this that may cushion us from a hard landing during this downturn. Cash flow will slow down and it will be increasingly difficult for geared companies to secure performance guarantees. What client will risk their project with such a company?”

No complacency

For Murray & Roberts, the economic downturn is providing an opportunity for introspection and review. “We had almost been in danger of over-trading: but that is no longer the case.”

There is no place for complacency, however, as demonstrated by the Board’s approval in 2008 of a comprehensive organisational change strategy to sharpen operational and business development focus across all domestic and international operations.

The cancellation of some contracts has forced the Group to shed some jobs in group businesses, such as brick-making, that have experienced the greatest attrition of order book and market. But it has also enabled the Group to buttress the critical mass of those construction and engineering businesses that had been in danger of over-trading, now leaving them far better positioned to face the immediate future. “The drop off in new business has given us a degree of flexibility and leeway we previously lacked,” says Brian.

One of the earlier strategic decisions that is now a source of stability to Murray & Roberts, is the strategic diversification of the earnings base. “We’re appropriately diversified into gross fixed capital formation, with more than 25 businesses that enable us to approach our industry from different dimensions and geographies. Each geography may go through a similar downturn, but they will not all occur simultaneously and will not all be identical. We have therefore adjusted our business development tactics to sectors and countries we may not have previously emphasised,” he says. This means that you may see Murray & Roberts operating in less traditional markets in Asia and South America.

Follow the money

‘Follow the money’, is the tactic: markets such as Dubai, which relied heavily on debt for strong economic growth are fading, but new ones such as Abu Dhabi, which still has free cash flow from oil revenue, are replacing them. “We’re seeing project erosion in one type of market, but growth in the other,” says Brian.

“Clients return to competitive blue chip companies with credentials and a track record of integrity – and it is this that may cushion us from a hard landing during this downturn.”

“The strategic decision taken in 2000 to be wholly focused on the construction economy of South Africa and related specialist sectors in selected international markets, remains a valid one and the global case for fixed capital formation is sound. South Africa and the developing world have embarked on a long cycle of increased investment into gross capital formation, and the current crisis will not derail that cycle. This current period will be seen as no more than a big blip in what is expected to be a 20 to 30 year upcycle.”

Much of the current financial crisis comes from companies pursuing ‘fad of the month’ policies – something Murray & Roberts has never entertained. Brian attributes much of the current financial crisis to ideas that gained currency several years ago, such as the restructuring of ‘lazy’ assets and balance sheets to replace then-expensive equity capital with cheaper debt capital. That ratio has now reversed.

“There’s still growth, albeit in new areas. You have to work smarter, and that’s exactly what we’re doing. We’re giving much more attention to costs to preserve our margin, and we’re adapting and using our brand to penetrate new markets and new geographies.”

“We have always advocated free cash flow as value, believing you can only prosper if you have a store of cash. The adage of your banker lending you an umbrella when it’s sunny and withdrawing it when it starts to rain has never been more applicable than today.”

There is no consensus among economists about the duration of the economic downturn: some believe that by the fourth quarter of 2009 the commodity cycle will have reasserted itself, and growth will resume. Others believe something fundamental has changed in the global economy, presaging a longerterm liquidity problem.

Brian favours the latter argument, pointing to the renewed banking crisis in the UK as evidence of a more fundamental problem. Nonetheless, he says, the particular dynamics of the South African economy suggest it will not be as badly affected and growth will resume by 2010.

But even with a pessimistic macroeconomic view, there is still scope for the industry to grow this year. “The conventional wisdom is of decline, but I say there’s still growth, albeit in new areas. You have to work smarter, and that’s exactly what we’re doing. We’re giving much more attention to costs to preserve our margin, and we’re adapting and using our brand to penetrate new markets and new geographies.”

A time for vision

“The stalling of the commodities cycle means the cost of projects will come down, and I believe prescient countries will be looking right now to put in infrastructure at relatively lower prices.

“Therefore, we’re optimistic, and I believe Murray & Roberts has the leadership position in this industry to drive our optimistic vision,” says Brian. “The United States became the world’s leading power after the Great Depression, because President Roosevelt had the foresight ‘to take a firehose to the problem rather than a teardrop’. I believe President Obama has the same vision, and may be able to lead the global economy out of its downturn.” But what about leadership in South Africa?