Cover story

RECOVERY & GROWTH

Impacted by the prolonged economic recession and challenges on some of its major projects, Murray & Roberts launched a three-year Recovery and Growth strategy in June this year. Two months later, the Group has already demonstrated early gains. Medupi power station under construction – July 2011

Medupi power station under construction – July 2011

Investors rightly fear debt-laden companies. Too many liabilities without the cash to meet them more often than not results in financial difficulty. Even with a plan of action on the table, investors worry that a business in recovery mode is hard to value.

That's exactly why the new Murray & Roberts management team, group chief executive, Henry Laas and group financial director, Cobus Bester, aim to move fast. And they've done exactly that.

Having taken over the reins in July this year and presented their first set of results to the market just two months later, they emphasise that the results for the year to 30 June 2011 are a true reflection of a difficult trading environment and the additional challenges the Group has had to face on several projects, but also that management has a clearly defined recovery plan which is at an advanced stage of implementation.

One of the Group's main challenges has been its liquidity position. That's mainly attributable to difficulties it has experienced on the Gautrain and Barrow Island projects. A number of actions have been taken which have already substantially improved the cash flow position, but this has become only a part of the new management's vision for Murray & Roberts.

Even before his official appointment to the top executive position, Laas was in the process of developing a new medium-term strategy.

New medium-term strategy

"We have adopted a three-year Recovery and Growth strategy, and we have already made good progress with the first phase of that strategy, which is recovery. This phase is vital to all that follows, because it concerns the establishment of a stable liquidity position. Growth cannot be contemplated in an environment of over-indebtedness," explains Laas.

The scale of Murray & Roberts' net indebtedness of R1,1 billion at 31 December 2010 called for immediate action.

Action has been taken, says Laas. "We have already achieved some very important targets that we established at the outset and, as a consequence, we have been able to demonstrate in our financial results to June 2011 a marked improvement in our liquidity, relative to the position at 31 December 2010. In particular, we have recovered more than R800 million in cash over and above our normal cash flows, largely as a result of the resolution of the Hitachi dispute, progress in resolving working capital issues on the Medupi Civils Joint Venture contract with Eskom, resolution of the Passenger Rail Agency of South Africa (PRASA) claim, and the collection of other long-outstanding debts.

"All of this has been achieved since April this year. We are pleased with the rate of progress and we believe that our decision to pursue a more challenging Recovery plan rather than easier short-term solutions will stand the Group in good stead. We closed out the previous financial year on a much-improved liquidity and net-cash position," adds Laas.

The next stage of Recovery

The first stage of the Recovery plan has had to address immediate liquidity concerns but the new management team has also ensured that it has a concurrent strategy to seek future growth. The global financial crisis had taken a heavy toll on world markets, and there has been a dearth of construction opportunity in areas where previously Murray & Roberts prospered. The Group needed to be restructured to position itself for future growth.

Negotiating Murray & Roberts out of its indebtedness has required courage and resolution from everyone involved, says Laas, because the market has tended to clamour for quick solutions that would have impaired the Group's long-term growth prospects. "There have been calls for us to dispose of core assets or have a rights issue. These are options available to us, but our preference would be to only consider a rights issue to facilitate future growth, not to improve short-term liquidity."

Instead, phase two of the Recovery plan concerns the ongoing disposal of non-core businesses, with the steel operations being the biggest, alongside two business units in the Middle East, and the marine construction business of Clough in Australia.

These transactions take time; even the sale of a core asset takes at least six months according to international norms. "The sale of the steel operation is the major disposal in the Group's plans and it is well advanced. We have letters of agreement regarding the disposal of the two Middle East businesses, but they involve conditions precedents that have to be met before the agreements are effective. Therefore, I anticipate that these disposals will only be finalised closer to December 2011."

The disposal of Clough's marine construction business has been concluded. Laas points out that the proceeds of this transaction will be used to invest in future growth in Clough, which will continue to intensify its focus on the many opportunities in the oil and gas and minerals markets of Australasia," he adds.

The Recovery plan has not considered the resolution of the Bombela Concessions Company claim on the Gautrain project. Bester explains that the Group has submitted its statement of claim and will proceed to arbitration, though all avenues of resolution are being explored, including mediation.

A key element of the Recovery plan has been to develop a common set of values and a vision for the Group: "By 2020 we will be the leading engineering and construction group in the global underground mining market and the emerging market natural resources and infrastructure sectors," says Laas.

As part of this alignment process, operations have been structured under five operating platforms:

• Construction Africa and Middle East
• Construction Global Underground Mining
• Construction Australasia Oil & Gas and Minerals
• Engineering Africa
• Construction Products Africa

Bester notes that the operating platforms reflect the nature of the Group's focus: three are in construction, and the remaining two in engineering and manufacturing, are also construction related. "The operating platforms facilitate greater alignment and focus," he adds.

Future growth

With the plan for the Recovery phase almost fully implemented well ahead of the one year deadline, Laas and his team will soon shift their focus to the growth phase which will be dominant in the following two years.

There will be three key strategic themes to the growth phase, in areas where the greatest growth can be achieved. These are:

Africa engagement

This strategy will benefit the construction, engineering and construction products operating platforms. The process for developing the Africa strategy is in place. A set of criteria or risk filters has been developed to assess each of the 54 countries on the continent to identify areas of greatest potential, and to distil market opportunities in the 54 countries to about five or six target markets which will probably become two or three regional hubs. For instance, were Kenya to be selected, it would be the hub for all of East Africa, and the same would apply in West Africa with hubs such as Nigeria or Ghana.

"Questions on implementation still have to be addressed as to whether we need to establish an office in each region, and whether our plan should include acquisitions of local businesses," says Laas.

Acquisitions

The second growth theme will involve potential acquisitions, primarily in Cementation's global mining construction markets. Cementation has achieved solid growth over the past five years and is expected to maintain that trend for at least another five years.

"However, we've realised that to effectively benefit from the opportunity that exists, we have to seek global growth opportunities. The first step will be to attain a critical mass in Australasia and thereafter look at a global acquisition to boost the overall contribution of this business to the Group," says Laas.

Potential acquisitions will also be considered in the domestic construction sector. Laas says the South African market is not big enough for all the current construction companies and consolidation may be required in the longer term.

Clough

The third leg of the growth plan involves Murray & Roberts' investment in the listed Australian company, Clough. The company is positioned in the oil and gas market, currently one of the fastest growing sectors in the world. "We are presently evaluating several options," says Laas.

Murray & Roberts management has developed plans for each of the five operating platforms. "For now we are finalising this strategy as we strengthen our balance sheet," says Laas, "but all operations will continue with their present business development plans."

Bester explains that there is no specific milestone that separates the Recovery and Growth phases: "It is a phased implementation that kicks in as liquidity improves and permits an acquisitive strategy. It will be dictated by availability of capital – in construction you cannot be hamstrung by debt. One event will trigger the next," he explains.

Market conditions

Laas describes conditions in the Group's markets as mixed.

Construction in Africa and the Middle East remain difficult markets and are not out of the recession. In South Africa, while there are several road and civil projects coming to tender, Bester comments that Government's recent policy has been to split these into smaller tender packages to enable the participation of emerging businesses. This is not ideal for larger companies like Murray & Roberts.

The construction products sectors are also impacted by the difficult conditions in the construction economy, but should start recording growth off a low base in 2012.

"Underground mining remains a strong business with growth potential, but our limitation is human resource capacity to support growth, and we plan to address this. In South Africa, there are a number of shaft sinking projects scheduled for the next few years and this will have significant spin-offs for our civil construction and engineering businesses," says Laas.

"Clough is in a good market and we expect it to grow and continue to do well.

"The Engineering Africa platform is well positioned for growth following the resolution of the Hitachi claim, and is largely dedicated to the current power projects which are likely to be ongoing for the next four to five years. However, there is a need to develop future business opportunities outside the power sector and a new managing director of Murray & Roberts Projects has been appointed to fulfil this mandate.

"As the construction economy recovers in the next year, we anticipate growth in all of our target markets over the next three years. We feel our destiny is in our own hands: our forecasts have not taken any account of the results of our growth strategy, and that will be superimposed onto our future growth forecasts," Laas concludes.

"We have already adopted a three-year Recovery and Growth strategy, and we have already made good progress with the first phase of that strategy, which is recovery"