M&R contemplates selling its stake in Gautrain concession company

JSE-listed multinational engineering and contracting company Murray & Roberts (M&R) is contemplating selling its 50% shareholding in the Bombela Concession Company, the operator of the Gautrain.

The group has valued its shareholding at more than R1.4 billion.

M&R financial director Daniël Grobler said on Thursday that this is one of the options being considered to increase the working capital required by the group to execute its R59.5 billion order book.

Read: Proposed Gautrain route extension moves closer to reality

M&R CEO Henry Laas admitted there was “quite a swing” in the group’s financial year to end-June to having net debt of R1.1 billion from R700 million cash net of debt in the previous year.

Laas said this cash was absorbed in working capital to fund the growth in the group and M&R is considering a number of proactive options to make sure the group can continue to provide the necessary support for the growth anticipated in the business.

Grobler said other options being considered include:

• Restructuring group debt post year-end, with the current R1.675 billion overdraft facility to be converted into a term loan facility of R1.35 billion and an overdraft facility of R650 million.
• Engagements with financial institutions to establish a working capital facility for Australian subsidiary Clough of between Au$30 million to Au$50 million. Clough currently does not have a working capital facility.
• The sale of M&R shares worth about R300 million that were previously acquired by the various company share schemes in the open market.

Grobler said the group has significant growth exposure in its energy, resources and infrastructure platform and mining platform and it needs to empower these businesses to expand way beyond 2026.

He said the 50% shareholding in the Bombela Concession Company is the only non-strategic asset the group could potentially sell to generate cash to invest in the growth of group businesses.

Grobler said the group started a process a while ago to explore the possible sale of its Bombela shareholding to see what value it can obtain for it and, if it makes sense, it will dispose of it.

“But we are not at a point as yet where the board has said ‘yes, we are going to sell it, this is the value, this is the buyer’. We are exploring it but it is going to be a short process to try and close it should the board take a decision to sell the asset,” he added.

Grobler confirmed that ridership on the Gautrain has negatively impacted the carrying value of this investment.

Read:
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He said ridership on the Gautrain prior to the Covid-19 pandemic was about 55 000 passengers a day, which dropped to zero during the pandemic, and is now at between 24 000 and 26 000 passengers a day.

Grobler said this resulted in the group booking a R193 million fair value adjustment for this investment in the year.

Full-year results

M&R reported a 36.5% rise in revenue to R29.9 billion in the year to end-June, from R21.9 billion in the previous year. Earnings before interest and tax from continuing operations increased by 30.5% to R705 million from R540 million.

However, supply chain and other issues impacted the group’s profitability, resulting in a deterioration in the group’s operating margin to 2.4%. This is below the group’s targeted operating margin range of between 3% to 5%.

Diluted continuing headline earnings per share grew by more than 260% to 58 cents from 16 cents.

Laas said the group’s growth predominantly came from improvements in its energy, resources and infrastructure platform. He said mining revenue was slightly up but earnings were slightly lower while the power, industrial and water platform reported a reduced loss.

Order book

The group’s strong order book was largely maintained at R59.5 billion compared to R60.7 billion in the previous year, with near orders increasing significantly to R60.4 billion from R11.1 billion.

“This is just extraordinary and it is a fantastic order book and set of near orders. Almost R30 billion [of the order book] is scheduled for the 2023 financial year,” said Laas.

“That is the level of revenue that we have achieved in the previous financial year so we do expect strong revenue growth to continue into the 2023 financial year. We can say with a reasonable bit of confidence that revenue for the 2023 financial year should be about R40 billion.”

Laas said M&R has been criticised for some time for persisting with its power, industrial and water business but believes it is “at the point of breakthrough where this business is ready to return to profitability”.

“The investment which is happening within South Africa and the accelerated investment in utility scale renewable energy is going to give us opportunities, which we have not had for a long period of time in this business.

“It has a very low order book at R400 million but we are quite excited about opportunities in Bid Window 5 [of the Renewable Energy Independent Power Producer Procurement Programme], where financial close will be reached at the end of September.

“We are well positioned for a significant flow of orders associated with that work. We believe it will return to profitability in 2023,” he said.

Read:
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Rowan Goeller, an analyst at Chronux Research, said M&R’s financial results are “pretty impressive” given that the Covid-19 pandemic and supply chain issues can cause havoc with the type of lump sum engineering, procurement, and construction (EPC) projects M&R specialises in and it maintained good margins in the energy, resources and infrastructure business.

Goeller said M&R’s group order book could grow revenue by 30% in 2030 and if the group improves its margin over the next year or two “that is going to deliver some decent earnings growth”.