M&R shares plummet 24.4% as further detail on debt challenges emerge

Shares in JSE-listed Murray & Roberts (M&R) slumped by 24.44% to close at R1.70 per share on Thursday, after its debt challenges became clearer and realisation that it has almost conceded defeat in its plan to regain its Australian mining business.

This is largely because its South African lenders are not prepared to support the planned acquisition of the mining business from the administrators.

The group lost control of Clough, the driver of its most significant energy, resources and infrastructure (ERI) platform, and Murray & Roberts (Pty) Ltd (MRPL), an indirect wholly owned subsidiary of M&R and the group’s holding company in Australia, when it put both companies into voluntary administration in December 2022.

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RUC Cementation (Pty) Ltd (RUC), M&R’s Australian mining business, was held within MRPL.

M&R confirmed in a trading update issued on 15 February that the group is continuing to explore options to retain ownership of RUC.

Funding constraints

However, M&R CEO Henry Laas said on Thursday he is unsure if the group will be able to put a funding package together that it believes will support a competitive offer for RUC.

“Although we are giving it our best shot, the chances of regaining ownership of RUC [are] probably remote,” he said.

Laas said the difficulty M&R has is that its lending banks in South Africa are not willing to support the group in a transaction where the cash that is required would be utilised for a business in Australia.

“I think the banking groups in South Africa are hesitant to advance funds that eventually will end up in Australia, so that is a bit of a problem.

“If we want to succeed in regaining ownership [of] RUC, it can only happen on the strength of the asset itself, RUC, and its own cash generating capability. That is making it a bit difficult for us,” he said.

Laas said it is “most tragic” that RUC also got caught up in the administration process and is being sold off by the administrators.

He added that the bidding process is still ongoing and binding offers need to be submitted by 17 March.

The loss of control by M&R of its portfolio of Australian businesses meant it was required to deconsolidate these assets from the group, which happened with effect from 5 December 2022 and required it to move those assets to discontinued operations.

Laas said there was an about R3.5 billion reduction in M&R’s equity as a consequence of this.

Smaller group

M&R is much smaller following this process and now comprises two instead of three platforms:

• Its mining platform – comprising Murray & Roberts Cementation, which predominantly services the South African and sub-Saharan Africa markets, and Cementation Americas, which comprises a business in the US and a business in Canada; and

• Its Power, Industrial and Water platform, which is focused predominantly on the energy and power sectors in sub-Saharan Africa.

M&R is also continuing to evaluate options to deleverage its balance sheet to achieve a sustainable long term capital structure.

Debt

Laas said what happened to M&R in the past six months “is quite devastating” and given the group’s smaller footprint, there are fewer cash-generating units and the group is challenged from a debt perspective.

“Although the debt-to-equity ratio for corporate debt is down at 36%, the debt itself is about R790 million and that is the figure that we need to work down,” he said.

Laas said when a company finds itself in a difficult liquidity position, the first thing it does is sell non-core assets, which M&R initiated through the sale of its shareholding in the Bombela Concession Company (BCC).

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He said that will realise R1.3 billion cash towards the end of March or early April this year and enable M&R to reduce its debt to R790 million.

Laas said the group does not have any other non-strategic assets it can sell and therefore has to look at other ways to deleverage its balance sheet, such as reducing its working capital, releasing cash through better working capital management and finalising and hopefully settling a number of outstanding claims that could bring in a couple of hundred million rand into the group.

He said M&R had a R16 billion order book at end-December 2022, which is a good order book considering the reduced scale or size of the business, with near orders at R14.4 billion, the majority of which sits in the mining platform.

Laas added that although the order book is a little bit lower than it was in the prior year, it’s “nothing we are concerned about”.

Updated trading statement

M&R this week reported that restated revenue from continuing operations grew by 40.5% to R5.89 billion in the six months to end-December from R4.19 billion in the prior period.

Earnings before interest and tax improved significantly to R80 million from R18 million.

M&R reported an attributable loss of R2.5 billion compared with the R55 million attributable profit in the prior period. Laas said R2.3 billion of this loss is attributable to MRPL, Clough and RUC and the deconsolidation of these business.

The diluted continuing headline loss per share widened to 30 cents from 25 cents in the prior year.

Group could ‘trade’ itself out of this situation

Rowan Goeller, an analyst at Chronux Research, said M&R has a funding issue to get through in terms of the group’s debt repayment and is in discussions with its lenders but could quite possibly trade itself out of this situation.

“In terms of debt repayments they have to make in the next 18 months, it’s going to be tight cash-flow-wise. The first challenge it has to get over is its debt hurdle,” he said.

Goeller said if M&R restructured its debt with its lenders, a rights offer is what the lenders like to see, but the question is whether large shareholders, including Aton, follow their rights.

He said M&R was unfortunate and unlucky.

“If the [post-Covid-19] supply chain issues lasted six months [less] and certain projects had been awarded six months earlier, they [M&R] might have been okay.

“I don’t think they acted irresponsibly within the context of it being a risky business that hit very strange conditions for two years in a market, Australia, that is very brutal to contractors.

“A lot of South African construction companies who got into similar types of problems kind of stumbled into it blindfolded and were always likely to get into trouble,” he said.

Listen: Murray & Roberts CEO Henry Laas discusses interim results with Simon Brown on MoneywebNOW. He notes that the mining unit did very well in H1 vs the prior year (or read the transcript)

You can also listen to this podcast on iono.fm here.