Murray & Roberts: fat orders, fat profit? Not always
A surging order book is behind a share recovery for M&R. But timing and margins are important too
You’d be hard-pressed to explain the post-results bounce in the Murray & Roberts (M&R) share price, to a six-week high of R13.
Not only did revenue from continuing operations drop 7% for the year ended June, the company generated 10% less in the form of diluted headline earnings.
Yet its share price almost immediately started clawing its way back to the levels prevailing before the Competition Commission dropped its prohibition bombshell in mid-July.
In a move few investors had anticipated, the commission recommended that the Competition Tribunal prohibit the proposed takeover of M&R by privately owned German engineering firm Aton. In a generally sluggish operating environment, the prospect of Aton’s R17 a share offer was considered the most enticing aspect of M&R’s share price valuation.
The commission’s news resulted in the share falling 20% in a matter of hours. At risk — the tribunal’s final decision has yet to be made — was not only the R17 offer but the prospect of Aton being required to offload a large chunk of the 44% M&R stake it has built up over four years.
A clinical perspective might find little to justify a share bounce, but CEO Henry Laas and the board have given shareholders something to look forward to in the now likely event that Aton fades from the picture: an order book up 55% to R46.8bn, so-called "near orders" of R14.4bn and an unstressed balance sheet.
While there are no formal accounting guidelines as to what exactly an order is, Ed Jardim, group investor executive at M&R, tells the FM: "We take a project into the order book when a signed order has been received from the client and the commercial arrangements have been finalised."
Keith McLachlan of AlphaWealth says the group has done well to distance itself from the troubled domestic construction industry but believes it’s difficult to place too much reliance on the order book because of a range of unknown variables, "not least of which is that the size of the order book is less relevant than the timing and the margins".
These are still anything but fat: margins in the engineering segment in its oil and gas platform, for example, were 3% compared to last year’s 8%.
Construction posted a negative 6% margin, though commissioning and maintenance jumped to 19%.
M&R now describes itself as a specialist engineering and construction company with three areas of focus: power and water; oil and gas; and underground mining. While underground mining was the only division that generated any profits during 2019, all three are showing good promise — at least according to the order book.
Laas said the lower and declining order book in the power and water platform reflects the near completion of the Medupi and Kusile power station projects and the prevailing market conditions in SA.
The particularly strong performance from the underground mining division — operating profit rocketed 72.8% to R814m — sheltered shareholders from losses in the other two divisions, and highlights the importance of this part of M&R’s business.
It was the overlap of the mining-related services that prompted the commission’s prohibition recommendation. Aton, through Redpath SA, provides a wide range of mining services to companies operating in Sub-Saharan Africa.
"The merging parties are close competitors," said the commission in its July ruling, "and this transaction will, for both parties, result in the removal of their closest and strongest competitor." It was concerned that the merger would create a company of such size and scale it would have the wherewithal to "throttle competition".
This must have been music to the ears of the independent board of M&R, which has aggressively pushed back against Aton’s acquisition ambitions since they were formally announced in 2018. If Aton is forced out of the picture the timing and margins of the order book will be critical.