This morning we had two big announcements from Murray and Roberts. One was a business update giving us an indication on how things are going around the world and then there was an announcement informing us of a R2 billion rights offer. This was expected by the market last year but in November they managed to restructure their debt facilities so this may come as a bit of a surprise. Let’s cover the business update first then look at the rights issue.

Now remember, these guys have been through a tough time having to write-down receivables from at least three really big projects. This includes the Gautrain where settlement is now only expected in 2014. The Gauteng Province has received an extension until March 2012 to submit its defence. Unfortunately Murray and Roberts have obligations to meet and these extensions are one of the reasons a rights issue has become necessary. Provincial finances have been all over the news of late and let’s be honest, things do not look good. The Dubai International Airport claims process has also met some delays and it is not expected that settlement will happen this financial year. This is the kind of thing that happens when a sector with a lot of players hits a slow down. Participants become ruthless and disputes arise.

On a positive note the order book looks strong and trading conditions have improved. Especially in the mining sector where they continue to secure significant contracts with big mining houses as demand for commodities remains strong. Very interestingly they mention a slowdown in the South African platinum sector due to a low platinum price. I can name a few other reasons, just look at what’s happening at Impala at the moment with the wage disputes.

Locally construction remains muted but in the long term things are more positive. “In the medium to longer term, the outlook for Construction Africa remains positive, given the major – and growing – infrastructural backlog in South Africa. However, in the near term the construction industry in South Africa is expected to remain muted.” The Middle East also has some exciting prospects with the World Cup coming up in Qatar in 2022.

The Australian market has been positive thanks to their massive commodity drive. Unfortunately you can see a trend with their international operations having a more positive outlook than the local stuff. Hopefully this will change.

So what of this capital raising? It’s big. Murray’s has a market cap of R8.6bn so we are looking at 23% of its entire market cap. That is why the share has been sold down 4.9% today. No one likes to be diluted. But it seems crucial for the future of the company. Just until these disputes are settled and that order book can bring the company back into profits. Here is the rationale from the company themselves.

“Subsequent to the October 2008 global financial crisis, and in particular since early 2010, Murray & Roberts’ business environment has been impacted by the weakening of the global economy and the slowdown in South African public spending on infrastructure. These factors, together with the challenges experienced on three of the Group’s projects namely, Dubai International Airport, Gautrain Rapid Rail Link and the Gorgon Pioneer Materials Offloading Facility, which resulted in unresolved claims, caused Murray & Roberts to end the 2011 financial year in a weakened financial position. The Board is of the view that the Rights Offer represents the best opportunity for the Group to retain strategic flexibility and to preserve and grow long-term Shareholder value.”

This whole situation reminds me why we do not invest in construction companies directly but prefer the broader based PPC. Project risk in this case has blindsided Murray’s on three occasions. I do believe the sector will pick up and I do believe Murray’s will get out of this mess. Shareholders will have to be patient though.

Tags: #construction, #M&R