COMMENTARY

Recovery and Growth

The Group has remained resilient to conditions in its construction markets due to the diversity of operations and markets. Global mining and natural resource markets remain buoyant across the world. Construction and related activities in both southern Africa and the Middle East experienced subdued market conditions as a result of reduced Government infrastructure spend and unstable financial markets inhibiting private expenditure. Although significant progress was made by the Group in resolving contractual claims, the estimated costs to complete, inclusive of penalties, on a number of major contracts increased significantly and the decision to dispose of certain business operations resulted in the need to make material asset impairments. The net result is that the Group recorded a loss for the year.

The Board extends its condolences to the families, friends and colleagues of 12 employees who lost their lives while at work in the Group’s operations during the year under review. Executive leadership has taken decisive action to address safety in the work place with an initiative primarily focussed on attitudes to safety and safe behaviour across the organisation.

A new leadership team has been appointed with effect from 1 July 2011, led by Henry Laas as group chief executive. The team has developed a Recovery & Growth plan which aims to return the Group to profitability in the 2012 financial year, with an improved liquidity position and growth thereafter.

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Financial year to 30 June 2011

Revenues from continuing operations increased by 10% to R30,5 billion (2010: R27,9 billion). An operating loss of R678 million (2010: profit R1 535 million) was recorded after accounting for the following charges and contract completion costs for the 12 months to 30 June 2011:

• SADC Construction – R1 150 million: Gautrain Civils Joint Venture (“Gautrain”) – Contract finalisation costs and provision for potential Competition Commission (“Competition”) penalties on identified possible transgressions on other projects;
• Marine Construction: Gorgon Pioneer Materials Offloading Facility (“GPMOF”) – R582 million of estimated contract completion costs;
• Middle East – R164 million for impairment of contract receivables in respect of legacy contracts; and
• Construction Products – R79 million impairment of assets.

The above charges and costs totalling R1 975 million increased from the R795 million of exceptional charges recorded to 31 December 2010 as a result of the following reasons:

• a provision for potential Competition penalties following the submission of previously unknown possible transgressions to the Commissioner in April 2011;
• a further provision against Gautrain contract receivables as a result of a new legal opinion received in respect of one component of the total claim;
• a Dispute Resolution Board ruling received in June 2011 requiring rectification work in respect of water ingress on the Rosebank to Park station section of the Gautrain tunnel, resulting in increased cost to complete and further delay penalties;
• a provision for increased arbitration legal costs in relation to the Gautrain Delay and Disruption claim, which is now only expected to be heard in 2013;
• losses on the GPMOF contract due to further delayed access post 31 December 2010, adverse weather conditions that hindered construction activities and allowed claims recognition in terms of IAS 11 (Construction Contracts); and
• a change in outlook on a market sector within the Construction Products platform requiring an impairment of related assets.

Excluding the above mentioned charges, the Group’s normalised earnings before interest and tax for the year amounted to R1,3 billion. Such normalised earnings were weaker in the second half of the financial year, primarily as a result of lower than estimated contract final accounts achieved in the Middle East and delays in orders received primarily within the Construction Products Africa businesses.

On discontinued operations, R326 million in respect of impairment of assets held in businesses to be sold or closed was recorded which is in addition to trading losses of R384 million for the year under review. Trading losses continued to be incurred in the second half of the financial year and additional provisions were made against assets to be sold or closed, based upon indicative disposal values.

As a consequence, the Group recorded a diluted headline loss per share of 394 cents and diluted loss per share of 387 cents both from continuing operations for the financial year to 30 June 2011, compared to the previous comparable period of diluted headline earnings per share of 314 cents and diluted earnings per share of 318 cents. After accounting for the loss on discontinued operations, the Group recorded a diluted headline loss per share of 503 cents and diluted loss per share of 585 cents respectively for the financial year to 30 June 2011, compared to the previous comparable period of diluted headline earnings per share of 340 cents and diluted earnings per share of 371 cents.

Notwithstanding the deterioration in earnings in the past financial year, the Group is well positioned for a return to profitability and growth in earnings.

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Liquidity

The Group’s liquidity position improved substantially from the net debt position at 31 December 2010 of R1 billion to a net cash position at 30 June 2011 of R759 million, excluding cash and interest bearing borrowings within discontinued operations. Whilst future revenue flows are anticipated, funding required to complete the Gautrain and GPMOF projects over the next six months is likely to again place the Group in a net debt position by 31 December 2011.

The Group’s restricted liquidity position is being resolved through a structured approach involving four initiatives:

• profitable and cash generative financial results from all operations;
• sale of non-core operations and assets;
• restructuring of banking facilities, by spreading the term of the facilities and reducing the reliance on “on-demand” facilities; and
• resolution of project claims.

Good progress has been made on all initiatives. Arbitration proceedings have been initiated on a number of the Group’s contract claims, however, final outcomes from these hearings are unlikely prior to 30 June 2012.

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Major projects

Murray & Roberts retains the capability and capacity to execute major complex projects. Such projects will continue to be a substantial part of our business and a competitive differentiation into the future, but will be subject to more effective risk management processes.

Murray & Roberts Projects successfully renegotiated its contractual arrangements with Hitachi for the delivery of the mechanical erection of the Medupi and Kusile power stations. The revised contract terms have significantly de-risked the commercial position on these projects and future profitability on the power projects is now probable.

Murray & Roberts Construction, in joint venture, is undertaking the majority of the civil works at Medupi Power Station (“Medupi Civil Works”). The contract is progressing satisfactorily despite the significant scope growth on the contract. Negotiations are in progress with Eskom to resolve outstanding claims related thereto.

Despite substantial completion of the Gautrain Rapid Rail Link project, the Group has made a material loss on its participation in construction activities on this project. During the year additional charges were taken on the construction contract relating to the impairment of contract receivables, estimated costs associated with water ingress rectification work, delay penalties as well as increased costs to complete the project by January 2012. Bombela Concession Company has submitted its Statement of Case in connection with the Delay and Disruption and related disputes on the Gautrain Rapid Rail Link project.

The Group encountered late site access, adverse weather conditions and material scope changes at its GPMOF project in Western Australia. A significant charge was taken during the year in respect of the estimated costs to complete the project. The anticipated completion date of the project is January 2012.

During the year the Group’s construction business in the Middle East participated in several major projects in Abu Dhabi. The Zayed University was completed while Saadiyat-St Regis resort complex will be completed during the course of the 2012 financial year. An arbitration proceeding on the Dubai International Airport Concourse 2 (“Dubai Airport”) is following its course and the Group expects to resolve the final account settlement in the second half of the 2012 calendar year.

Clough is undertaking, in joint venture, two major and profitable LNG (liquefied natural gas) projects, the PNG-C1 contract in Papua New Guinea and the Gorgon Downstream LNG contract in Western Australia.

The value of still to be agreed Group contract claims and variation orders included in the statement of financial position at 30 June 2011 was R1 968 million (2010: R1 966 million), net of on-account payments of R334 million. These claims have been taken to book in terms of IAS 11 (Construction Contracts) and following engagement with independent legal, commercial and claims consultants. The majority of this balance relates to claims in respect of Gautrain, Medupi Civils Works, GPMOF and Dubai Airport. The Board and management remain committed to the resolution of all contractual disputes and collection of resultant claims. As previously disclosed to shareholders, adjudication of these legally complex financial claims and variation orders within major projects has yet to be finalised, and is subject to arbitration and/or negotiation. As a consequence the potential exists for a materially higher or lower amount being finally awarded compared to that recognised in the statement of financial position at 30 June 2011.

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Risk management

Managing risk effectively is at the heart of the Group’s sustainability. The setbacks during the year on certain major projects have necessitated a renewed focus on identifying and evaluating risk within the Group. An increase in staffing of the legal and commercial teams is in progress, the Group’s bespoke Opportunity Management System is being upgraded and improved project processes and systems are being implemented.

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Competition Commission

The Group has committed to full co-operation with the Competition Commission (“Commission”) to eradicate anti-competitive behaviour within the construction industry. In February 2011, the Commission announced a Fast Track settlement process aimed at providing a transparent, cost effective and swift resolution to its investigations into the construction industry. Regrettably, and due mainly to late notifications by former subsidiary company executives, a limited number of projects were identified where possible transgressions may have occurred. As a consequence, the Group lodged its applications for these projects on 15 April 2011. A provision has now been made for potential penalties for these identified possible transgressions. The Board reiterates that it does not condone any anti-competitive or collusive conduct and all identified infringements have been disclosed to the Commission.

Notwithstanding the Group’s efforts to disclose all anti-competitive matters to the Commission, there may be certain residual matters which have not yet come to the Group’s attention and that may potentially give rise to additional penalties.

The Group’s Statement of Business Principles is a detailed exposition of ethical standards and practices and has been distributed to all employees, service providers and business partners. The Business Principles leave no room for unacceptable practices such as collusion or corruption.

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Disposal of non-core assets

Discontinued operations in steel reinforcing bar manufacture and trading, Johnson Arabia crane hire and Clough’s marine operations all produced losses in the year to 30 June 2011.

The sale of discontinued operations is well advanced and management is targeting for the transactions to be concluded by 31 December 2011. Conditional offers for the Group’s shareholding in the N3 Toll Concession and Johnson Arabia were received prior to 30 June 2011. Clough announced the sale of its marine construction division for AUD127 million on 8 August 2011.

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Construction Africa and Middle East

Effective 1 July 2011, Nigel Harvey assumed executive responsibility for the Murray & Roberts Construction Africa and Middle East operating platform. The platform comprises the following operations:

• Construction Africa – Murray & Roberts Buildings, Murray & Roberts Western Cape, Murray & Roberts Botswana, Murray & Roberts Namibia, Concor Civils, Concor Roads & Earthworks, Concor Opencast Mining
• Murray & Roberts Marine
• Murray & Roberts Middle East
• PPP Investments and Services – Murray & Roberts Concessions and Tolcon.

Consolidated revenues decreased 19% to R9,1 billion (2010: R11,2 billion). Revenues in Africa were lower as a result of soft market conditions in South Africa primarily resulting from a reduction in Government’s expenditure on infrastructure. Revenues were also lower as a result of the Gautrain project nearing completion.

The reduction in revenues and competitive tendering conditions impacted on the operating profit from ongoing construction activities in Africa. Further losses were incurred to ensure timeous opening of the Gautrain system, despite delays incurred as a result of land deficiencies.

Marine’s revenues were largely related to the GPMOF contract in Australia and the significant losses are largely related to claims still to be agreed.

Middle East revenues declined in-line with regional market conditions. Despite the successful delivery of a number of projects, in the light of unstable financial markets in that region a prudent approach was taken to estimate contract finalisation values. After accounting for overheads, the result for the region’s continuing activities was break-even. A further impairment was taken on long-outstanding contract receivables.

A provision has been raised for identified possible transgressions of competition laws as submitted in terms of the authorities’ Fast Track application process.

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Construction Global Underground Mining

The Construction Global Underground Mining operating platform is led by Peter Adams. It comprises five Cementation businesses based in Johannesburg, Perth, North Bay (Canada), Salt Lake City and Santiago.

Consolidated revenues increased 46% to R7,8 billion (2010: R5,3 billion) with operating profit up 35% to R602 million (2010: R447 million), at a margin of 7,7% (2010: 8,4%). Sustained worldwide demand for commodities resulted in improved activity in all three operating regions and prospects are expected to remain positive for the foreseeable future.

The businesses are currently involved in the development of 21 deep level shafts across all regions.

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Construction Australasia Oil & Gas and Minerals

Kevin Gallagher has been appointed Clough CEO to succeed John Smith by the end of the calendar year. Murray & Roberts holds a 62% shareholding in Clough Limited, a company that delivers an integrated engineering, procurement and construction service primarily to oil & gas and minerals projects in Australia and Southeast Asia. Clough in turn owns 33% of Forge Group Limited, also an ASX listed company, involved in engineering, construction, procurement and maintenance in the mineral resources sector.

Revenues increased 40% to R5,4 billion (2010: R3,8 billion) with operating profit up 32% to R269 million (2010: R204 million) at a margin of 5,0% (2010: 5,3%).

Australian government support for the development of their resources sector, together with ongoing high levels of investments in oil & gas and minerals projects, present many opportunities for Clough and the Clough-Forge relationship.

Full details on the Clough and Forge financial results for the year to 30 June 2011 and its prospects are published on www.clough.com.au and www.forgegroup.com.au respectively.

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Engineering Africa

Effective 1 July 2011, Frank Saieva assumed executive responsibility for the Engineering Africa operating platform. The platform includes Murray & Roberts Projects, Genrec, Wade Walker and Concor Engineering. The results of Murray & Roberts Projects and Genrec’s involvement in the Medupi and Kusile power station projects are grouped together under the Power Programme.

Consolidated revenues increased 138% to R4,1 billion (2010: R1,7 billion) primarily driven by increased activity on the power station projects.

A new commercial arrangement was entered into between Murray & Roberts Projects and the main contractor on the power station projects, Hitachi Power. The arrangement settles past disputes and significantly reduces the commercial risk and future profitability on the power projects is now probable.

Murray & Roberts Projects is also active in a number of other projects and is seeking further opportunities in minerals, water and industrial projects.

Genrec is operating at full capacity manufacturing steel for the power station projects, while positioning itself for future opportunities outside the power programme.

Wade Walker suffered from delays in the award of new work during the year under review but now has a strong order book that is well diversified across geographies and sectors.

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Construction Products Africa

Orrie Fenn leads the Construction Products Africa operating platform. The platform comprises Hall Longmore, Much Asphalt, Rocla, Technicrete and Ocon Brick. Industrial Products reflects the Group’s investment in Union Carriage & Wagon (UCW).

Consolidated revenues decreased 28% to R4,2 billion (2010: R5,8 billion).

Revenues at Hall Longmore declined sharply following the completion of Transnet’s 720 kilometre New Multi- Product Pipeline project. This major project, worth more than R2 billion to Hall Longmore, accounted for 70% of its turnover in the prior year. After incurring idle factory time, progress is being made in re-establishing the order book.

Much Asphalt again performed well on the back of ongoing freeway and other road construction in the major metropolitan regions.

Decisive measures were taken in the year to position Rocla for profitability. The company’s trading environment was extremely challenging, with Government cutting back on infrastructure spend and little to no activity in the residential market.

The building products businesses, Technicrete and Ocon, performed well in the face of difficult conditions in the building industry.

UCW performed well, delivering a substantial number of locomotives. A contract extension for the production of additional locomotives for Transnet was concluded and UCW is again engaged in PRASA’s refurbishment programme.

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Health safety and the environment

The safety of all who work for and with Murray & Roberts is of paramount importance. The Health, Safety and Environment Committee worked tirelessly with management, throughout the year, to sharpen its focus on workplace safety and to chart new and improved principles, practices and procedures.

DuPont Sustainable Solutions (“DuPont”) were tasked with assessing our South African operations against international best practice. An outcome of the DuPont process, which is still underway, is the formulation of a new Group health and safety plan to support our vision of “Together Towards Zero Harm” for Health, Safety and the Environment.

The actions taken in this critical area underscore the importance that Murray & Roberts attaches to safety. We are determined to increase our efforts across the Group to keep our people safe and to weave safety considerations into the fabric of the business.

Murray & Roberts creates permanent value by establishing infrastructure that serves societies and communities. In doing so, the Group is committed to inflicting no harm on the environment. Operations mostly have a low environmental impact but we acknowledge that the Group still has much work to do in this important aspect of the business.

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Human capital, transformation and skills development

Our people give Murray & Roberts its competitive edge. The Group continues to invest significantly in retaining and developing talent across all of its operations.

The Group initiated a leadership assessment programme to identify talent for mentoring and fast-tracking and 187 delegates took part in Leadership Development Programmes.

Empowering all of our people will be a key driver for success and the Group is acutely aware of the need to create an environment in which transformation can take place to become a preferred employer among talented black graduates, artisans and managers. While there was no major change to the Group’s Broad-Based Black Economic Empowerment rating this year, Murray & Roberts remains committed to the principles of equitable, affirmative access to economic and employment rights. The Group retained Level 4 contributor status.

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Leadership

The Group’s future Executive Committee will consist of Henry Laas (chairman), Cobus Bester, Orrie Fenn, Peter Adams, Nigel Harvey, Ian Henstock, Frank Saieva, Andrew Skudder and Yunus Karodia as company secretary.

Guided by renewed purpose, values and vision, the Group’s operating structure has been realigned to best support the Recovery & Growth plan. The structure has focussed operating platforms with businesses grouped by similar markets and core competencies allowing better risk management and decision-making. The five operating platforms are: Construction Africa and Middle East; Construction Australasia Oil & Gas and Minerals; Construction Global Underground Mining; Engineering Africa; and Construction Products Africa.

The operating platforms bring together industry leading capabilities and strong brands. Business plans for all operating platforms have been defined and will be vigorously pursued to ensure a strong and dynamic Murray & Roberts.

The new executive team is committed to a leadership style that affords the highest priority to sound relationships with all the Group’s stakeholders. We seek to build trusted partnerships with employees, the investment community, suppliers and partners, and most importantly with our customers and clients.

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Dividend

The Board has resolved not to declare dividends until the Group’s liquidity position has improved.

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Board of directors

During the year, the Board appointed Bill Nairn as a non-executive director. Henry Laas and Cobus Bester were appointed as group chief executive and group financial director respectively with effect from 1 July 2011, following the retirement of Brian Bruce and Roger Rees. Malose Chaba and Trevor Fowler resigned as executive directors of the Company and Group during the year. Non-executive director, Imogen Mkhize retired during the year.

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Order book and prospects

The Group’s order book, which now includes Hall Longmore and UCW, at 30 June 2011 was R55 billion (2010: R44 billion). The operating margin contained in the order book is within the Group’s strategic range of 5,0% to 7,5%.

The Group’s strength lies in its diversity, in terms of the breadth of the services and products offered across the engineering and construction value chain, as well as market spread and exposure to different economic cycles.

The Group expects a return to an acceptable level of profitability in the year ahead and all operating platforms other than Construction Africa are forecast to experience improved trading conditions. The level of this profitability will depend on economic conditions, order book development and conversion, particularly in South Africa and reduction of working capital.

Murray & Roberts embarks on the 2012 financial year with new leadership, a renewed focus on risk management, health and safety, a sound order book and a determination to grow the business while shrinking debt.

The information on which this prospect statement is based has not been reviewed or reported on by the Group’s external auditors.

On behalf of the directors

Bedfordview
31 August 2011

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