Murray & Roberts (M&R) lost more than a third of its market value on Monday after the construction and engineering group forecast a loss in the six months to end-December, catching the market off guard.
The shares plummeted as much as 41%, the worst on record, before recovering slightly to end 34% lower at R4.33, giving it a market valuation of R1.8bn.
The construction sector has been in the doldrums since its heyday ahead of the 2010 Fifa World Cup, with majors such as Group 5 having since fallen off the rails.
Despite the growth prospects touted during expansion into the competitive Australian and Asian construction markets, M&R and its peers — including Wilson Bayly Holmes-Ovcon, which last month reported its first annual loss — have taken big hits in that region.
Margins
In a trading update, M&R said a number of projects were progressing slower than planned, affecting margin and working capital requirements.
It told shareholders that it had experienced margin deterioration at the Traveler project in the US and Waitsia in Australia, both of which will be close to completion by the end of the 2023 financial year.
“The recently disclosed escalation in costs [is] attributable to the disruption in supply chain delivery and delay in project milestone payments,” an M&R spokesperson told Business Day. These “continue to persist, with projects progressing slower than planned”.
Subsequently, the construction group said it expected its half-year results would be “at least 100% down” on the previous and corresponding reporting period.
Operating in the mining, energy, infrastructure, industrial and water sectors in Africa, the Middle East, Southeast Asia, Australasia and North America, the group generates the bulk of its revenue from its operations in the Indo-Asia-Pacific region, which includes Australia.
The 120-year-old company said that at this stage the board of directors does not have reasonable certainty on the earnings per share ranges.
Order book
In its financial results for the year ended in June, the group reported a strong order book of nearly R60bn, saying R29.8bn of the R40bn in expected revenue for the 2023 financial year had already been secured.
However, it identified lower numbers across its African operations.
In August, it signalled a return to group profit for its half-year to end-June, boosted by a record order book and a strong project pipeline.
In a sudden about-turn on Monday, it reported that the delivery of its order book had been disrupted, with the operating environment leading to increased working capital requirements to tackle the dislocation in project cash flows.
“This will add to short-term cash flow issues,” Chronux Research analyst Rowan Goeller said, adding that the group was looking to sell some assets to cover the losses.
M&R said its working capital requirements were especially acute in its energy, resources and infrastructure business platform.
Small Talk Daily analyst Anthony Clark told Business Day that M&R had just begun to recover lost momentum, and its offshore expansion was seen as a catalyst for a potential resumption of interest in the stock, after low government infrastructure spending for the best part of a decade.
“The very fact that these companies have these vast order books may appear to be a glittering affair,” Clark said.
“But given that they operate on such razor-thin margins, if anything goes wrong, the probability of disappointment is extremely high.”
M&R said it was reviewing its strategic options to tackle the problem division’s near-term working capital needs, while also advising shareholders to exercise caution when dealing in the company’s securities until a further announcement is made.
“To be fair to them it is not performance-related,” said Goeller, highlighting that the group experienced Covid-related inflation and supply chain challenges. “M&R is sophisticated and intelligent in how they take on work,” he said.
M&R counts the Public Investment Corporation among its largest shareholders.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.