Murray and Roberts (M&R) rocketed as much as 32% on the JSE on Tuesday after it said Italian industrial group Webuild agreed to buy its stake in its Australian construction subsidiary Clough for A$350m (R4bn).
The surprise announcement on the sale of the Perth-based engineering and construction business, which was at the heart of M&R’s growth strategy in Australia, sent the share price soaring before it settled 17.3% higher at R5.42 on Tuesday.
Clough falls under M&R’s energy, resources and infrastructure segment and in June boasted a more than A$3bn strong order book up to June, which was said to have the potential to exceed $4bn this financial year.
Three weeks ago the R2.4bn JSE-listed group warned that its working capital requirements were under pressure, affected by Covid-related disruption. It said extra working capital was needed with margins shrinking at its Traveler petrochemicals project in the US and the Waitsia onshore gas project in Australia. This announcement saw its share price plunge 36% in a day.
Rather than trying to raise more capital, the board, led by Suresh Kana, said the sale was the preferred move.
“This is a critical step as the platform is in immediate need of a significant cash injection to service its order book and commercial commitments, which M&R is not able to provide,” CEO Henry Laas said.
If the deal, subject to regulatory approval, is concluded then the entire platform will become part of Webuild and M&R will have no residual exposure to Clough, he said.
Gryphon asset management analyst Casparus Treurnicht said M&R shareholders were nervous after the previous Sens announcement that there might be liquidity issues at the firm due to problematic contracts.
“This will hopefully give them the necessary breathing space to conclude problematic business without having to resort to shareholders for a rights issue,” he said.
Speaking to Business Day, media relations head at M&R Ed Jardim said that even though the Clough order book has been at record levels over the past 18 months, due to the lump sum/ fixed price nature of the major contracts on the platform, M&R believes the market is concerned about the inherent risk these projects posed to the company’s balance sheet.
He said this was worsened by the recent announcement of the cash-flow issue.
“I believe that the announcement today essentially removes the potential financial impact and perceived future contract risk of these projects from M&R,” Jardim said.
The deal was “an elegant solution for the current challenges faced by both M&R and Clough”.
Webuild, a Milan-based construction and civil engineering company, agreed to buy its Australian rival Clough in a bid to strengthen its presence in that market and diversify its portfolio. It has worked alongside Clough in the past, including on a hydropower project in Eastern Australia.
At end-June, Clough had an order backlog of about €2.1bn, and ended financial 2022 with revenue of about €1bn and no debt.
M&R will benefit by A$350m through the cancellation of its outstanding intercompany loan account between its Australian holding company and Clough, and a cash payment of A$500,000 from Webuild.
The intercompany loan Clough originated through the buyout of the minority shareholders by M&R in 2013.
Chronux Research analyst Rowan Goeller said that seeing that this might have not been the end of cash requirements at Clough “an opportunity to exit is now not a bad option”.
He said part of the conundrum was that the appetite on the part of the parent company to send about R2bn to Australia was simply not there. An offer to exit with a positive number is better than facing an unknown cash drain and potential rights offers if required,” said Goeller.
He warned however that M&R “will have to reinvent itself following this transaction as Clough was an integral part of the company’s growth strategy”.
This strategy has been focused on growing its international footprint and diminishing contributions from Southern Africa, with less than 10% of revenue forecast from the region over the next three financial years.
After the sale of Clough M&R will be structured into two platforms: the multinational mining platform and the Sub-Saharan Africa-focused power, industrial & water platform. Its interests in Australia will continue through RUC Cementation Mining, one of the three operating companies in the group’s multinational mining platform.
M&R’s share price has fallen about 62% this year.
Update: November 8 2022
This story has been updated with share price information and company and analyst comment throughout.
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