Johannesburg, 20 Oct 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Murray and Roberts Holdings Limited of A-(ZA) and A1-(ZA) in the long and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Murray and Roberts Holdings Limited (M&R”) based on the following key criteria:
M&R continues to entrench its position as an international engineering and construction group by expanding its range of higher margin offerings. While its natural resource exposure has curtailed its total order book in the face of significantly depressed global commodity prices, the group’s broad diversification by geography and type of offering has insulated its earnings from the highly competitive and uncertain local industry. To this end, SA made up 38% of F15 turnover (F14: 30%) and just 11% of operating profit (F14: 8%). Given the shift in M&R’s strategy, SA is not likely to return to historical highs of c.90% of total turnover, especially as infrastructure, engineering and construction demand could fall further.
Revenue contracted for the first time over the five-year review period, declining by 15% to R30.6bn in F15, due to a 32% contraction in the Oil & Gas top line and the scarcity of new work. Secured Oil & Gas work had halved to R8.4bn at FYE15, as clients continue to defer projects due to weak oil prices and slowing global growth. The one-year order book for F16 equated to 76% of F15 revenue, from 72% previously, implying that revenues are likely to remain stable.
M&R staved off large losses (last seen in F11 and F12), with the ratio of distressed contracts to turnover kept within internal comfort levels. Nonetheless, loss making Power & Water projects drove down the group’s EBIT margin to 3% in F15 (F14: 3.3%). Accordingly, normalised operating profit declined to a three-year low of R905m (F14: R1.2bn). Barring unforeseen risks, firmer margins are expected from all but one of the group’s platforms in F16, deriving from rigorous risk management and ongoing restructuring of certain businesses.
The erratic retained cash flows reported over the review period arose from working capital pressures associated with executing large projects and the cash drain from distressed contracts. Some relief came from sizeable cash proceeds from the sale of non-core assets such as Forge and Construction Products. Having spent R4.4bn on the Clough deal in F14, M&R plans to continue to scale back capex on weak sectors (especially mining), and will enhance its operational capabilities through small, bolt-on acquisitions. Following the repayment of loans and finance leases amounting to R1.5bn, cash closed F15 at a five-year low R2.9bn (FYE14: R4.3bn), while borrowings decreased by 44% to R1.5bn. Of the cash, R883m was AUD-denominated (FYE14: R1.9bn), and R676m in Rand (FYE14: R602m), closely matching the R928m and R507m in AUD and Rand debt respectively (FYE14: R1.8bn; R608m). Liquidity is also supported by R3.4bn in untapped facilities.
The group order book closed F15 at R38.3bn (FYE14: R40.9bn), with a reduced R7.9bn worth of near orders (FYE14: R17.3bn). An opportunity pipeline of R75bn is at bidding stage, for which M&R expects a one in two success rate on mining work and one in 10 odds in other sectors.
Any positive rating action will be dependent on an increase in workflow from domestic infrastructure projects, and a recovery in commodity prices, which would support demand from the mining and energy sectors. M&R remains well positioned for such a recovery, which should see revenue and operating margins increase. However, major losses arising from incidents onsite, coupled with an unforeseen elevation in distressed contracts across the group (particularly in pressured sectors), could materially curtail M&R’s credit risk profile, exerting downward pressure on the ratings. Local work is also vulnerable to labour militancy, social unrest, and adverse regulatory changes, which could significantly impact profitability.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2001)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (October 2014)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2015
Murray & Roberts Holdings Limited rating reports, 2001-2014
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commodity||Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Order Book||This refers to the portfolio of confirmed contracts/orders that a corporate entity has at any point in time, and is jargon typically associated with construction and manufacturing companies in reference to their prospective business.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Turnover||The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating Was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Murray and Roberts Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Murray and Roberts Holdings Limited with no contestation of the rating.
The information received from Murray and Roberts Holdings Limited and other reliable third parties to accord the credit rating(s) included:
- the 2015 audited annual financial statements;
- four years of comparative numbers;
- corporate governance and enterprise risk framework;
- industry comparative data and regulatory framework; and
- banking facilities available to the group.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.