Johannesburg, 28 Oct 2016 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Murray & 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 (“GCR”) has accorded the above credit ratings to Murray & Roberts Holdings Limited (“M&R,” or “the group”) based on the following key criteria:
The Negative outlook remains premised on challenges besetting the construction industry, amidst a protracted slowdown in the domestic economy. Of particular concern is the scarcity of new workflow for medium to large scale contractors, as the pipeline of public infrastructure and mining sector projects is expected to remain constrained in the near term. The country’s extremely constrained fiscal position will continue to force the South African government to defer most of its planned infrastructure spend, while subdued commodity prices have significantly curtailed private sector demand internationally. This is seen in the decline in M&R’s total order book to a new low of R33bn (FYE15: R38.3bn), a trend also manifested by its peers.
That said, GCR has affirmed M&R’s Issuer ratings, given its evolution from a locally focused, heavy construction group, into a specialised oil & gas, underground mining, power, and water project contractor across various territories. South Africa accounted for 27% of its F16 revenues (F15: 38%) and just 5% of operating profit (F15: 11%), reflecting the group’s extensive external footprint, but also emphasising the challenging domestic operating environment.
Despite the reduced domestic workflow, South Africa remains strategic for the group. In this regard, GCR has noted its participation (along with six other listed contractors) in the recently signed Settlement Agreement, which reflects positive sector engagement with government in support of transformation. Similarly, M&R’s advanced negotiations relating to the sale of its infrastructure and building businesses to a black-owned contractor have been considered. The disposal will reduce counterparty and other project risks associated with large civil and building projects, and will free up management time to focus on its core competencies. However, performance will continue to be curtailed during periods of weak global demand, until the group builds up sufficient annuity cash flows from the higher-yielding sections of the project value chain to reduce variability through the cycle.
Group revenue increased by 9% to R26.1bn in F16, and was mainly drawn from underground mining and oil & gas projects. The EBIT margin has shown some resilience in the past four years, due to strong offshore performance and an enhanced risk framework, which has addressed the negative overhang from historical multi-billion Rand losses incurred on infrastructure contracts in F11 and F12. While attributable earnings from continuing operations went up by 8% to R877m, management expects a contraction in F17, mainly attributed to the continued close out of oil & gas projects.
The structure of the group’s debt has changed materially, and just AUD35m of the AUD160m secured from local banks to buy out Clough minorities remains outstanding. Overall, borrowings closed F16 at a new low of R1.1bn, of which 20% was Rand- denominated, with a further 45% being Australian Dollar debt. Most of the R2.8bn cash balance was also foreign-currency denominated, and covered debt outstanding at FYE16 by 2.6x, from 1.9x previously. No adverse currency mismatches are evident, and funding flexibility is enhanced by standing facilities equating to R5.4bn, of which R4bn remains untapped.
Looking ahead, any positive rating action in the medium term will be dependent on a definitive upturn in commodity prices, which will unlock material, project-driven demand and cash flows without a substantial outlay on capacity building. However, any material losses arising from incidents onsite, poor delivery, or an elevation in distressed contracts, would warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2001)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (October 2015)|
|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, 2001-2015
|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.|
|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.|
|Long Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|Short Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|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.|
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Murray & 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 ratings have been disclosed to Murray & Roberts Holdings Limited with no contestation of the ratings.
The information received from Murray & Roberts Holdings Limited and other reliable third parties to accord the credit ratings included:
- the 2016 audited annual financial statements;
- four years of comparative numbers;
- corporate governance and enterprise risk framework;
- industry comparative data and regulatory framework; and
- details of the banking facilities available to the group at 30 June 2016.
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.
GCR affirms Murray & Roberts Holdings Limited’s rating of A-(ZA); Outlook Negative.