Johannesburg, 19 November 2019 – GCR Ratings (“GCR”) has affirmed the national scale long term Issuer rating accorded to Murray and Roberts Holdings Limited (“M&R”, “the group”) of A-(ZA) and revised the short term Issuer rating to A2(ZA) (on the change in GCR’s Rating Scales, Symbols and Definitions, May 2019); with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Murray and Roberts Holdings Limited||Issuer Long Term||National||A-(ZA)||Stable Outlook|
|Issuer Short Term||National||A2(ZA)|
GCR announced that it had released new criteria for rating corporate companies in May 2019. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology, and the ratings have been removed from ‘Under Criteria Observation’.
The ratings accorded to M&R reflect its strong balance sheet and demonstrated track record of executing engineering and construction projects across various territories. The group’s growing exposure to developed countries (68% of its order book) is expected to anchor earnings over the rating horizon, offsetting the impact of the distressed South African operating environment. This is, however, counterbalanced by the group’s small scale against global competitors.
Supporting the credit rating is M&R’s strong net ungeared position, underpinned by R2.7bn in unrestricted cash. This compares against R1.7bn in gross debt at FY19, which rose from just R554m at FY18 due to a mix of finance leases to support growth and the acquisition of bolt on businesses. Thus, while discretionary cash flow coverage of gross debt fell to 77.8% at FY19 (FY18: 128.8%), and interest coverage narrowed to 17.5x at FY19 (FY18: 24.5x), credit protection metrics still align with very strong levels. Even after stressing for a portion of the outstanding guarantees, and operating lease liabilities, GCR expects net debt to EBITDA to trend below 1x over the next 12 months. While GCR considers M&R’s ability to raise new equity capital to be curtailed due to the complications of the large Aton shareholding, access to capital is supported by large facilities from the largest local banks and reputable international funders.
Strong liquidity is also credit positive, with M&R reporting liquidity coverage of 2x on a one-year basis and 1.5x on a two-year basis. Liquidity coverage is supported by the large cash balance and committed unutilised facilities, against moderate capex commitments and low debt maturities. Nevertheless, GCR recognizes the inherent liquidity risks faced by construction companies, in the event that contracts are delayed or there are cost overruns.
Constraining the rating somewhat is the erratic historical earnings trend and low margins. A delay in initiating oil and gas contracts, and dearth of new contracts in South Africa, saw revenue decline by 7.7% to R20.2bn in FY19, while negative margins were reported in those segments. This was offset by a robust underground mining segment performance, as firmer commodity prices necessitated investment in mining infrastructure. Nevertheless, the group operating margin narrowed to 2.2% (FY18: 2.5%), with operating income decreasing by 16% to R453m in FY19. Looking ahead, the strong growth in the order book to R46.8bn at FY19, and further positive tender outcomes in 1H FY20, bode positively for revenue growth and margin enhancement. GCR thus expects the overall operating margin to trend upwards towards the 5% level over the rating horizon. Nevertheless, earnings remain sensitive to the inherent cyclicality of the industry.
The Stable outlook reflects GCR’s expectation that the group will remain net ungeared with a strong liquidity position.
The group’s ratings could get an uplift from a sustained margin enhancement, leading to improved earnings. Conversely, downward pressure on the ratings could emanate from an increase in debt to fund operations, particularly if the balance sheet shifts from the net ungeared position. A deterioration in earnings could also result in a downgrade.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Alan Mananga||Associate Analyst: Corporate Ratings|
|Johannesburg, ZA||alanm@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institutions|
|Johannesburg, ZA||Matthewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Companies, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Corporate Sector Risk Scores, November 2019|
Murray and Roberts Holdings Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A(ZA)||Stable||September 2001|
|Issuer Short Term||Initial||National||A1(ZA)||–||September 2001|
RISK SCORE SUMMARY
|Country risk score||11.0|
|Sector risk score||4.5|
|Management and governance||0.00|
|Leverage and capital structure||2.00|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS 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.
The credit ratings have been disclosed to Murray and Roberts Holdings Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
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 information received from Murray and Roberts Holdings Limited and other reliable third parties to accord the credit rating included:
- The audited financial results for June 2019;
- Four years of comparative audited numbers;
- Analyst presentations;
- Detailed facility breakdown at June 2019;
- Industry comparative data.