Engineering and mining group Murray & Roberts’ share price fell off a cliff on Monday, 17 October, after the construction giant issued a profit warning that it anticipates its half-year results will be down by at least 100%.

The warning came via a Sens update, which cited ongoing disruption to its order book delivery. By mid-morning, shares had plunged to R3.99, from Friday’s close of R6.54, a loss of more than 40%. They recovered somewhat in late afternoon trade, to R4.32.

Shareholders were referred to the group’s stakeholder report for the year ended 30 June 2022, in which M&R disclosed that “delivery of its order book was increasingly being disrupted in the current environment and that increased levels of working capital were required to address the dislocation in project cash flows.

Supply chain disruption

“Shareholders are advised that the disruption in supply chain delivery and delay in project milestone payments continue to persist, with a number of projects progressing slower than planned, impacting margin and working capital requirements. Margin deterioration has recently been recorded at the Traveler project in the USA and the Waitsia project in Australia, both of which will be close to completion by the end of the financial year 2023.”

In January last year, Clough, an M&R subsidiary, was awarded a contract worth AU$400-million for engineering, procurement and construction work on the Waitsia Stage 2 development project in Western Australia, which includes a gas processing plant with a 20-year life cycle. The Waitsia gas field is ranked as one of the largest gas fields ever discovered onshore in Australia and was forecast to bring “significant” economic benefits to the midwest region from both the construction and operating phases.

Clough is also a partner in a consortium building the Snowy 2.0 pumped hydro project in New South Wales, Australia. Last month, RenewEconomy reported that Clough had no working capital facility. M&R, the clean energy publication said, had blamed the liquidity problems on the cost of new equipment, such as the “massive tunnel boring machines digging into the national park’s mountains and other costs now subject to ‘contingent revenue’ claims”.

“Can you believe it, it’s got zero working capital facilities. It’s ludicrous for Clough not to have anything in place,” M&R group finance director Daniël Grobler reportedly told analysts.

In the US, Clough was awarded the $630-million multiyear Traveler petrochemical project near Houston, Texas in 2019.

Warning signs

On 31 August 2022, M&R announced its annual results for the year ended 30 June 2022, which revealed strong growth in revenue and earnings from continuing operations. It revealed an order book and near orders that provided an “unprecedented” R120-billion market opportunity for the group, with revenue from continuing operations at R29.9-billion (up from R21.9-billion in 2021), earnings before interest and tax from continuing operations at R705-million, and a quality order book maintained at R59.5-billion.

The order book of R59.5-billion and its significant near orders of R60.4-billion (up from R11.1-billion in 2021), includes high-profile, multiyear projects. Several large projects in the Asia-Pacific region and North America are under way, and while it said there were no loss-making projects in the portfolio, the “impact from supply chain disruption and escalating inflation was most evident in this platform.

“The unprecedented challenges apparent in today’s commercial environment have placed increasing pressure on the Group’s working capital requirements; however, project plans and cash flows are regularly reviewed and updated to ensure potential risks are identified early.”

That said, the board had resolved not to declare a dividend for the year under review.

The JSE’s Limited Listings Requirements require companies to publish a trading statement if there is a reasonable degree of certainty that the financial results for the next reporting period will differ by at least 20% from the previous and corresponding reporting period.

Caution

In Monday’s Sens announcement, M&R said it has a reasonable degree of certainty that the margin deterioration would be at least 100% down on the previous and corresponding reporting period. 

“At this stage, the board of directors of the company does not have reasonable certainty on the earnings per share ranges. The group will, however, publish an updated trading statement once there is more certainty on these ranges.”

The group said its working capital requirements were “especially acute” in its energy, resources and infrastructure business platform, adding that it was currently reviewing its strategic options.

“The developments described above relating to the ongoing disruption to order book delivery may have a material effect on the price of the company’s securities. Accordingly, shareholders are advised to exercise caution when dealing in the company’s securities until a further announcement is made.” DM/BM