Company Analysis: Murray & Roberts Holdings Ltd.

The construction industry in South Africa has faced an uphill battle following the conclusion of the largest infrastructure program tendered out by government in successfully winning the bid to host the 2010 Soccer World Cup that placed a mandate to upgrade existing facilities and in some instances building brand new amenities to cater for the needs of hundred of thousands of tourists attending the soccer spectacle.

Rapid Rail or Tepid Sail???

Murray & Roberts was one part of the construction consortium brought in by government to implement the required expansion before June 2010 which added an extra element of time risk to the projects given the enormity of scale in what was needed to be achieved as well as in terms of the lucrative value attached to finalising the projects.

The company's main project came in constructing Africa's first rapid rail transit system together with an operating license valid for fifteen years after the completion of the project. The Gautrain offered investors in the company a chance to get in on a share of a project that had enormous potential in expansion from the initial phase as well as being rewarded from a steady income of concessions obtained from the operation of the transit system.

However as fate would have it, construction costs ran over budget while time kept ticking away and although the company was able to deliver the service on time, disputes were raised by the Gauteng Provincial Government over the responsibility of the costs to the segments of the delivered project that hadn't gone to plan in budgetary terms.

Many saw these actions as delay tactics by government in trying to lower the cost it paid for the project while others saw it as a necessity given the accelerated progress that was needed to complete it as well as considering the initial cost proposed by government and the final cost count was largely out of proportion.

Having dragged out the matter long enough both parties decided to settle their disputes in the interest of focusing on running the transit system to full capacity in an effort to sell the idea of a third phase to the project which would see the reach of system extended to the outskirts of the main cities.

All the while investors patience in tapping into the lucrativeness of the contract faded with every proceeding year the disputes lay unconcluded while the company was found wanting in having been found guilty in colluding with other companies in the sector in charging the government exorbitant amounts for completing the projects.        

Bombela Concession Company, in which Murray & Roberts has 33%, and the Gauteng Provincial have agreed to settle of all #Gautrain disputes. pic.twitter.com/3vQRZuxlry

— Justin Brown (@JustinBrownSA) November 18, 2016  

Read more here: http://www.iol.co.za/business/companies/gautengs-bombela-deal-buoys-mr-2091758 

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Murray & Roberts Holdings Ltd.

From the time highs made in 2007 there's been a consistent downward direction in place that's hardly produced any opportunity to the upside. More interesting are the price movements endured in recent times especially when you look at the highs made in the beginning of 2014 and the lows touched this year which represent a mere 33% of those previous levels.

What lies ahead?

The dismal performance in recent years has meant M&R management have no other choice but to restructure the business given the dry up of projects in South Africa due to the lack of trust between them and government and not forgetting the downturn in economic growth in the continent of Africa which the Group concentrated vigorously in finding new sources of revenue.

An announcement made by management surrounding the sale of the Group's Infrastructure and Building Platform operations are stark indications that it no longer sees opportunity in doing business with government and instead has decided to place its attention on infrastructure within the natural resources sector.

However jumping into an industry that's had its own fair share of misgivings over the past five years does present risks that might not make every investor comfortable with taking on especially when considering the major commodity producers have taken to size down on expansionary projects in the last year in an effort to cut back on debt.  

MUR Disposal of the Murray & Roberts Infrastructure & Building Platform and Withdrawal of Cautionary Announcem... https://t.co/GyAafUm4ea

— JSE_SENS (@JSE_SENS) November 1, 2016

Fundamental Analysis

A decent size company of R5 billion although much smaller to what it had been, there's scope to see some upside however with the company going through a transition it could take time before the true value is unlocked. 

The P/E ratio is suggesting the stock is cheap with the Net Asset Value showing that investors would be receiving the stock at a 50% discount at current levels. 

There's still quite a bit of shares available to issue which does play favourable to management who might utilise such capital to expand the company's ambitions.