Financial director report

Roger Rees, financial director

The year has seen a crisis in the global economy and financial turbulence in the Group's operating markets. The Group's operating performance has been tested particularly in the second half of the year.

Murray & Roberts has proved resilient, with revenues and operating profit increasing by 27%, due to organic growth, and an operating margin of 8,6%.

The order book was R40 billion at 30 June 2009, representing 157% of contracting and engineering revenue, and remains strong despite cancellation of work during the year.

Income statement

Continuous revenue increased by R7 billion over 2008 to R34 billion based only on organic growth. Construction SADC, Engineering SADC and Middle East clusters increased revenue by 55%, 37% and 30% respectively over the prior year.

Despite a challenging year, the revenue of Cementation Group grew by 14% year on year, with growth achieved in South Africa and Canada.

Construction Products SADC increased revenue by 9% compared to the prior year, reflecting the impact of lower residential demand in South Africa. Steel revenue decreased by 5% in difficult trading conditions of extreme price volatility in which commodity prices ended the year 50% below their peak.

Operating profits of R2,9 billion increased by 27% on the prior year and are in line with revenue growth. Approximately 60% of the Group’s operating profit is generated in Southern Africa, and 40% from international operations.

	The Group's operating performance was tested, particularly in the second half of the year, but Murray & Roberts proved resilient

The operating profit of Construction SADC, Engineering SADC and Middle East was R180 million, R320 million and R157 million, respectively, ahead of the prior year, and although Gautrain showed strong growth in revenue, profit recognition remains conservative.

The operating profit of Construction Products SADC was lower than in 2008, primarily due to steel write downs which were a consequence of the sharp decline in commodity prices. The downturn in the South African residential construction market impacted the housing sector which reported reduced profit. The infrastructure sector recorded growth on the prior year, due primarily to the performance of Much Asphalt.

In 2007, the Group raised its medium term strategic operating margin framework to between 7,5% and 10%. I am pleased to report that despite the challenges encountered over the last twelve months an operating margin of 8,6% was achieved, which is consistent with the prior year.

A net interest expense of R37 million compares to interest income in the prior year. Increased working capital funding supported revenue growth, while increased stock holdings in Genrec, UCW and Hall Longmore and utilisation of advance payments further increased working capital demand. The Group’s significant international cash holdings experienced a decrease in interest income as global interest rates declined.

The Group’s effective tax rate was 21,3% (2008: 19,9%). The Group continued to benefit from a zero tax regime in the Middle East markets. With the benefit of a tax loss brought forward, Clough reported an effective tax rate of 9,7% (2008: 0,3%).

Balance sheet

The Group invested R2,4 billion in capital expenditure during the year (2008: R1,8 billion), in line with the commitment given in the 2008 annual report.

Capital expenditure of R282 million in mining was primarily project related. R494 million was invested in Construction Products SADC to ensure ongoing efficiencies in production facilities. Clough invested R589 million in the overhaul of a vessel and the purchase of additional marine equipment. R366 million was invested in Genrec, UCW and Hall Longmore facilities to enable the operations to meet the demands of their medium term order books.

Cash generated by the operations was R2,6 billion (2008: R3,6 billion). Operating cash flow was down at R1,6 billion (2008: R3,1 billion). Working capital recorded an increase of R1,3 billion. Clough’s working capital increased by R469 million with the balance of the increase in working capital attributed to inventory built up in Genrec, UCW and Hall Longmore.

Since 2006, revenue has increased by R23 billion and there has been a net increase in working capital of just R403 million over this period. The inflows achieved in 2007 and 2008 have been reversed by the outflow in 2009. The Middle East recorded an improvement in cash collection year on year.

Cash on hand at 30 June 2009 was R4,7 billion (2008: R4,7 billion) with approximately R1,7 billion held in joint ventures. Interest bearing short term loans and bank overdraft increased to R907 million and R1,8 billion respectively in support of working capital funding.

Equal amounts of cash on hand are held offshore and onshore. The increase in bank overdraft has occurred mainly in South Africa where interest rates have been comparatively higher than offshore deposit rates.

Interest bearing long term liabilities decreased to R784 million (2008: R804 million).

Total goodwill in the Group’s balance sheet at 30 June 2009 was R490 million (2008: R488 million) with Clough’s goodwill accounting for 61% of the total.

Shareholder funds increased 15% to R5,6 billion (2008: R4,9 billion) giving a return of 38,6% (2008: 40,3%) on average shareholder funds for the year.

Clough

The Group holds a shareholding in Clough Limited of approximately 59%. The conversion of convertible notes in the latter part of 2009 could increase the Group’s shareholding to about 63%.

Clough reported a 68% increase in operating profit. The G1 project, the last of the residual claims brought forward from pre-acquisition, was settled in the year. No recognition has been taken pending the outcome of an Indian taxation authority ruling.

On 6 July 2009, Clough completed the disposal of its 82% shareholding in Indonesian listed subsidiary, PT Petrosea Tbk, for a cash consideration of US$83,8 million (R670 million). The financial effects of this transaction have not been brought into account at 30 June 2009. The results of Petrosea have been recorded as a discontinued operation in the Group income statement and the assets and liabilities have been recorded as assets held-for-sale in the Group balance sheet.

At 30 June 2009, Clough, which is listed on the Australian Stock Exchange, traded at a closing price of 73 Australian cents per share. This compares to the Group's average holding cost of 47 Australian cents per share. Subsequent to year-end, Clough's share price reached 99 Australian cents.

Major projects

The scale and duration of major projects secured by the Group over the past few years presents a number of challenges, not least of which is revenue recognition, such that neither present nor future shareholders are unduly prejudiced or advantaged relative to one another.

It has been determined that the level of revenue recognition on Gautrain and Dubai Concourse 2 project is appropriately conservative and justifiable in terms of each contract, given the complexity and magnitude of claims and variation orders still to be resolved.

Earnings and dividend

The Group reported diluted headline earnings per share of 675 cents, compared to 550 cents in the prior year. The total dividend for the year has been declared at 218 cents with a final dividend of 133 cents per share.

The Group’s dividend policy is to declare a dividend within a cover range of 2,8 times to 3,2 times based on diluted headline earnings earnings excluding Clough. In addition, the dividend received from Clough is passed through to Murray & Roberts shareholders.

Roger Rees