U.S. markets closed

Edited Transcript of MUR.J earnings conference call or presentation 5-Mar-20 10:00am GMT

Q2 2020 Murray & Roberts Holdings Ltd Earnings Call

Bedfordview Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Murray & Roberts Holdings Ltd earnings conference call or presentation Thursday, March 5, 2020 at 10:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniël F. Grobler

Murray & Roberts Holdings Limited - Group Financial Director & Executive Director

* Ed Jardim

Murray & Roberts Holdings Limited - Group Investor & Media Executive

* Henry Johannes Laas

Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director

* Mike da Costa

Murray & Roberts Holdings Limited - CEO of Business Platform

* Peter K. Bennett

Murray & Roberts Holdings Limited - Business Platform CEO

================================================================================

Conference Call Participants

================================================================================

* Marc Ter-Mors

SBG Securities (Proprietary) Limited, Research Division - Head of Equity Research & Head of Industrials

* Prince Mathoni

Standard Bank Group Limited - Data Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Ed Jardim, Murray & Roberts Holdings Limited - Group Investor & Media Executive [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and good afternoon to our stakeholders on the webcast as well as on the call. Welcome to the Murray & Roberts interim results for the 6 months ended 31 December 2019.

Just a quick note on safety before I hand over to our CEO. In the unlikely event of an emergency, you have 2 evacuation routes off of this floor. The first is out these doors to my left, left again towards where the bathrooms are. There's an emergency evacuation door there. You can depress the glass, that'll break and release the door. You make your way down to the ground floor, there is signage that shows the ground floor, out and around the building to the public parking space across from the building, where we will do roll call.

Your second evacuation option off of this floor is once again out these doors to my left, towards the lift lobby. There are a set of stairs on each side of the lifts. Please make your way down to the ground floor, out the main entrance where you would have come in this morning and across the road towards the public parking space, we will do roll call. Our HUC executives and security team will assist with the evacuation and we have no drills planned for today.

So welcome. And with that, I'd like to hand over to our CEO. Thank you, Henry.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, Ed. Good afternoon, ladies and gentlemen, and welcome. Allow me to make a few introductions. Our Chairman, Dr. Suresh Kana. Suresh, just stand up please. And then a few of our executives. Mike da Costa, the CEO of our mining business. Mike, if you could stand up? Steve Harrison, Power & Water platform CEO; and Peter Bennett, the Oil & Gas platform. So Peter came all the way yesterday from Australia. They've changed the timing of the flights from Australia. And if you return from Perth, the flights used to be midnight. It's now 2:30 in the afternoon. So you arrived here 7:00 in the evening. Whereas previously only arrived the following morning, about 5:00. So I said to Peter earlier today, I'm very glad that he was able to make that flight. So he could have watched the last few overs of the cricket yesterday. The ODI between South Africa and Australia. And the fact that we have won make it a lot easier for me to speak to Peter. It would have been a lot different if we lost. But welcome.

Daniël Grobler will share the presentation with me, and you all know Daniël very well. And I would like to start off with the salient features.

First of all, you'll see revenue and earnings before interest and tax is up compared to the previous period. And that is essentially due to the performance that we recorded in the Underground Mining business, whereas Oil & Gas and Power & Water on par with the last year and in line with our expectation.

Attributable profit is down from ZAR 186 million to ZAR 163 million, and that is essentially due to an increase in your interest expense, which Daniël will explain in a lot more detail, but it relates to the acquisition funding that we've incurred on some of the acquisitions that we think -- that we concluded last year as well as the IFRS 16 impact on interest, and then there's also additional working capital that we had to finance, and there was no interest expense on that.

The projects in the Middle East have all been completed now, and we've received the takeover certificates. And now that, that has happened, the business was classified as a discontinued operation in the current period. And for that reason, you'll see that revenue earnings before interest and tax and diluted continuing HEPS on this slide have been restated for that adjustment.

The order book was the highlight of the reporting period, up to ZAR 50.8 billion. And you will recall when we did the full year results last year, we did indicate to the market that the order book potentially could increase to about ZAR 50 billion, ZAR 55 billion. And you can see it is at ZAR 50.8 billion. The significance of this is that only once before in the history of Murray & Roberts was the order book higher than that. It was ZAR 60 billion in December 2008. Then the global financial crisis impacted the business, and then very quickly dropped down to ZAR 40 billion by June 2009. Now I know if you have to adjust it for inflation, the numbers would be very, very different today. But still this ZAR 50.8 billion, we believe, is a quality order book.

The previous high of ZAR 60 billion included a lot of projects in the Middle East, and you will recall that was a better experience for Murray & Roberts as a group, the time that we spent in the Middle East. We don't know about any project in this order book of ZAR 50.8 billion that, at this stage, is at risk, from an earnings point of view, to potentially not achieve the margins that we've tendered on those projects.

So that really is a strong order book. And to me, as I said, that really is the highlight of the past 6 months. The net cash position is marginally down to ZAR 0.8 billion. But when you do the IFRS adjustment, the net cash of ZAR 0.8 billion changes to a net debt position of ZAR 0,1 billion. And again, Daniël will give you all the detail. Lost time injury frequency rate. It has deteriorated from last reporting period to 1.12. and that is a concern. It's something that we are paying attention to. And all effort is going into bring the safety performance back to where it used to be, round about 0.6 to 0.8 lost time injury frequency rate.

We are very glad to, again, have gone through a period without recording any fatal incidents. And this has been for the past, I think, 2 years that we haven't recorded a fatal incident. That in a business that undertakes the type of work that we do in the underground mining space, Peter, in your space and in your space, Steve, I think it is a commendable performance. In our organization, we really believe that you can, you can build these projects without injuring people. And it is just completely unacceptable that it never will be acceptable for us to have people losing their lives whilst they're on service. So we're very pleased with the overall performance for the first 6 months of the year, more or less in line with our expectation, and the order book really was the highlight.

I'm not going to get into much detail as far as the strategy is concerned. We have covered that off in previous presentations. All I can say is, at this stage, we don't foresee any change in strategic direction. We are comfortable where we are, that the initiatives that we are implementing, that those are the right initiatives for the group. And we think that the group has now stabilized at this stage, at a place where we can grow organically, and where we can grow through further acquisition.

The strong order book that you see is not going to present us with growth potential in the current financial year. So we have noted the first half of this year, very similar to the first half of the previous year, and we do expect that the full financial year results also be more or less in line with what we reported in the previous year.

This order book will support growth in FY '21. Now where will the growth come from? When Daniël goes through segmental analysis, you will notice that the mining business really is the platform that is contributing to earnings at this stage. We don't get much contribution from the other 2 platforms. From a group context, the growth will come from the Oil & Gas platform, starting to become a meaningful contributor again to group earnings. We do expect that the mining business will continue to maintain earnings at the current levels.

About the longer-term outlook, we still believe that the natural resources market is the right market for us to be in, but we do undertake work in selected infrastructure markets to balance the cyclicality in natural resources.

I've got a slide on each of the platforms. If we start off with Oil & Gas, what you see here is the global footprint. And we have now, through the acquisition we concluded last year in Houston, we've established a meaningful presence in the U.S.A. We don't intend to establish any permanent offices in other geographic regions. It's essentially Australasia, as you can see on the screen, and then also in the Americas, and we are comfortable that we are really positioned now in those geographic markets where we can implement the type of projects that we are aiming to implement.

The market focus globally is LNG, petrochemical sectors. But in Australia, it's got an added element to it. We will continue to focus on the traditional markets where Clough has been very active in for many, many decades. So we will do selected infrastructure projects, and we will undertake project work in the Metals & Minerals space.

And with that being said, we've realized that the naming convention of our platforms have to change. The Oil & Gas is no longer an appropriate name for this platform. And we are working on renaming this platform. And when we do the full year results after June, we will share with you the new name for the Oil & Gas platform.

The market conditions in the U.S.A., the LNG and petrochemical market is presenting us with opportunity. LNG in Australasia, there's still limited opportunity at this moment in time, but the infrastructure market and metals and mineral market is really, really buoyant. And Peter has done a great job when we realized that the Oil & Gas was running out of steam at a rapid rate to continue focus on your traditional markets, and we have secured a substantial order book in that space. So well done with that, Peter.

From a prospect point of view, as I said, good revenue that will give us growth into financial year '21. And it will also translate into growth for the group as a whole. Now I've got 2, the bullets on the platform prospects, 1 talking about transport infrastructure in Australia, and the second one, talking about spend in the Metals & Minerals area. And you will see there's significant expenditure in those markets, and that is where Peter and his team is currently focusing on for that region.

Our business in the U.S.A., Clough USA, we are very pleased with what we have achieved in a short period of time. The acquisition of the division of Saulsbury came with a project that was approaching completion and had a couple of months to go, and we took that project over as part of the acquisition. We had a bit of a hiccup in closing the project out with some losses that we've incurred on that. But that is far offset by the profits that we've earned on the Next Wave project, which we've secured shortly after that acquisition. But all in all, in time to come, North America will be a very big part of this group, and it might even be a bigger contributor to earnings than what the Australasia region is at this stage.

The Underground Mining platform, well established, Santee, is in the south of California, just north of the Mexico border, and I had a question just before the presentation started about that business, which is Terra Nova Technologies, that's the business that we've acquired in the previous financial year. It operates out of Santee. Again, a very good global footprint. There is no plan to expand that. And I think we really have a good presence in all the main mining territories globally.

Our focus is in underground mining services, but that also now includes material logistics, which is the services being provided by Terra Nova Technologies, conveyor systems, crushers, screens, so that is now part of our focus.

Market conditions. Overall, we believe that the growth that we've experienced or that we've seen in the market where our mining clients were increasing their capital expenditure, that is no longer happening. So that has tapered off, and that indicates to us that the mining cycle might have reached a plateau. We don't expect significant new greenfields mining opportunities into the foreseeable future. And most of the spend will be in brownfields operations.

We are performing well in all the geographies in Australasia, Africa and in the Americas, and it really is a very, very strong business that we have within the group.

TNT, we are very pleased with that acquisition. I think it holds great prospects for us as an organization. Currently, it's predominantly operating in the Americas. And we have now established an office in Perth as well for TNT, and we will be undertaking or expanding that business into Australasia and also into South Africa and sub-Sahara Africa.

The Power & Water business is a business which is essentially based in South Africa, sub-Sahara Africa. It is not a business that has the potential, from a market opportunity, to operate at the same scale as Underground Mining or the Oil & Gas platform. It always will be a much smaller platform. And if you look at the investment that we see in South Africa, I think it is an unrealistic expectation. If anyone was to expect that this business could potentially compete with an Underground Mining business or with an Oil & Gas business. It's always going to be a much smaller business. Our focus isn't in the Power & Water space, but also complementary markets. And for that reason, we will also be changing the name of this platform, and we will communicate that after the year-end results. Power & Water is no longer an appropriate description for this platform, and that change will happen.

There's limited investment in power. There's limited investment in water. Other than what we see is happening in the City of Cape Town, where they have committed to quite an extensive investment program, and we were very glad when we secured our first project for wastewater treatment in Cape Town, the Athlone project.

Eskom is also presenting an opportunity. You will recall, the acquisition was actually last year, but the effective date was the 1st of September. So it was in the current period of a company called OptiPower. It's a specialist in overland transmission lines, substations, and we're very pleased that, that business is doing very well. It's been with us now for a quarter, final quarter of the previous 6-month period and second quarter and a substantial amount of work out on tender. About ZAR 2.5 billion from Eskom. And we are tendering this, and there's a number of projects currently under adjudication, Steve, that we hope to get secured before the end of June.

The LNG market in Mozambique is an opportunity that we've been waiting for, for a long time, and we've all been talking about it for a very long time, but it has now arrived. The projects have started. The major EPCs on the projects have been engaging with us. We've received them in our offices not so long ago. And we will, I would say, we've certainly, before the end of December, we will have received certain packages that we could tender on those projects. It will not bring earnings in the current financial year. It will be too late for that. But we do expect that the work will start towards June 2021, the end of the next financial year. So that is a nice opportunity for us.

We understand that the funding into those projects, a lot of the funding was provided by South African banks, and part of the funding agreement is that there should be a certain percentage of spend incurred with South African service providers. And that is where we fit into the picture, and we believe we've got a compelling service offering that would meet the requirement of those major EPCs.

At this stage, it's an opportunity that is being pursued through the local South African business. But that does not exclude the possible participation of the Oil & Gas platform, depending on the type of work packages which is put out to tender. So we may call on Peter and his team to come in to support us if that is required. If not, Steve and his people will execute by themselves.

The order book is up significantly. But the growth you will see was predominantly in the Oil & Gas business. And that comes from 2 projects. The Snowy project. We've spoken about that, I think, at your full year results, but also the Next Wave project. And the Next Wave project is a project that we secured in this business that we've acquired in the U.S.A. So we're very, very pleased with the growth that we've seen in the Oil & Gas platform. And as I have said, that order book growth will support revenue into financial year 2021. That will make this platform, again, a meaningful contributor to our group profits.

Don't be concerned about the Underground Mining platform that's gone down, the order book that's gone down to 13 or from ZAR 25.7 billion to ZAR 19.6 billion. It is -- the order book is something that comes in lumps and not spread equally every month. And we are, I would say, in a good position to increase the order book by about ZAR 10 billion by June. So we would expect that the mining order book, which is currently ZAR 19.6 billion, potentially could increase by a further ZAR 10 billion by June this year, in a few months' time. And that would indicate to you that we are very, very far advanced on negotiating to major contracts. And if we conclude those, combined value in the order of ZAR 10 billion.

Power & Water. It's got a very low order book. There are no opportunities in South Africa of any scale that can compete with Medupi and Kusile. We have recently secured the project for ZAR 890 million. That project is for international client, but the project has been put on hold because of industrial unrest and community unrest in the area where this project has to be built. So although we have secured the project, it's not in the order book. And we haven't received a letter of award because of this delay on the implementation. So yes, that is one of the largest opportunities available in the market. And if you compare that to the scale of opportunities that we have in mining and in Oil & Gas, we took hundreds of millions and billions of rands. It is just an indication of the lack of investment in major opportunities that we're currently; experiencing in South Africa. Total order book up to ZAR 50.8 billion, and as I said, it really is a good position for us to be in.

This is also an interesting slide. It conveys a few messages. The first is that the order book, if you look at the order book split, 74% of that is in the international market, and 26% is in SADC. So it gives you a feel for sort of the revenue, how the revenue in the organization, where the revenue is earned.

But another interesting part of it is, you look at Oil & Gas, that ZAR 5 billion is secured for the remainder of the 2020 financial year. In other words, the 6-month period that we're in now, that will be earned -- that revenue will be earned as we implement the projects.

For the current financial year, you will see from Daniël, his presentation, in the first half, revenue in that platform was just above ZAR 3 billion. So we do expect that for the full financial year to approach about ZAR 9 billion. And if you look at 2021, that is what we already have as a secured revenue for the next financial year.

So we are very pleased about that. There are still a number of projects which are under adjudication, Peter, and that is not considered in the order book. That's in the pipeline. But we already have, today, secured work equal to the revenue that we will earn in the current financial year. Secured work for the new financial year.

Underground Mining, a nice spread. And as I said, there's about ZAR 10 billion that we expect to secure before the end of June. And Power & Water is just a reflection of the lack of opportunity that we have in the local market.

Again, the order book at ZAR 50.8 billion, and then the pipeline. Near orders, these projects that we essentially have secured, but the contracts have not been signed yet. What I can say is that this value has, subsequent to December, moved into the order book. That value has moved into the order book. And I'm not sure, Mike, on the Underground Mining, how much of that has moved into the order book? Category 1, how much?

--------------------------------------------------------------------------------

Mike da Costa, Murray & Roberts Holdings Limited - CEO of Business Platform [3]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [4]

--------------------------------------------------------------------------------

Mike is just saying that, in his business, ZAR 2 billion of the ZAR 6.1 billion has already moved into the order book. Just to explain the difference between category 1, category 2 and category 3, the categorization refers to the maturity of an opportunity. So category 1 would represent projects which we have already tendered or which we are currently busy tendering. So those would be the next wave of projects that will be built. Behind that is category 2, those projects are not at the tender stage yet. It's in feasibility study stage, budget estimates. So it's the next wave of projects that will come. And in category three, from a timing point of view, it's further out. There's no tenders, no budgets or feasibility work on those opportunities yet. But we do track them. When you look at the success rate that we have on our tenders in the various platforms. It varies. But overall, I would say, a reasonable expectation would be, of that ZAR 70 billion that you see there, that at least ZAR 30 million to ZAR 35 billion should be secured and should find its way into your order book once the adjudication process has been concluded.

And ladies and gentlemen, that brings me to the point where I would like to hand over to Daniël, and he will talk to you in a bit more detail about the results.

--------------------------------------------------------------------------------

Daniël F. Grobler, Murray & Roberts Holdings Limited - Group Financial Director & Executive Director [5]

--------------------------------------------------------------------------------

Thank you, Henry. So first, Ed, if I can start the presentation with a lame joke, and Ed said, definitely not. There are so many serious people from a financial point of view, I've just got to start the presentation, and he just gave me the no. He said that in 2 sentences. So what I will start off with is a comparative financial information. I'm going to go into a lot more detail further on in the presentation.

Underground Mining had a strong performance when you compare that to prior. Oil & Gas, were close to breakeven, both of the platforms, but that's in line with the expectations. The investment in the Bombela Concession Company has done really well, and I'll get to the reasons why they've done well.

As Henry mentioned, interest decreased significantly to the prior year. There's reasons for that. There are some elements that will not repeat in the next year, and we'll talk to that in detail. Tax is sitting at a high effective tax rate of 28% (sic) [38%] and I'll get to that part. We've spent quite a lot of effort with Deloitte's reviewing the tax rate and seeing how we can get that down. And discontinued operations is marginally down compared to prior year, and I'll talk you through the reasons for that. So in general, attributable profit was down by 12%.

The one thing Ed said I can include is the new accounting standard. So these things are always nice to know and nice to understand. But when you get to the detail, half of the people get lost. So what I'm going to try and do is explain this in terms that I understood, and I'm sure if I understood it, you will understand it.

So in the past, we had financial leases and we had operational leases. Financial leases is when you go and buy a car, your car comes on to your balance sheet and your liability comes onto your balance sheet, and you need to just pay your monthly installment. Operational leases is a lease like this building. So I don't -- I get an invoice every month. I file my invoice every month and that's the end of the transaction. What this new accounting standard forces you to do, it says, Daniël, calculate the rest of your lease payments until the end of your lease period, bring that as a liability onto the balance sheet, and then you bring the right to use of the asset onto your balance sheet. So you've got an asset and a liability on your balance sheet, which previously you didn't have.

At the bottom sentence of that slide, we see that the total assets that we brought on to the balance sheet was ZAR 795 million, and the total liabilities we brought on to the balance sheet was ZAR 886 million, and there's a reason why a small difference of ZAR 92 million went through equity.

So what does that mean for the income statement? In the income statement, if you go down the income statement, there's a line called interest before earnings, before interest and tax, depreciation and amortization. So previously, your operating expense would have been a deduction, would have been included in that line. What the standard now does, it says, you take your assets that you brought on to the balance sheet, and you depreciate that. So that falls below the EBITDA line. So as you take the interest on this liability that you've created, and you include that in your interest line. So what will happen is that your EBITDA will be higher compared to prior year, and your interest expense will be higher compared to prior year. So that was the exciting part of the presentation. And that flows through into the income statement.

And to the income statement, we can see that revenue increased from ZAR 9.7 billion to ZAR 10.7 billion. EBITDA increased exactly due to these reasons that I've spent 20 minutes explaining. And then if we look at our EBIT, EBIT's ZAR 54 million up compared to prior year. We'll unpack that when we get to the segmental slides.

Net interest is significantly higher than prior year. I've got a slide following. We'll unpack that. Taxation remains high. We've got a tax rate of 38% prior year as well as current year. We've done a lot of work with Deloitte trying to lower that. There's no silver bullet, but there's a lot of small items we can do to try and get the tax rate down from 38%.

If we then go down to discontinued operations, it's ZAR 38 million compared to ZAR 26 million. I'll talk to that. But in general, the attributable profit was down ZAR 163 million compared to ZAR 186 million, which is a 12% decline.

So if I go to interest. So in this period, we had an interest charge of ZAR 91 million. In the prior period, we had an interest charge of ZAR 9 million. So the variance is ZAR 82 million. So what is this variance comprised of and which of these elements are expected to occur in the second half of the year, but disappear in the next half of the year? Implementation of IFRS 16 is unfortunately compulsory. We are going to see that in all the quarters going forward, so that's going to stick with us for life.

The additional 17% we acquired in the Bombela Concession Company was refinanced or was financed in December 2018. So what that means for prior period July to December '18, there was no expense, and then in the second half of that year, there would have been an expense. So obviously, in the first half of the new financial year, there's an expense. Hence, there's an incremental ZAR 20 million expense when we compare this year compared to prior year.

TNT acquisition funding. You incur debt when you buy an asset. And the funding we can see is low, it is sitting at ZAR 13 million. In the next 6 months that will go up probably by another ZAR 5 million.

But the TNT acquisition funding will be a lot lower going forward in the new financial year. Working capital management is an item I'll talk to on the balance sheet. We were not paid by a number of debtors for a number of reasons. And some of those debtors we just work with them through their tough times to try and get them through a difficult situation, but that working capital outflow had to be funded.

And you will see on the balance sheet, that ZAR 600 million of it was funded by our cash. And then we had to incur overdraft facilities of ZAR 600 million to fund the rest. So those things attract interest. There's no silver bullet that's going to say that from the 1st of January that amount's not going to be there. Working capital management will be incurred in the second half of the financial year. But when we go into the new year, the bulk of the working capital items should be sorted out, and that line item is not expected to reoccur in the next financial year.

If we go in to the segmental reporting, Clough, we've broken down again into 4 divisions. The first division is Engineering & Construction. We can see a nice increase in revenue. The order book, we can see, I don't know if the word is nice, but a significant increase from ZAR 3 billion to ZAR 29 billion, but the profit slightly increased from a loss of ZAR 17 million to ZAR 47 million.

Henry mentioned when we acquired the Saulsbury division, we took over a project called Next Wave. That project incurred further losses than what we've thought. Those losses are included in the profit of ZAR 47 million. So had we not had those losses, that figure could have been a lot higher and the margin would have been higher. But with a project that we acquired in Saulsbury called Next Wave, has got significant project -- profit within the next 6 months. So overall, that still remains a very good acquisition to us.

If you look at Global Marine towards the end of last year, they acquired that project in Canada. They had very slow revenue burn. You can see the bulk of that project is still sitting in order book, that's expected to start burning over the next 12 months. Clough, in general, adopted a business model where they started allocating tender cost per division to those divisions. And where it becomes the most blatantly clear is on Global Marine where the operating loss is higher compared to the prior year, and that's mainly as a result of the tender costs that were completed to prior year.

Commissioning & Maintenance is one of those things which we hoped would carry on into infinity, unfortunately not. But if this project come into an end, you can see a drop in earnings from ZAR 1.6 billion to ZAR 280 million. We still carry a high level of profit. Now in each project, you build up a contingency reserve and you allocate that against certain risk elements that you identify in the project. Now as you go through in terms of closing out these projects, you mitigate these risks. If the risks disappear, you can release your contingency. On this specific one, we had a provision of $5 million for superannuation, which is a form of tax payment in Australia. We were taken to court that we owe an additional $5 million. We won the court action, so we were very successful in releasing that $5 million to come to the income statement. And we do that on all of our projects as we go through.

So we see a reduction in the Clough corporate and overhead expenses as a result of genuine cost savings. They have embarked on a cost saving process, and they've allocated tender cost to the divisions. But the pleasing thing is the increase in the order book, where it went up from ZAR 4.3 billion to ZAR 30.4 billion. We believe it's quality order book. We believe they've got the right people on the job to execute those jobs, and that's going to be the challenge going into the new year.

If you look at Africa, mining always stays close to my heart. Our friends in Africa had an increase in revenue due to some big projects ramping up. The prior year margin at 8% is higher than the current year margin at 6%. Now the prior margin was boosted by a project that came to an end. Again, they had a number of risks on that project, which they successfully mitigated. I think they negotiated for a period of 3 to 4 months. But at the end of that period, that contingency that they could release that increased margin for Africa in the prior year.

Australia is a bit of a different story. Australia is in a buoyant market. And the secured contracts, and you can see their revenue increased. Australia had a very difficult contract with a client. And they were able to successfully renegotiate new rates with their clients as at the first of January 2020. So we'll see going into the new year that renegotiation will increase margins. So we do see a significant increase in the Australian margin in the next 6 months. But for that project, it's not going to be the increased margin from a loss of 10% to your profit of 50%. It's just a realistic increase in margin.

If we look at the Americas, both turnover as well as EBIT increase. That's mainly as a result of the acquisition we had in TNT, successful acquisition, and you can see that both in turnover and operating profit. And if we move to the right, to the order book, Henry already spoke about the order book, that needs to be up by the end of the year. But there's a lot of potential in -- I mean, some of the clients were in sole source, discussing with the clients on multibillion, some way down to 1 or 2. So we're confident that, that order book will grow going into the new financial year.

If you look at Water -- so in the power segment in 2019, it's only the Power Programme. You can see it came down from 2018 to 2019 and it almost halved. If you look at their order book, their order book is sitting at 153. So there's virtually no work left for us on the Power Programme under our conventional contract. But we are winning on certain outages projects. They range from between ZAR 20 million and ZAR 50 million per project, high margin projects, but those come as and when Eskom gets some for us to do some of those maintenance projects. And you can see, as I mentioned in the order book, very little work left in the new year.

Water. Last year, I made a comment that Water keeps dripping along. We're pleased to say that they've secured contracts with Cape Town called Athlone contract. Our shareholder contract is ZAR 111 million. And there's 3 new water contracts that will come to market in the next 3 months. And we're quite optimistic that, hopefully, that bubbling of water may become a trickling of the slow river and starting to make a meaningful contribution within the group going forward.

Transmission & Distribution is OptiPower. We can see strong performance. They weren't in the group for the full 12 months. They only came in on the 1st of September, but their tender levels and activities have been the highest that they've ever been in the issue of OptiPower. So we're optimistic about the future of OptiPower and that they can make money going forward.

Because we ran out of space on this slide, we combined Other between resources and industrial, electrical and instrumentation. The 2 main projects in that is SEPI and Polokwane. Now what we can say is those areas operate in a very, very difficult market. There's so many claims floating about. There's so many unknowns floating about. If you make a slight loss on one of those contracts, it's going to have a heavy impact on the margin that you make.

We have been shortlisted, as Henry mentioned, for an international company. If we win the job, that side will look a lot better. But in the meantime, they are operating in a tough environment.

Corporate is in line with prior year. But the main focus for us and for the Power & Water Board is to get that order book up to a level that is respectable and will start contributing to the group. So if we can get them to an earnings level of between ZAR 100 million and ZAR 150 million. I think we would have done well. And I think they have got the capacity to do that over a period of time.

If we look at Bombela, on the face of it, questions are asked. Well, ZAR 114 million last year, guys, you said that, that's a reasonable number. The number is now ZAR 197 million. So over the past 6 months, we've successfully renegotiated the settlement agreement with Province. There's about 8 settlement disputes for the operational period that were concluded in that negotiation. And there were a number of clauses, which not only caused ambiguity now, but also in future. So what we did is we made sure that the wording in that contract is 100% clear going forward, and that the risk profile of that contract is understood 100%. So we were able to revalue that contract and that brought another element of profit to the table.

It's the first time we included a slide on discontinued operations. The reason we did that was from Middle East in 2018, they made a profit of ZAR 11 million, and that's, I think, the first profit they've made in 10 years. And the reason they made the profit was that a ZAR 30 million foreign exchange gain on a loss on a loan that they had, and that was offset, again, some of the legal fees and operational fees.

In the current year that went against us, we had a ZAR 11 million loss on the foreign exchange lines. So there's already a ZAR 40 million swing, and we had our legal fees and average fees, which made it difficult for us. So that's why you will see there's a bit of a swing between a total of ZAR 48 million versus ZAR 26 million. In Other, we've still got some minor costs coming through between Infrastructure & Building as well as Genrec. Those items are coming to an end, and those costs are expected to become lesser and lesser.

This is my second last slide, but probably the easiest one to understand. There's lots of numbers on it, so you can see it. If we look at property, plant and equipment, it's the top line. From June 2019, it was ZAR 2.2 billion. It went up to ZAR 2.8 billion. The main reason PPE went up is as a result of the implementation of IFRS 16. You'll recall, IFRS 16 assets would have been -- gone up by ZAR 770 million. So of that, ZAR 600 million went to PPE, and there's an element to other noncurrent assets and current assets, which are subleases within this building and some of the other buildings, which we brought on balance sheet. But the main reason for PPE is ZAR 600 million. On the asset side, it brought additional liabilities of ZAR 0.9 billion.

The second big thing that you will see is under current assets. So in the prior year, it was ZAR 7.1 billion. In the current year, it's ZAR 8.2 billion. So in general, your other current assets went up by ZAR 1 billion. So that's working capital outflow at the business of ZAR 1 billion. So we record sort of a perfect storm, but there's reasons why that went out. And we are confident that the bulk of those items will be clawed back by the end of June.

So what were those items? In Power & Water, we had 3 contracts where we do milestone billing. So those milestones, we started to incur costs before the end of December. So in month 1, you incur the cost, you pay it; month 2; month 3; month 4; month 5. You only get paid in month 10 for those costs. So by the time you get to receive revenue, you've already experienced all these costs. And in Power & Water, that was about ZAR 220 million. So that certificate, Steve, is due in April. And Steve promised his car and his house that, that money will be in the bank by the end of June.

In Underground Mining, we've got -- in Africa, we had 2 debtors that weren't paying us. That doesn't concern us. On the 1 debtor, we've got a payment guarantee. We've been working with the client very closely to make sure that we are going to get paid. So that payment guarantees, ensures that we [borrow back] before the end of June, we will repay that money. And then we've got some other debtors in Zambia, which we had some issues on WIP, which had been resolved. Those monies will be in the bank in the next month.

If we go to RUC, we mentioned that on the Mt. Morgans contract that they lost money. They will pass another AUD 5 million by the end of April. So that money will come in. The last one is in Cementation Canada. So they were in dispute with 1 debtor, and they were in negotiations with a second debtor. That second debtor went owner-operator. They took over a mine from us. So there were extensive negotiations as to what they're going to pass for the equipments, which people are going to take over. And unfortunately, those negotiations started in November and went all the way to February. So the good thing is, in February, we got paid CAD 15 million.

Mike da Costa will say that's Canadian dollars. And in the next 2 months, we're going to be paid another CAD 5 million. So those are all monies that will come back into the bank to help claw back some of that ZAR 1 billion working capital outflow. It is a focus area in the group. There's a lot more focus to ensure that these hiccups don't happen over December or June break. But believe me, there's a number of action items that's been put in place that we track the platform, see -- if I was to make sure that these things get done by the end of June.

When we get to debt slide, it's always -- debt can be viewed in 1 of 2 ways: What is the company's total debt, I take that to my credit committee, and they say no to everything; or we actually unpack the debt and we understand the debt. And then we go to our credit committees and say, "Right, guys. We understand what's the right levels of debt."

So IFRS 16 is nothing new. And I think the banks will find that everyone will come back. And if there's a big service or debt facility ratio in any covenant, discussions will be held with the banks to try and remove IFRS 16 from it because it just doesn't make sense. Like normal IFRS standards, that part just doesn't make sense. Then we've taken the rest of the debt and split it between self-servicing debt and corporate debt.

Self-servicing debt has got 2 elements to it, and you can see that on the bottom block. If I win a mining project and I buy an LHD for ZAR 100. I then put that LHD on the mine. And as part of my certificate on the revenue line, I say that you need to pay me ZAR 10 from our LHD. I take that ZAR 10 from my LHD, and I give that to Riksbank to serve as my asset-based financing.

On top of the ZAR 10 in your revenue certificate, you earn a profit of 15% to 20%, so you're not utilizing the profit on that project to pay that asset. That asset is embedded in the revenue in the contract, and it shouldn't be used or seen as true debt. And it's the same with the Bombela Concession Company. The dividends being generated partly goes towards settling the debt and partly comes to us, Murray & Roberts. So we see that as self-servicing debt.

The true debt that we're following is a corporate debt. And at the moment, the corporate debt is sitting at ZAR 1.143 billion. So why is that debt high? We can have a look at the TNT acquisition, that's sitting at ZAR 297 million. We can see that within 12 months, that's come down by half. And we think a significant part of that will still be paid off within the next 12 months.

In terms of overdrafts and sundry loans, there's some loans relating to JVs, very small, but about ZAR 750 million of that amount relates to overdraft facilities. So all these actions that I've taken you through should enable us to bring the overdraft facility down. And then a true figure that we follow is that 21%. So that's your gearing ratio for corporate debt. 21%, even with a high overdraft, are really comfortable.

If in corporate debt, you then take out loans to go and pay something else and that corporate debt rockets up to 30%, 40%, that means that you've got to generate money and profit within the company to go and service that corporate debt. It gets a lot more uncomfortable. So from a debt and a balance sheet point of view, where we sit as Murray & Roberts today are not too concerned.

And that's, Henry, I think is my final slide until you get to my famous Snowy picture.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [6]

--------------------------------------------------------------------------------

Okay. Peter, can you tell us what we're looking at there?

--------------------------------------------------------------------------------

Peter K. Bennett, Murray & Roberts Holdings Limited - Business Platform CEO [7]

--------------------------------------------------------------------------------

[You can see] on the existing Talbingo Dam from the original Snowy Hydro project, so with -- what Snowy 2.0 is a pump hydro project. It doesn't create any new dam facility. It does create a connection between 2 reservoirs of about a kilometer difference in elevation. So it's all underground, the only thing you'll see in the existing infrastructure is some intact structures in existing dams. Everything else is below that.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [8]

--------------------------------------------------------------------------------

It's a beautiful part of the country where the dam is going to be -- the project will be built.

--------------------------------------------------------------------------------

Peter K. Bennett, Murray & Roberts Holdings Limited - Business Platform CEO [9]

--------------------------------------------------------------------------------

It's a national park.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [10]

--------------------------------------------------------------------------------

It's a national park. A few presentation takeaways. The current financial year, as I mentioned, it is about consolidating these acquisitions into the group, building the order book, which we have demonstrated and successful project delivery. The order book of ZAR 50.8 billion, we believe, is a robust order book. It is a quality order book.

Underground mining, strong result, TNT, contributing well. And we expect this business to continue to do well. Having said that, client expenditure has tapered off. The cycle, we believe, has reached a plateau, so we don't expect any real growth from the mining platform over the next year or so, unless there's an acquisition. But organically, it's going to be hard to grow off that base. But we do expect it to at least maintain this level of earnings into the new year.

The growth will come from oil and gas, which has now got a solid order book already secured for FY '20, '21. And we're very pleased with that position that we've achieved. The Power & Water business, as you would have noticed from Daniël's slides, it's just different from a scale point of view. And OptiPower, which we've acquired recently, we believe, is a very interesting business, very profitable, high margins, but from a scale point of view, it is not that significant.

Group, overall, we are happy where we are. The results for the first 6 months, in line with expectation. And I think the order book is giving us confidence into financial year 2021.

I just want to say a few words about the Middle East. It is now a discontinued operation. And every year, there is ZAR 10 million or ZAR 20 million that goes into the Middle East. And some time, we need to get to a point where that was closed and that we can draw a line under the Middle East. We had a very detailed discussion at your Board meeting yesterday, specifically around the Middle East, where all the remaining actions and activities were explored and debated in a lot of detail.

We are still of the view that the accounting position adopted by Murray & Roberts on the Middle East, in total, is fine. But we want to get to a point that we can close the door behind us and throw the key way and never go back. We are targeting June 2021, so another year. We're targeting June 2021, and hopefully, by then, we'll be able to close the door in the Middle East.

Ian, our Commercial Director, is working with me and with Gary Wells and Daniël. Gary is our executive in the Middle East, working very, very hard to make sure that we achieve that. There are still a minefield of risks in the Middle East that we need to mitigate and that we need to navigate around. And we are doing that. And it is a very, very awkward situation, where we're getting to a point where, the way that we -- in which we understand the rule of law and the way in which it is understood in that part of the world, understanding is not always the same. So it's a difficult thing for us to do, but the positive message I want to leave you with is we're seeing an end to our presence in the Middle East. And we are targeting June 2021 for an exit, and hopefully, we can achieve that.

So thank you very much. What we would like to do now is give you the opportunity to ask questions, and please feel free to ask questions.

Yes, Marc.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Marc Ter-Mors, SBG Securities (Proprietary) Limited, Research Division - Head of Equity Research & Head of Industrials [1]

--------------------------------------------------------------------------------

Marc Ter-Mors of SBG Securities. A difficult question perhaps, the COVID virus. I'm sure the company will have done scenario analysis and impact studies. Can you comment both short term, what supply chain effects could be as well as longer term, perhaps your view on the impact on commodity cycles?

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [2]

--------------------------------------------------------------------------------

Yes. I think the -- I can't give you a definitive answer because we're still in the process of doing the work. I'm trying to understand what the commercial impact might be. And we're looking at it from 2 angles: First, from a health point of view, our people that we employ in various parts of the world, how do we manage that, to not expose them to unnecessarily -- exposure to this virus; but then secondly, the work that we do, and what the potential impact on that might be and the commercial impact on that. We did say in our press release that should we find that there is a material impact, we will come back to the market, and we will talk to the market about that.

Having said that, we had a brief meeting actually before this, before this presentation. And currently, there's essentially 2 areas which we are being impacted. In South Africa, we're building a project for SEPI, and we make use of specialist welders out of Thailand. And with travel restrictions, it's a bit problematic to maintain that skill on the project. So the impact of that, we need to work out and understand exactly what that's going to be. But we don't think it is much more other than a slowdown in the progress of implementation. That's what the impact is going to be, but that hasn't been quantified yet.

The second area, you can imagine, Asia and Australasia, maybe some concerns because the supply chain to that part of the world for projects essentially all links back to China. We are building a project in Mongolia. It's a mining project. It's a joint venture between a third party, our Oil and Gas platform and the Underground Mining platform. So between Peter and Mike, we have a 66% stake in that joint venture. And I'm going to ask Peter to -- be frank, Peter, just tell us what the impact is on this Mongolia project. We haven't quantified the impact yet, but the practical implication on the ground, just share that with us, please.

--------------------------------------------------------------------------------

Peter K. Bennett, Murray & Roberts Holdings Limited - Business Platform CEO [3]

--------------------------------------------------------------------------------

So in Mongolia, there's probably 2 main areas that are impacted. One is from the supply chain side, there's a lot of owner-supplied equipment for one of our projects there that is being impacted in its ability to be delivered. It gets quarantined at the border. From our shaft sinking project there, we also have some equipment coming from that part of the world, but also is impacted in its ability to be delivered. Although this morning, we had a truckload of cable arrive on site just fine. So it's not consistent at the moment.

The bigger challenge we have, from our perspective, is around the movements of our personnel. And given the limited access routes into Ulaanbaatar, that's becoming more and more challenging. So now there's -- if you travel through Korea, there's a 21-day self quarantine requirement through Bangkok, through just about every route. There's some element of that, so our ability to maintain our supervision on-site is being impacted. So we're working with the client there to consolidate our work areas into some more defined space such that we can manage that more effectively. But as Henry says, at this stage, we don't know what the long-term impacts will be. We do see there will be a slowdown in works on site, and that's about as definitive as we can be at this point.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [4]

--------------------------------------------------------------------------------

So the challenge for us, under these circumstances, where we're already impacted by the virus, is to come to some sort of arrangement with a client because we don't want to incur the cost impact of the delay. So that -- it's all subject to negotiation. And whilst it is all very uncertain, nobody really knows how long this will last. And is it another month, or is it another 6 months? And even the client bodies, where we are building these projects, they also don't know how to respond to this and how to actually be ready for whatever scenario we may be facing.

We are aiming to conclude our internal work by Friday of next week. And by then, we should have a better feel for what the potential impact might be. So it's not as broad as one would potentially expect. As I say, currently, it's essentially 2 projects: It's the project in South Africa, where we're having problems with bringing people in from Thailand; and in this project in Mongolia, which Peter has spoken about. In Australia, the impact at this stage on us is minimal, Peter?

--------------------------------------------------------------------------------

Peter K. Bennett, Murray & Roberts Holdings Limited - Business Platform CEO [5]

--------------------------------------------------------------------------------

Very minimal, Henry.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [6]

--------------------------------------------------------------------------------

It's very minimal. So yes, even in Australia, the supply chain links back to China, but very minimal impact at this stage. Further questions? Yes?

--------------------------------------------------------------------------------

Unidentified Analyst, [7]

--------------------------------------------------------------------------------

I want to ask about the local project that's been delayed due to community unrest. So what happens in the event -- so you're delivering the projects, and during execution, the same thing occurs? Please take us through that.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [8]

--------------------------------------------------------------------------------

Yes, we're not -- we haven't started on the project yet. We know that we've been successful, but the formal or official award has not been made because of the delay. But should something like this occur, whilst we're implementing the project, it will all be regulated by the terms of the agreement that you entered into with your client. So normally, if the unrest is due to our cause, then it would be for our cost. But if it is a general area thing that's got nothing to do with us, we tend to get extension of time. And in some instances, even cost covered by the client, almost like a type of a force majeure event. Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [9]

--------------------------------------------------------------------------------

Two issues. One is TNT, what -- is there some normal margin in that business? And how does that vary -- how variable is it over time?

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [10]

--------------------------------------------------------------------------------

It's between 15% and 20% of revenue. That's the margin of that business. It's a specialist logistics company. Most of the work that they do is design supply. Alternatively, it is EPC. That's going out to engineer it, you procure it and you construct it.

--------------------------------------------------------------------------------

Unidentified Analyst, [11]

--------------------------------------------------------------------------------

And the second question is what's the way forward with ATON at this stage with -- where do things stand?

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [12]

--------------------------------------------------------------------------------

Who is ATON? No. As you know, at the end of September last year, that was the long stop date, and they did not extend the long stop date. And for that reason, the offer is no longer in play. We have not had any engagement with ATON yet. We will catch up with them as part of this result cycle. And hopefully, next week or the week after next, we will talk to them.

--------------------------------------------------------------------------------

Prince Mathoni, Standard Bank Group Limited - Data Analyst [13]

--------------------------------------------------------------------------------

Prince from Standard Bank. Just on the debt side, what would you say was the split between your local and foreign-denominated?

--------------------------------------------------------------------------------

Daniël F. Grobler, Murray & Roberts Holdings Limited - Group Financial Director & Executive Director [14]

--------------------------------------------------------------------------------

Debt, in terms of?

--------------------------------------------------------------------------------

Prince Mathoni, Standard Bank Group Limited - Data Analyst [15]

--------------------------------------------------------------------------------

In terms of denomination.

--------------------------------------------------------------------------------

Daniël F. Grobler, Murray & Roberts Holdings Limited - Group Financial Director & Executive Director [16]

--------------------------------------------------------------------------------

Self-servicing? Corporate?

--------------------------------------------------------------------------------

Prince Mathoni, Standard Bank Group Limited - Data Analyst [17]

--------------------------------------------------------------------------------

Yes, just across, maybe, the board, the total.

--------------------------------------------------------------------------------

Daniël F. Grobler, Murray & Roberts Holdings Limited - Group Financial Director & Executive Director [18]

--------------------------------------------------------------------------------

So from an overdraft point of view, the bulk of the overdraft is carried here. We've got a ZAR 50 million overdraft that was utilized in Australia. The risk was used here. The JV loans were allocated between Australia as well as the Middle East. And the self-servicing debt, the bulk of that debt sits actually in Clough, it sits in Cementation, and it sits in corporate properties in South Africa, about 1/3, 1/3, 1/3.

--------------------------------------------------------------------------------

Henry Johannes Laas, Murray & Roberts Holdings Limited - Group Chief Executive, MD & Executive Director [19]

--------------------------------------------------------------------------------

It's very quiet. Any further questions? Are there any questions on the call? Ladies and gentlemen, thank you very much. Please join us next doors for something light to eat. Thank you.