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Johannesburg - The performance of construction group Murray & Roberts Holdings [JSE:MUR] would have been disappointing, even if it had been paid its dues for the Gautrain construction project.
According to analysts, the group's earlier aggressive recognition of profits is one of the myriad reasons why its results were poor. The company usually recognises profits on long-term projects before these are 60% complete.
M&R's CEO Brian Bruce said on Thursday at the annual results presentation in Sandton the R1.4bn owed to the group in unpaid claims was largely responsible for halving its earnings at year to end-June 2010 from 675c to 340c.
The claims include R670m in cost overruns on the Gautrain, and work done on the Dubai International Airport and the Eskom Power Programme.
However, the group's operating profit still declined by 36% to R1.8bn. The order book, an indication of how much work a construction company expects to garner in the year, also showed a drastic decrease from R42bn over the last 15 months to R30bn in the last six months.
"There has been very aggressive recognition of profits over the years," said Dirk Noeth, an analyst at Avior Research.
Noeth said the nature of Murray & Roberts' projects, which tend to run over long periods, forces it to recognise profits before completion. But as projects ran into trouble, the recognised losses had to be reversed.
"This is where the weakness in the current results lies, aside from the uncertainty of when the R1.4bn in claims will be recovered," he said.
Quentin Ivan, an investment analyst at Coronation Fund Managers, agreed with Noeth. Revenue is recognised on a percentage of completion basis which is often subjective in nature, he said.
"The financial results were adversely effected by additional charges recognised for scope changes and variations which are subject to claims,” he said.
The spike in construction activity and opportunities before the global financial crisis also played a role in causing a major hangover for the local construction industry.
More players entered the market as established firms increased their capacity to handle major projects. Once the financial crisis hit and global opportunities dwindled, competition increased and margins came under pressure.
According to Ivan, Murray & Roberts traditionally punches above its weight in terms of project size.
"Post the financial crisis, these mega projects are hard to come by," he said. According to Ivan, the lack of annuity earnings enjoyed by construction companies means that Murray & Roberts continuously has to win more projects to replace completed work.
"This will be tough in an environment where competition has intensified and clients have either cancelled or delayed capital expenditure plans."
According to Bruce, the group's order book needs short-term work, but is still exposed to the local public sector over the long term. "We're confident of the government's R846bn commitment to infrastructure," he said.
Bruce also said resources will be an essential focus for the group. "We have been driven by the fortunes of the natural resources market place."
- Fin24.com
According to analysts, the group's earlier aggressive recognition of profits is one of the myriad reasons why its results were poor. The company usually recognises profits on long-term projects before these are 60% complete.
M&R's CEO Brian Bruce said on Thursday at the annual results presentation in Sandton the R1.4bn owed to the group in unpaid claims was largely responsible for halving its earnings at year to end-June 2010 from 675c to 340c.
The claims include R670m in cost overruns on the Gautrain, and work done on the Dubai International Airport and the Eskom Power Programme.
However, the group's operating profit still declined by 36% to R1.8bn. The order book, an indication of how much work a construction company expects to garner in the year, also showed a drastic decrease from R42bn over the last 15 months to R30bn in the last six months.
"There has been very aggressive recognition of profits over the years," said Dirk Noeth, an analyst at Avior Research.
Noeth said the nature of Murray & Roberts' projects, which tend to run over long periods, forces it to recognise profits before completion. But as projects ran into trouble, the recognised losses had to be reversed.
"This is where the weakness in the current results lies, aside from the uncertainty of when the R1.4bn in claims will be recovered," he said.
Quentin Ivan, an investment analyst at Coronation Fund Managers, agreed with Noeth. Revenue is recognised on a percentage of completion basis which is often subjective in nature, he said.
"The financial results were adversely effected by additional charges recognised for scope changes and variations which are subject to claims,” he said.
The spike in construction activity and opportunities before the global financial crisis also played a role in causing a major hangover for the local construction industry.
More players entered the market as established firms increased their capacity to handle major projects. Once the financial crisis hit and global opportunities dwindled, competition increased and margins came under pressure.
According to Ivan, Murray & Roberts traditionally punches above its weight in terms of project size.
"Post the financial crisis, these mega projects are hard to come by," he said. According to Ivan, the lack of annuity earnings enjoyed by construction companies means that Murray & Roberts continuously has to win more projects to replace completed work.
"This will be tough in an environment where competition has intensified and clients have either cancelled or delayed capital expenditure plans."
According to Bruce, the group's order book needs short-term work, but is still exposed to the local public sector over the long term. "We're confident of the government's R846bn commitment to infrastructure," he said.
Bruce also said resources will be an essential focus for the group. "We have been driven by the fortunes of the natural resources market place."
- Fin24.com
