2009-03-27 · General Property News
DURING the course of Wednesday afternoon, Murray & Roberts (M&R) reported, as you would have read in yesterday’s newspaper, that the Tameer Towers project in Abu Dhabi had been terminated. M&R’s one-third share of the contract was worth about R5bn.
As M&R is one of the counters in the Private Investor portfolio I read the Sens report carefully, While I was disappointed on the news, I was not especially perturbed for two reasons.
The first was that the contracted revenue estimated to be lost in the current financial year was about R90m. At an operating margin of about 10%, this means that M&R could have expected attributable profit (before interest and tax) of about R9m had the contract not been terminated.
The costs incurred in setting up the contract will be recovered. In other words, its wallet has not been affected now.
Secondly, the company reported that current and future opportunities in the region had already been identified that “hold the potential to replace the forward order book”.
I expect other contracts could be terminated and the order book in the Middle East may be juggled and shuffled for some time yet. But, on the face of things, M&R’s investment fundamentals have not changed materially since it cautioned on the volatility of business in the region.
Market sentiment, it seems, may not be quite as sanguine as mine. The closing price on Wednesday was down to R42 from R43,80 the previous day. But then the drop in the share price may just as well have been from some profit-taking as, only about a month ago, M&R’s shares were trading at about R35.
The fact is that, unfortunately, the cancellation of this contract has adversely affected the expected flow of future operating profits. At an operating margin of 10%, the anticipated profit stream at the operating level over the course of the contract was about R500m, more than just a blip on the company’s business plan.
If management secures new contracts to replace the Tameer Tower project, the profit stream will be slowed. Even so, I really don’t expect M&R’s bottom-line earnings per share growth over the long term will fail to exceed the Private Investor’s core criterion – or even be dented.
As I still have to hand the detailed results of the half-year results of Stefannutti Stocks (Stefstok) for the half year ended August 31 2008, I’ll use this report as an example of how profit emerges as construction contracts progress.
In its half-year Stefstock reported contract revenue from contracts (some in progress and other completed) of R2,54bn. It incurred contract costs of R2,15bn, so the gross profit on its contract work was R390,9m, a gross margin of 15%.
The company’s operating profit (which takes into account overheads, depreciation and noncontract revenue) was R179m and its operating margin was 7%.
On an order book of R6bn, Stefstock could, therefore, plan for an operating profit stream of at least R420m over the period during which the contracts on the book are expected to be completed.
I hope this helps you to understand why I’m not in a state of shock about M&R’s deletion from the order book.
As M&R is one of the counters in the Private Investor portfolio I read the Sens report carefully, While I was disappointed on the news, I was not especially perturbed for two reasons.
The first was that the contracted revenue estimated to be lost in the current financial year was about R90m. At an operating margin of about 10%, this means that M&R could have expected attributable profit (before interest and tax) of about R9m had the contract not been terminated.
The costs incurred in setting up the contract will be recovered. In other words, its wallet has not been affected now.
Secondly, the company reported that current and future opportunities in the region had already been identified that “hold the potential to replace the forward order book”.
I expect other contracts could be terminated and the order book in the Middle East may be juggled and shuffled for some time yet. But, on the face of things, M&R’s investment fundamentals have not changed materially since it cautioned on the volatility of business in the region.
Market sentiment, it seems, may not be quite as sanguine as mine. The closing price on Wednesday was down to R42 from R43,80 the previous day. But then the drop in the share price may just as well have been from some profit-taking as, only about a month ago, M&R’s shares were trading at about R35.
The fact is that, unfortunately, the cancellation of this contract has adversely affected the expected flow of future operating profits. At an operating margin of 10%, the anticipated profit stream at the operating level over the course of the contract was about R500m, more than just a blip on the company’s business plan.
If management secures new contracts to replace the Tameer Tower project, the profit stream will be slowed. Even so, I really don’t expect M&R’s bottom-line earnings per share growth over the long term will fail to exceed the Private Investor’s core criterion – or even be dented.
As I still have to hand the detailed results of the half-year results of Stefannutti Stocks (Stefstok) for the half year ended August 31 2008, I’ll use this report as an example of how profit emerges as construction contracts progress.
In its half-year Stefstock reported contract revenue from contracts (some in progress and other completed) of R2,54bn. It incurred contract costs of R2,15bn, so the gross profit on its contract work was R390,9m, a gross margin of 15%.
The company’s operating profit (which takes into account overheads, depreciation and noncontract revenue) was R179m and its operating margin was 7%.
On an order book of R6bn, Stefstock could, therefore, plan for an operating profit stream of at least R420m over the period during which the contracts on the book are expected to be completed.
I hope this helps you to understand why I’m not in a state of shock about M&R’s deletion from the order book.
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