Wednesday, July 21, 2010

Murray and Roberts will gain from alliance with chinese company

Financial services group Credit Suisse Standard Securities has explored the notion of a potential future alliance between China based construction players and Murray & Roberts, to enter African regions with high infrastructure investment levels.

As a result, Credit Suisse Standard Securities, a joint venture company created by Standard Bank and Credit Suisse, pointed to a one-year target price of R65, from a current share price of R39.24 for the construction group.

It follows comments from Murray & Roberts CEO, Brian Bruce, to find a basis for a strategic partnership following a recent trip to China.

"We believe the strategic rationale for such an engagement is comprehensive as Chinese, and other Asian players, seek to facilitate development of mineral resource supplies, aligned infrastructure and social development needs and could offer capital support at low cost."

"MUR should not ignore growth options north of its home market, offers valuable competencies and has a regional balance sheet that may restrict growth rates if large project options present themselves," Credit Suisse Standard Securities said.

It noted that inward Foreign direct investment (FDI) into Africa, excluding the more established economies of Egypt and South Africa, had increased from US$2-2.5 billion per annum in the 90's to US$50 billion in 2008.

"We estimate that China has started playing a meaningful role, with an increasing contribution from 5 percent of African FDI to 15 percent over past five years," the banking group said.

Credit Suisse Standard Securities forecast that China's contractor influence in African markets is set to accelerate when excess construction and materials capacity develops in China.

"Growth in GDFI (Gross Domestic Fixed Investment) outpaced consumer growth over 15 years resulting in 40 percent GDFI contribution to the economy. This should free up export capacity when the domestic GDFI cycle moderates," the group said.

It argues that Murray & Roberts could contribute in specialised engineering areas including mining, marine oil & gas, the local sourcing of materials and managing a diverse business environment, "while Chinese contractors could offer low labour and equipment costs, access to Chinese public and business networks plus attractively priced capital," it said.

Credit Suisse Standard Securities highlighted sizeable Chinese players active in the region including China State Construction Engineering Corporation, China Railway Group, China Communications Construction Group, Shanghai Construction Group and China Railway Construction Corporation, as potential suitors.

In June, Murray & Roberts Holdings said it expects a dramatic decline in its diluted headline earnings when it reports its full year results towards the end of August.

The group said it expects diluted headline earnings per share and diluted earnings per share for the year ending June 30, 2010 to be 50 percent to 55 percent lower than the previous comparable period.

In 2009, the group reported diluted headline earnings of 675 cents per share, up 23 percent on the previous year.

It noted that the estimated cost to completion of the Gautrain Project infrastructure works saw an increase of about 390 million rand from its original estimate.

MUR said that its operating margin would remain within the group's strategic range of 5.0 percent to 7.5 percent.

The group said its Order Book remains stable at about R40 billion with a solid long-term component in Southern Africa.

"The Group's international markets continue to offer increased levels of opportunity while there is a shortage of new work flow into the group's South African markets," it said.

Brian Bruce last month alluded to a potential pick-up in its mining contracting divisions, noting that global mining resources markets were showing signs of a recovery on the back of increased demand for natural resources.

"The Order Book improvement in Clough (Australia) is evidence of the increased levels of activity in the natural resources sector, particularly oil and gas," he told I-Net Bridge.

Clough is a publicly listed Australian based engineering, construction and asset support contractor and a majority-owned unit of MUR.

The CEO said that the international markets in which the group currently operated in, the Americas, Middle East And Australia, all fall within the natural resources sector.

Bruce added that the exception of Dubai and Bahrain, Middle East construction markets remain in positive territory.

"The group has a solid order book and prospects in Abu Dhabi and secured its first contract in the significant Saudi Arabia market," he said.

An I-Net Bridge consensus forecast for Murray & Roberts revealed fully diluted headline earnings per share of 382.2 cents for 2010, and 532.4 cents per share for 2011.