We need a big, black giant

MURRAY & ROBERTS LEADS THE WAY

Murray & Roberts’ (M&R) decision a month ago to exit its construction business should see the entry into the sector of “an unlisted black-owned company that is currently not involved in construction”.

At the time of the announcement, M&R chief executive Henry Laas described it “as the biggest strategic decision since the merger of Murray & Stewart and Roberts Construction back in 1967”. There aren’t too many companies around that would be able to afford a business of this scale, and with deep enough pockets to enter such a capital-intensive sector. Patrice Motsepe’s African Rainbow and Phuthuma Nhleko’s Pembani spring to mind. You’re talking about a deal (likely) worth a good few hundred million rand, possibly even a billion.

M&R’s construction business is profitable. In the financial year to June 30 2016, it reported revenue of R4.36 billion, and eked out the smallest of operating profits (from R5.9 billion in revenue and R43 million in operating profit in 2015). Its order book is solid at R4.7 billion.

On a revenue basis, however, this unit is less than a fifth of M&R’s overall business and an even smaller percentage of its order book.

It’s active at Medupi and Kusile and completed high-profile projects like Melrose Arch, the domestic terminal at OR Tambo International Airport, Absa Towers West, Portside in Cape Town and the Green Point Stadium.

That said, construction in South Africa is not the profit machine it once was. Laas says “it is a very low margin business, and we have had experience in the past on one or two projects that if things go wrong it goes wrong in a very big way and it knocks out the profitability for the rest of your project”.

Laas made the point on the call that “a black-owned business would have a 20% pricing advantage over another business. So if you price a R100 million project and you’re a black-owned entity and you are pricing at 20% more than another company that is not black-owned you will still be successful in winning that tender”.

He pointed to others in the sector, specifically Aveng, also investigating a similar kind of transaction.

Chairman Mahomed Seedat writes in the group’s annual report “the Board concluded that to remain relevant and competitive in its domestic market, it would be necessary for the operating group to accelerate its transformation. We are exploring various strategic alternatives”.

From none to possibly two huge black-owned construction companies in the next year or two?

One wonders why this didn’t happen far sooner?

It’s certainly got a better chance of succeeding than the DTI’s fanciful plan to “create” black industrialists with helicopter money.

Hilton Tarrant works at immedia. He can still be contacted at hilton@moneyweb.co.za