M&R receives R285m Gautrain business disruption insurance payout

JSE-listed multinational engineering and construction group Murray & Roberts (M&R) has successfully finalised a Gautrain business disruption insurance claim and received R285 million because of the low ridership levels on the Gautrain caused by the Covid-19 lockdown.

M&R CEO Henry Laas said the proceeds from the claim were used to repay some of the high-interest debt in the Bombela Concession Company (BCC).

“That is obviously going to reduce some of the interest exposure going forward. All in all things are looking okay but we need [Gautrain] ridership to improve,” he said during a virtual business presentation last week.

M&R owns a 50% stake in the BCC, which holds the 15-year concession for operating and maintaining the Gautrain. Laas said this investment and the fair value adjustments M&R does on that investment “is very much linked to the ridership” on the Gautrain.

“Pre-Covid-19 we were doing about 55 000 passengers a day. Currently we are doing about 13 000 passengers a day … So it’s in a difficult space and we need to get ridership levels to increase,” he said. “But under the current Covid-19 scenario, it’s very difficult for us to increase ridership levels.”

M&R confirmed in July 2020 that Gautrain ridership levels had slumped to as low as 6 000 a day.

No further claims

Ed Jardim, the group’s investor and media executive said on Tuesday M&R will not be able to submit another business disruption claim for the continuing low ridership levels on the Gautrain. He added that the actual business disruption impact is larger than the value of the business disruption claim that had been settled.

BCC carries the risk on actual revenue up to a certain level. From this level up to the guaranteed level, the revenue gap is covered by the Gautrain Management Agency’s (GMA) “patronage guarantee”.

The GMA’s senior manager (for) reputation Tlago Ramalepa said the Gauteng Provincial Government makes provisions for all its annual financial obligations, but there is a cap in the concession agreement to the patronage guarantee, which is a limit to the amount the province has to pay in any month. “This cap is the point at which Bombela also takes the risk of revenue losses. The patronage guarantee payable varies from month to month and the province is monitoring ridership closely,” he said.

Jardim said M&R is unable to disclose details of the Gautrain financial model, including the threshold at which the government subsidy or “patronage guarantee” kicks in and the upper ridership threshold at which the subsidy falls away. However, he confirmed that at the current low ridership levels “the patronage guarantee has been at its maximum already”.

The latest GMA annual report reveals that the patronage guarantee payment by the agency increased to R1.971 billion in the year to end-March 2020 from R1.667 billion in the previous year. Jardim said that the work-from-home phenomenon by many employers has negatively impacted ridership numbers on the Gautrain.

Going forward

“As the vaccination process unfolds, Bombela envisages that working arrangements may change and ridership numbers will then organically increase … The Gauteng provincial government and BCC both took multi-million rand ‘hits’ last year because of low commuter patronage on the Gautrain caused by the Covid-19 lockdown.

Laas disclosed during a presentation on M&R’s financial results for the year to end-June 2020 that Covid-19 had a R622 million impact on the group’s earnings before interest and tax. About a third of that R622 million related to M&R’s investment in the BCC, he said.

The value of M&R’s investment in the BCC is negatively impacted when Gautrain ridership levels are below the threshold at which the government subsidy kicks in. Jardim told Moneyweb on Tuesday that the annual fair value adjustment of M&R’s investment in the BCC is based on “the annual change of the net present value calculation of the future dividends to be received on the investment”.

“In terms of the year to June 30, 2021, the fair value adjustment is not expected to be materially different from previous and corresponding financial years,” he said.

Analysis

Marc Ter Mors, global head equity research at SBG Securities, said the R285 million Gautrain business interruption insurance claim was positive for M&R, a substantial payment and above his expectations.

However, he believes the Gautrain still needs to be at a slightly higher ridership level for M&R not to have to make a negative fair value adjustment on its investment in the BCC. However, he believes there are even more “swing factors” in the profit recognition on M&R’s energy, resources and infrastructure (ERI) platform.

He said this business in the Asia Pacific region has quite high overhead costs but has a tremendously large order book and if those projects start ramping up, “you are likely to see high revenue growth and very high operating gearing”.

Ter Mors added that M&R’s investment in the BCC would have contributed a large portion of the group’s earnings before interest and tax in the past – and may still do so in the six months to end-June 2021 – but M&R expects the profit generation in the next three years to start coming from the ERI platform. “We think it will start coming through in the financial results to June [this year],” he said.

M&R had a record order book of R60.5 billion at end-December 2020 but believed it could grow to about R80 billion by end-June 2021. The group’s ERI business had an order book of R42.2 billion at end-December, which was also a record high for this platform, and near orders of R5 billion.

Source: Moneyweb