Aveng interim results

Tuesday 17th February, 2015

Operational and macroeconomic challenges negatively impact improving performance

Key features

Revenue decreased by 14% to R23,9 billion (2013: R27,7 billion).
Net operating earnings down by 19% to R413 million (2013: R510 million).
Headline earnings per share down 58% to 34,5 cents compared with 82.1 cents in 2013.
Net cash improved to R1,7 billion from R1, 3 billion in June 2014.
Two-year order book flat at R32,5 billion against December 2014.
Commenting on the results Aveng CEO, Kobus Verster said “The headwinds experienced in the first half of 2014 continued to constrain the construction market in the second half of the year. Increased competition in the Australian and Asian markets, coupled with lower commodity prices globally resulted in declining resource-related opportunities. Despite the challenging market environment, our local construction and mining order books showed strong growth.”

Notwithstanding the challenges, the positive cash flows from operations, combined with the successful launch of our R2 billion convertible bond and the sale of the Electrix business supported an increase in net cash from R1,3 billion at 30 June 2014 to R1,7 billion. This reflects the steps taken to strengthen liquidity and reduce fixed costs, and we expect to see continued progress in this regard.

Operating performance

The trading conditions within the South African and Australian Construction & Engineering businesses remained challenging, with the Group’s performance constrained by decreasing opportunities in a tighter resource market and a tougher economic climate. This was exacerbated by increased competition from international construction companies.

Construction & Engineering: Australia and Asia’s revenue was impacted by the completion of multi-year pipeline and building contracts, which saw the Pipelines segment reduce its contribution to total revenue to 9,6% from 33% in the comparative period. McConnell Dowell (MCD) has made progress in resolving problematic contracts and continues to diversify its work into South East Asia and New Zealand with a focus on the transport sector (road, rail and ports), as well as the maintenance market and commercial buildings.

Construction & Engineering: Africa and Rest of Africa remained constrained with investment in large infrastructure investments still not at an optimal level. Positively, there has been an uptick in government project wins, with the public sector now contributing 37% to the order book, from 20% in June 2014. Marginally improved revenue was driven by an increase in rail related work, construction activity on two large private sector building-related contracts and engineering work on two renewable energy contracts, namely the Gouda wind farm and Sishen solar energy plant.

As of 1 July 2014 this segment includes Aveng Capital Partners (which previously fell under “Other and Eliminations). The segment is responsible for the Group’s investments in South African toll roads, property and renewable energy concessions.

Despite the commencement of the Nkomati Nickel Mine contract and increased scope at other projects in South Africa, Aveng Mining’s revenue performance was unable to compensate for the non-renewal of three gold mining contracts in Africa. This was exacerbated by the downturn in the commodities market. There has, however, been a strong improvement in the order book, with Mining’s dependence on gold and coal falling relative to platinum, iron ore and manganese.

The Manufacturing & Processing part of the business’ performance was impacted by steel sector labour disruptions which partially drove the earnings decline of 51% to R79 million.  Notwithstanding, on a top line basis Aveng Infraset benefitted from strong demand for precast concrete products in Southern Africa, particularly Mozambique and Zambia, while Aveng Lennings Rail Services’ revenue was assisted by growth in rail construction and maintenance services in Southern Africa. 

Aveng Steel continues to experience extremely challenging market conditions in South Africa. The business was adversely affected by reduced volumes, high competition and low international prices combined with month-long industry labour disruptions, which had a notably negative impact on volumes and inventory levels.

Order book and prospects

The decrease in the order book from June 2014 reflects the significant challenge across the business in winning new work. The two-year order book decreased 12% to R32,4 billion from R37,1 billion in 30 June 2014, impacted by a significant drop in the Construction and Engineering: Australia and Asia order book. Conversely both Construction and Engineering: South Africa and rest of Africa and Aveng Mining increased their order books, with a strong focus on diversifying cross-border markets and growing further into the rest of Africa.

Kobus Verster said, “I am reasonably comfortable with the steady progress made in delivering Aveng’s medium term strategy. In the face of the extremely challenging market environments, the Group continues to focus on the competitiveness of the cost base.”

He adds: “Our short-term focus remains the stabilisation and recovery of the business. Progress has been made in reducing the operating losses at Aveng Grinaker-LTA, whilst Aveng Steeledale and Aveng Duraset have returned to profitability. Management has been strengthened across the business, resulting in notable improvements in project execution and operational excellence. We have relocated the Aveng Corporate Office to Aveng Park in Boksburg and the process of disposing of the majority of the Group’s property portfolio in South Africa well advanced. Strategically we are focusing on opportunities that allow us to deliver multi-disciplinary solutions across the infrastructure value chain, pursuing growth through expansion in sub Saharan Africa and South-East Asia.”