Aveng Group full year results

Tuesday 26th August, 2014

Aveng delivers improved operational performance despite challenging market conditions across geographies

Aveng delivers improved operational performance despite challenging market conditions across geographies 

Key features
Revenue increased marginally by 2% to R53 billion
Net operating earnings increased by 20%
Adjusted earnings per share (excluding impairments) (“AEPS”) and headline earnings per share (“HEPS”) declined by 4% and 10% respectively
Overall performance affected by the financial impact of Gold Coast
Aveng Grinaker-LTA recovery process progressing well
Improved performance by Aveng Manufacturing and Processing
Two-year order book strong at R40,9 billion (9% increase on 2013)
Net cash deteriorated to R1,3 billion from R2,4 billion whilst cash holdings amounted to R4,1 billion
Successful launch of R2 billion 5 year senior unsecured convertible bond in July 2014

Commenting on the results Aveng Group CEO, Kobus Verster said: “I am relatively pleased with the progress being made in the stabilisation and recovery of underperforming areas in the business. However, the overall performance was overshadowed by losses on the Gold Coast project in Australia and at Aveng Grinaker-LTA.

The past year has seen a challenging domestic infrastructure environment exacerbated by lower mining activity (on the back of weaker commodity prices) as well as labour disruptions. Additionally, we experienced a generally subdued manufacturing and steel sector. Notwithstanding, rail related infrastructure projects in the SADC region offer good opportunities for the civils, rail and concrete products businesses. Despite the slowdown in Australia’s core mining and pipeline sectors, attractive opportunities remain in the Australasian and Pacific region, particularly in the transport-related infrastructure markets as well as in the oil and gas industry.

It is pleasing to see the outcomes of the optimisation programmes that have been implemented across the Group beginning to show results and form a stable foundation for the growth of our business.”

Group revenue increased by 2% to R53 billion on increased activity at Aveng Grinaker-LTA and Aveng Manufacturing. The continued focus to reduce costs and turnaround the Aveng Grinaker-LTA business saw its operating loss reduce, culminating in a net operating loss for the Construction and Engineering: South Africa and Rest of Africa operating segment of  R566 million, against a loss of R968 million for the comparative period. This, supported by the substantial improvement in the performance of the Manufacturing and Processing operating segment, drove an overall 20% increase in the Aveng Group’s net operating earnings to R784 million. The Group’s net finance expense increased to R183 million resulting in AEPS and HEPS being down by 4% and 10% respectively.

Operating Performance

During 2014, Aveng Group operations experienced mixed performance as outlined below:

The Construction and Engineering: Australasia and Asia business saw flat revenue of AUD3 billion (a 5% increase in Rand terms to R28 billion due to a weaker exchange rate). However, significant losses from McConnell Dowell’s Gold Coast contract saw earnings decline by 58% to
R271 million. Whilst claims related to this and the QCLNG contracts remain unresolved, major loss making contracts in Australia are substantially completed. Overseas operations in New Zealand and South East Asia, particularly the Electrix, Building and the Tunnelling businesses, performed well and achieved strong profit growth on increased revenue with excellent project execution in most areas.

The performance of Construction and Engineering: South Africa and Rest of Africa improved in the second half of the financial year despite the impact of the tough external environment. Revenue was up 15% to R8.5 billion due to a combination of work on two renewable energy contracts, the ramp up of the Nacala and Majuba Rail projects, as well as the commencement of the Mall of the South in Alberton, Johannesburg and the Sasol Head Office in the Sandton CBD. Continued labour disruptions (R97 million), insufficient margins on legacy contracts, rain related delays on the Mokolo Crocodile Pipeline contract, still-high overhead costs and delays in the resolution of claims resulted in a net operating loss of R566 million.

Aveng Mining earnings reduced as the downturn in the commodities market contributed to the completion and non-renewal of three gold mining contracts in Ghana, Guinea and Tanzania during the second half of the financial year and the cancellation of the Lumwana copper contract in Zambia in 2013. The business, however, maintains a diversified client, commodities and country portfolio and has been awarded new, profitable contracts. This has resulted in a strong performance despite the reduction in revenue. The operating segment’s order book growth of 21% reflects a positive outlook.

Apart from those operations with exposure to the platinum industry and its related industrial action, the Aveng Manufacturing businesses had a strong year. In particular, the Infraset and Lennings Rail Services businesses performed well by taking advantage of transport-related opportunities in both sub-Saharan Africa and South Africa. In this regard, Aveng Manufacturing’s railway sleeper and concrete products manufacturing facility in Tete, Mozambique, was fully commissioned during the year.

Aveng Steel operated in extremely challenging market conditions during the year under review as lower demand from the construction industry in a generally weak economy was compounded by industrial action in the automotive, construction and mining sectors. This was further exacerbated by high levels of competition and overstocking in the steel industry. However, the Group is pleased to report that both Steeledale and Aveng Steel Fabrication reversed their combined R200 million loss positions from FY2013 to profitability, buffering Aveng Trident Steel’s performance.

Order book and prospects

The Group’s two-year order book increased to R40.9 billion for the year ended 30t June 2014, an increase of 11% compared with R36.7 billion reported at December 2013. The bulk of the order book exists within McConnell Dowell (59%) as it diversifies into more non-mining related sectors. The Construction and Engineering Business: South Africa and the Rest of Africa, has increased the contribution of its work outside South Africa to 9%.

Kobus Verster concluded, “We continue to implement actions that will see Aveng well positioned to benefit from improved operating conditions. With a strong order book and the underperforming contracts largely completed, we expect an improvement in performance in the short term”

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