Aveng confirms big job cuts as it reports R578m loss

Tuesday 18th August, 2015

Aveng chairperson Mahomed Seedat on Tuesday opened the Aveng results presentation in Johannesburg by noting that the board was “very disappointed” with the “less than satisfying results” delivered by the construction group for the year ended June 30.

He said the board was determined to turn the company around, noting a number of steps to resuscitate the group, such as stabilising the management team, implementing a rigorous risk management philosophy and ensuring the board increasingly challenged management decisions. 

The JSE-listed group suffered a headline loss of R578-million, or a loss of 144.3c a share, for the year ended June 30, which represented a sharp deterioration from the R421-million headline profit reported in 2014.

Aveng also reported a net operating loss of R288-million, compared with operating earnings of R799-million in the previous financial year.

Revenue declined by 17%, to R43.9-billion, while its two-year order book fell by 22% to R28.9-billion.

Delays in resolving long-standing problem contracts, losses in the steel and engineering businesses, restructuring costs and a substantial provision (R583-million) for commercial claims under negotiation within Grinaker-LTA, all aided in pushing the JSE-listed group into the red, said Aveng Group CEO Kobus Verster.

The company was also faced with a general slowdown in all of its markets, he added.

Grinaker-LTA raked in yet another loss for the year, at around R500-million.

Grinaker-LTA in the 2012 financial year recorded a R790-million loss, which included a R200-million provision for the Competition Commission investigation into collusion in the South African construction industry. In 2013, the loss widened to R950-million.

Aveng’s South Africa and rest of Africa construction and engineering business, which housed Grinaker-LTA, reported a loss of R566-million for the 2014 financial year.

The aim of the current restructuring programme within Grinaker-LTA was for the business “not to be a big construction business, but rather a profitable one”, noted Verster.

He was confident Grinaker-LTA could reach break-even in the 2016 financial year, supported by interventions such as improved risk management, the managed completion of problem contracts, the appointment of experienced project managers and enhanced estimating capabilities.

However, this timeline could be disrupted should the company not secure and execute some new work by the end of the year. This might also see the company again resize to adjust to a new revenue level.

In order to survive, Aveng had to size itself according to market demand, said Verster.

“It is easier to upscale a well-performing business than to downscale a poor-performing business.”

Grinaker-LTA, as well as Aveng’s steel, Australian and mining businesses had shed around 6 000 jobs in the year ended June 30, in roughly four equal measures, with 885 of this number permanent staff.

Verster said this was due to the cyclical nature of the construction business, as well as a subdued economic environment where large, labour-intensive projects were being replaced by a pipeline of smaller projects.

He expected the South African construction market to remain subdued in the short to medium term, with limited evidence of the large infrastructure projects promised by government.

The two-year order book for the construction and engineering business in South Africa and rest of Africa stood at R7.4-billion for the year ended June 30, virtually unchanged from the previous year.

The Australasia and Asia construction and engineering business saw a sharp decline in its order book, from R30-billion in 2014, to R11.6-billion at the end of June, owing to declining investment in this part of the world.

Aveng was also no longer interested in public-private partnerships (PPPs) in this region, as with the problematic Gold Coast Rapid Transit Project, in Australia, as they were costly to tender and high risk in nature, said Verster.

Aveng would, however, still tender on South African PPPs, which had a “lower risk profile”.

Aveng Mining faced a tough commodities market, with its two-year order book declining to R7.9-billion, down from R8.6-billion in the previous year.

The mining industry would remain constrained in the medium term, commented Verster.

Aveng’s Manufacturing and Process business delivered “solid results”, he added. However, Aveng was currently “looking at its options” regarding Aveng Steel.

Verster expected the steel industry “to remain difficult in the medium term, with limited improvement in prices and volume projected in the current economic climate”.

As part of the company’s recovery strategy, Aveng has also closed its Engineering and Projects Company (E+PC).

Delivering an E+PC type project required an appetite for risk that Aveng would rather assign to competent companies within South Africa, through the formation of joint ventures, said Verster.

Looking at the year ahead, Verster was positive that Aveng’s stabilisation and recovery strategy would yield results, “resulting in a strong improvement in the group’s operational performance in the 2016 financial year”.  

Engineering News

Edited by: Creamer Media Reporter