Aveng turnaround starting to show results

Tuesday 23rd August, 2016

AVENG FULL YEAR RESULTS FOR THE YEAR ENDED 30 JUNE 2016
AVENG TURNAROUND STARTING TO SHOW RESULTS

SALIENT FEATURES

• Strong improvement in safety performance
• Revenue declined by 23% to R33,8 billion (2015: R43,9 billion)
• Net operating earnings improved to a profit of R146 million (2015: loss of R288 million) with an improved gross margin
• Overheads reset for lower activity levels
• Headline loss per share improved by 48% to a loss of 75 cents per share
• Substantial improvement in the performance of Aveng Grinaker-LTA, with strong cash generation
• Sale of property portfolio, infrastructure investments and Aveng Steeledale business concluded

Johannesburg, 23 August 2016: Commenting on the results, Aveng Chief Executive Officer, Kobus Verster, said: “Aveng has made significant progress in restructuring its business, nearly halving last year’s headline loss. Furthermore as a result of strategic interventions, Aveng is emerging as a more focused business, well positioned for improved performance in what we believe will still be difficult trading conditions in the short term.”

Operating environment

During the last 12 months Aveng was impacted by slow revenue growth in the construction industries in both South Africa and Australia, which is in line with the lower economic growth in both markets.

Kobus Verster commented: “While the South African construction industry remains influenced by continued low levels of public sector expenditure on major projects as well as the impact of the depressed mining and steel markets, we do see growth opportunities in the Australian market in the medium term.”

The reduced investment environment in Australia, following the end of the decade long resources boom, was only partially offset by increases in government expenditure in transport and water infrastructure, leading to an overall construction market decline. The New Zealand construction market has remained steady, with road, public transportation and water project opportunities.

The mining industry globally is under considerable pressure, which has resulted in numerous mining contract cancellations, scope reductions and client requests for price discounts as clients seek to maintain increasingly marginal mines. This decline appears to have stabilised over the last quarter. The South African domestic steel market was adversely impacted by lower priced imports from China, coupled with poor domestic demand and excess global capacity.

Strategy delivery

Aveng continues to execute it strategy in three distinct phases. The initial ‘recovery and stabilise’ phase is mostly complete.

The performance of Aveng Grinaker-LTA has improved in a number of areas. Loss making contracts have been resolved and the ratio of projects executed at or better than tender margins has substantially improved, resulting in an 88% reduction in the loss to R69 million. The Aveng Shafts & Underground business has been successfully integrated with Aveng Moolmans and has returned to profitability.

The quality of the order book improved across the Group. Despite difficult market conditions McConnell Dowell increased its order book by 22% to AUD1,5 billion, benefiting from several large awards in Australia, Southeast Asia and New Zealand in the last six months.

Cash flow generation improved in the South African operations. Aveng has successfully reduced its fixed cost base across the Group and ensured that it is aligned to current and foreseeable future market conditions. Further to this, negative working capital at McConnell Dowell is expected to reverse in 2017 as the benefits of the comprehensive resetting of its business under new leadership take effect.

The claims settlement process on QCLNG is expected to be concluded in 2017 and Gold Coast in 2018.

During the year, Aveng has concluded two of its strategic initiatives, being the sale of its four infrastructure investments to Royal Bafokeng Holdings (Pty) for a cash consideration of
R860 million; and the sale of 70% of its share in Aveng Steeledale to the Kutana group of companies for approximately R252 million.

The Group sold its property portfolio in October 2015, which further contributed to Aveng’s positive cash flow during this period.

Detail on the financial performance

The Group’s improved net operating earnings are as a result of an improved financial performance from  Aveng Grinaker-LTA on the completion of loss-making contracts; an improvement in the ratio of contracts operating at or better than tendered margins; strong performance in the Building business; the resolution of some major commercial claims and a further reduction in fixed operating expenses; various cost saving initiatives implemented throughout the Group; an improved financial performance at Aveng Steel in the second half of the year; and fair value gains on the infrastructure investments.  

The 23% decline in Aveng’s revenue was primarily due to continued difficult trading conditions in most of the markets in which it operates, most notably Australia, as well as contract cancellations and scope reductions in the Mining business and reduced steel volumes.
The Group’s gross margin improved to a credible 7,4% compared to 5,4% in the previous year, with significantly more contracts meeting their tendered margins.

Aveng achieved strong cash generation in the South African operations, while McConnell Dowell’s operating free cash flow was impacted by cash consumptive projects.

Delivery of key projects

In South Africa, the Mall of the South was successfully completed and the Majuba rail link is in its final stages of construction. A number of high rise projects in Sandton and the Hilton Hotel in Swaziland commenced during this period. Higher revenues were achieved on the power projects compared to 2015, as a result of acceleration measures taken in order to meet the utility’s revised milestone dates.

Other notable contracts which are progressing according to plan include the Dr Pixley Ka Isaka Seme Memorial Hospital in KwaZulu-Natal, the 129 Rivonia Road project in Sandton, and the Cape Town International Convention Centre extension.

McConnell Dowell’s Australia-based projects, including the Webb Dock, Brisbane City Council Ferries and Boardwalk, are progressing well. Southeast Asia’s operations continued to perform strongly in all major regions. Recent project awards in Singapore, Malaysia and Thailand have contributed to an improved order book. The Waterview project, the largest infrastructure development project ever undertaken in New Zealand, is close to completion, while the Tonga and Tuvalu runway projects in the Pacific were completed.

Aveng Shaft & Underground’s Chuquicamata contract in Chile has progressed well with claims being resolved and the shaft bottom reached in July 2016. The project is on schedule for completion in late 2016. 

Outlook

Verster concluded: “Challenging economic conditions are expected to continue in the short term, although with more positive medium term opportunities in Australia. We are starting to see the positive effects of substantial interventions implemented over the past two years and this should result in a strong improvement in Aveng’s operational performance in the 2017 financial year.”

The Group continues to investigate and pursue transformational options for Aveng Grinaker-LTA. The divestment of Aveng Trident Steel remains an objective, however the achievement of acceptable value under current market conditions is likely to be challenging.

Aveng’s two-year order book amounted to R28,2 billion at 30 June 2016, remaining relatively unchanged from the R28,9 billion reported a year before. This includes a 42% or R4.9 billion (22% in AUD dollars), increase in McConnell Dowell‘s book as a result of its increased success rates in the second half of this year and the weakening of the Rand.