Restructuring yielding results - 2016-02-23

AVENG RESTRUCTURING YIELDING RESULTS IN TOUGH MARKET

Salient features

  • Strong improvement in the safety performance
  • Revenue declined by 25% to R18,0 billion (2014: R23,9 billion)
  • Headline loss of R231 million (2014: Headline earnings of R138 million)
  • Property transaction concluded in September 2015, offset by the settlement of the QCLNG advance
  • Aveng Grinaker-LTA advances towards break-even with strong cash generation
  • Continuous focused restructuring is yielding results
  • Net cash of R331 million compared to R393 million in June 2015
  • Strategic measures
    • Aveng Steel divestment
    • Aveng Capital Partners monetisation
    • Aveng Grinaker-LTA empowerment

Johannesburg, 23 February 2016: The continued global economic slowdown and consequent reduced demand for infrastructure projects, a generally weak local trading environment for steel and cost pressures in the mining sector, led to Aveng today reporting a headline loss of R231 million or 58,0 cents per share for the six months ended 31 December 2015.

This was a substantial improvement against the R716 million or 178,8 cents headline loss per share in the second half of last year, but remains a significant deterioration relative to a headline profit of R138 million or 34,5 cents per share for the comparative period.

The loss was partially mitigated through the substantially improved performance by Aveng Grinaker-LTA, the solid underlying results from Aveng Mining and Aveng Manufacturing, albeit at lower volumes, as well as successful cost saving initiatives. The conclusion the South African property transaction contributed R577 million to basic earnings.

Aveng chief executive officer, Kobus Verster, commented: “While weak economic conditions globally have created challenging operating conditions for infrastructure companies generally, we are heartened by the strong progress we have made with our strategic initiatives to stabilise our operations and position them better for improved financial performance. Comparing all our businesses between this first half of the current financial year, and the immediately preceding six-month period, shows that our various initiatives are starting to take effect.  We are especially pleased with the turnaround in the performance of Aveng Grinaker-LTA and our improved liquidity position. Our intention is to continue our cost management and efficiency focus for all divisions.  We have also announced today that we will be implementing three notable strategic actions that will be value enhancing for shareholders.”   

Aveng continues to see strong year-on-year improvement in its safety performance, with the All Injury Frequency Rate (AIFR) improving to 2,8 in the current period. Safety remains a core value of Aveng and is integral to the way the company conducts its business.

Aveng’s initial ‘recover and stabilise’ phase of its three-pronged strategy to generate growth and enhance profitability is well advanced. This is evidenced by the improved performance at Aveng Grinaker-LTA, the overall fixed cost reduction programme across the Group, improved liquidity and cash generation in the South African operations and better project execution. While McConnell Dowell made good progress in finalising various large projects, the financial performance of this operating group remains disappointing and is receiving ongoing attention.

The key issues on which Aveng has made considerable progress in the current period are:

  • The operational turnaround at Aveng Grinaker-LTA.  Loss-making contracts have been closed out, overheads reduced and the ratio of projects executed at or better than tender margin has substantially improved. Strong cash generation in the period has been supplemented by the resolution of various claims and receivables, which was delivered as a result of a stable management team and considerable improvements in the core skills base. Aveng Engineering was restructured, with all but two loss-making contracts now completed.
  • Liquidity has been strengthened.  The Group ended the first half of the current financial year with net cash of R331 million following the repayment of the Queensland Curtis Liquid Natural Gas (QCLNG) advance, the successful conclusion of the property sale, strong operational cash generation from all South African operations and a cash utilisation by McConnell Dowell. During the period, several cash consumptive projects were completed. The Group is now well placed to manage through what is likely to remain a difficult trading environment. The Group’s cash, after deducting short term liquidity requirements, combined with available facilities results in free liquidity headroom of R2.5bn.
  • Substantially reduced claims.  Total amounts due from contract customers have reduced by R1,3 billion, excluding foreign exchange movements, due to an intensified focus on claims settlements in all business units combined with continuous collection of receivables. The arbitration process of the QCLNG project has now moved to the hearing stage and Aveng has been advised to expect the findings during September/October 2016. The claims relating to the Gold Coast Rapid Transit (GCRT) project were lodged during the period, but the process remains protracted with conclusion anticipated in late 2017. Excluding these two projects the Group has an uncertified claims position of R1.3 billion.

Despite the progress made in the implementation of this strategy and noticeable improvements in project performance and cost reductions, the Group is faced with continued weak markets and a poor share price performance. This has prompted a strategic review of the business in order to accelerate the unlocking of value for shareholders, which has resulted in Board approval to implement a divestment of Aveng’s steel business, the monetisation of Aveng Capital Partners and the empowerment of Aveng Grinaker-LTA.

It was previously announced that the steel business is being reviewed and Aveng has received various non-binding offers from numerous parties, to acquire or partner with Aveng, for both the entire operating group and for certain of its business units.   While discussions are ongoing, there can be no certainty that these discussions will result in a transaction.  Aveng will make further announcements, if and when appropriate.  It is important to note that the disinvestment decision is based on longer-term strategic objectives. In the near term, the outlook for the steel business is improving and given our liquidity position, we are comfortable that any disposal will therefore only occur at acceptable value.
The turnaround process of Aveng Grinaker-LTA has reached a stage where consideration can be given to positioning the business for future improvement in financial performance in terms of Aveng’s existing strategy. The Board has concluded that it is imperative to introduce a B-BBEE partner, or partners, who will hold a significant equity interest in the business, in order to remain relevant to a transforming South African economy. Advisors have been appointed to assist Aveng in this process and stakeholders will be updated as this transaction progresses.

Consistent with the strategy of recycling the capital invested within the portfolio of Aveng Capital Partners once the underlying projects have reached an appropriate level of maturity, the Board has approved the monetisation of the existing portfolio.  Assets currently under management will be disposed in the market or seeded into a fund. An independently obtained valuation indicates substantial cash value can be realised through such transactions.  

The Board is of the view that executing these transactions will support an improved return on invested capital in the medium term. Combined with the existing robust liquidity position, this will provide the Group with greater flexibility and optionality in its capital allocation.

Operational review

Revenue at Construction and Engineering: Australasia and Asia decreased by 40% to
AUD726 million and is reflective of the continued weakness in the Australian market, the completion of multi-year pipeline and infrastructure contracts and the sale of Electrix in the previous financial year. Cash flow is expected to remain negative for the next six months, but will be positively impacted by the resolution of claims.

Overseas operations in Singapore, Malaysia, Thailand, Indonesia, Philippines, Hong Kong, the Middle East and New Zealand performed strongly, with a 37% increase in revenue to R2,5 billion (AUD257 million) with good margins and positive cash flow.

Construction and Engineering: South Africa and rest of Africa experienced a 10% decline in revenue, primarily due to lower civil engineering and mechanical and electrical work. However, net operating losses for the segment of R125 million, were 45% lower than the losses of the comparable period, due to a substantial turnaround from Aveng Grinaker-LTA, which generated a loss of R48 million against a R299 million loss in the comparable period.

For Aveng Capital Partners, net operating earnings decreased by 94% to R6 million against the comparative period, primarily due to the majority of the renewable energy investments achieving marketable maturity in the prior period.

Mining reported consistent revenue of R3,0 billion against the comparative period, while net operating earnings decreased by 18% to R198 million, largely due to discounts awarded to clients operating in a difficult commodities environment. The division is working closely with clients to assist in reducing overall mining costs and to regain some of the margins lost due to discounts through various productivity improvement and cost efficiency initiatives. The mining industry continues to be under extreme pressure which is affecting the current contracts and the opportunities available to the business.  This impact is likely to be evident in the remaining six months of this financial year. 

Revenue in Manufacturing and Processing decreased by 17% to R4,4 billion and net operating earnings decreased significantly to a loss of R48 million. Aveng Steel was negatively impacted by weak demand, reduced international steel prices, increased competition from cheaper imports and significant restructuring costs to re-align the fixed cost base.  Despite lower gross profit margins, the operating group contributed strongly to positive cash flows. Despite tough market conditions Manufacturing continues to perform well, although the impact from the slowdown in the mining sector and lower sleeper volumes have negatively impacted its financial performance.


Two-year order book

The Group’s two-year order book of R29,3 billion, at 31 December 2015, remained relatively flat compared to the previous period. The slowing of McConnell Dowell’s traditional markets in Australia and ongoing weakness in the South African construction and mining sectors, has resulted in a trend towards lower margin projects. Aveng continues to intensify efforts to increase its presence in the growth markets of Southeast Asia (road and rail transport infrastructure) and the rest of Africa (mining and transport infrastructure). 

Recent significant project awards include the 129 Rivonia development in Sandton (situated on the site of the previous Village Walk), the first phase of the Leonardo Towers in Sandton and the Hilton Hotel in Swaziland. In Australia and Asia, recent awards include the Waitaki Bridges Replacement in New Zealand and the O-Bahn City Access in Adelaide, the Northern Gas Pipeline in the Northern Territory, the Barangaroo Ferry in New South Wales and the Refinery and Petrochemical integrated development steam cracker complex project in Malaysia. Mining contracts were also extended at Kolomela (Klipbankfontein) and Sadiola in Mali.

Outlook

Aveng is expecting the market to remain subdued in the short to medium term with limited evidence of large infrastructure contracts. There are attractive opportunities in Australia, New Zealand and Southeast Asia in particular. Key markets are expected to remain tough and management will continue to take the necessary actions to manage the business within the constraints of the current economy.
Aveng will continue to focus on cash generation, intensify cost savings efficiencies, and preserving the balance sheet for the remainder of the financial year.
Verster concluded: “We will focus on our existing strategic initiatives for the remainder of the financial year and give notable attention to the recently announced interventions at Aveng Steel, Aveng Grinaker-LTA and Aveng Capital Partners.”

Note for the editor

About Aveng
For more than 125 years, Aveng has evolved in character, capacity and reach and continues to make its mark across the globe. Its origins lie in modest construction projects but Aveng, a leader in infrastructure, now boasts expertise in steel, engineering, manufacturing, mining, concessions, public infrastructure and water treatment.

Aveng operates in a diverse range of sectoral and geographic markets. Our primary geographic markets are southern Africa and Australia and we leverage our presence in these markets to pursue growth opportunities in East Africa, Southeast Asia and the Middle East. The company employs some 20 000 people and has an annual turnover in excess of R40-billion.

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For further information contact:
Sorita van Tonder
Aveng Communication Manager
Tel: +27 11 779 2800
Mobile:  +27 72 372 9854
Email: soritavt@aveng.co.za

Issued by Aprio on behalf of Aveng:
Michelle Copans
Tel: +27 11 880 0038
Mobile: +27 82 743 9962
Email: michelle@aprio.co.za