Aveng : full year results

Turnaround efforts overshadowed by weak macroeconomic conditions

Key features
• All Injury Frequency Rate improved to 3,5 compared to 3,8 at 30 June 2014
• Revenue decreased by 17% to R43,9 billion (2014: R53,0 billion)
• Net operating earnings decreased to a loss of R288 million (2014: R799 million profit)
• Headline earnings per share decreased to a loss of 144,3c (2014: 112,5c profit)
• Sale of Electrix business was successfully completed resulting in a R777 million profit
• Successfully placed R2 billion senior unsecured convertible bonds
• Net cash of R0,4 billion from R1,3 billion in June 2014
• Property deal is substantially concluded

Commenting on the results Aveng Group CEO, Kobus Verster said:

"While Aveng has made inroads in delivering on our strategy, improved operational performance was overshadowed by the economic slowdown in our key markets. Delays in resolving historical problematic contracts, losses in the steel and engineering businesses, restructuring costs and a substantial provision for an unresolved claim also impacted performance."

Noting the Group's actions to addressing key issues, Verster stated: "Decisive steps were taken during the year to strengthen the group's financial position and our leadership capacity, thereby addressing areas of underperformance in the operations. These interventions have delivered positive outcomes."

Challenging Operating Environment
Aveng was impacted by the lack of material improvement in domestic infrastructure investment in both the public and privates sectors in South Africa. This was aggravated by reduced mining activities and labour disruptions, specifically in the construction, steel and mining sectors. The steel business was adversely affected by labour disruption and weak margins due to low demand and increased price competition. Conversely, the building industry remained relatively strong, with a number of large projects underway.

In the Australian market, trading conditions remained difficult, with a fall in all categories of infrastructure development except for residential building. Delays or cancellation in tenders impeded anticipated growth in social and transport-related infrastructure projects. Notwithstanding efforts made by McConnell Dowell to increase social and infrastructure-related projects these are not yet compensating for the reduced mining infrastructure spend and the decline in liquid natural gas projects.

Traction gained on strategy delivery
Aveng's recovery and stabilisation plan, which is focussed on restoring liquidity, reducing fixed overhead costs and improving areas of underperformance, while optimising the group for future profitability continues to progress well.

Specific to liquidity, initiatives implemented during the financial year include the successful issuance of R2 billion convertible bond and the sale of the Electrix business. Regulatory approval was recently granted by the Competition Tribunal for the disposal of the majority of the group's South African property portfolio, which is anticipated to be completed before the end of the first quarter of the 2016 financial year.

Operationally, the group has ensured that its fixed cost base is aligned to current and foreseeable future market conditions. Accordingly an increased effort was placed on restructuring and cost savings initiatives throughout the business. Aveng Moolmans and Aveng Shafts & Underground were fully integrated during the year to create Aveng Mining, a single sizeable entity operating under a common management team with shared support services, to enable the operating segment to remain competitive in a weak commodity market. Similarly the steel businesses were also integrated under Aveng Steel.

There has been an added focus on strengthening leadership, as well as attracting and retaining project management and commercial skills to address the major reasons for contract underperformance, particularly in the South African and rest of Africa construction business. These interventions, together with improved risk management processes have delivered positive outcomes, the full effect of which will contribute to the financial performance improvement in 2016.

More detail on the financial performance
The 17% decline in revenue was primarily due to the completion of multi-year major mining and infrastructure projects in Australia and Asia, as well as labour disruptions in the South African mining and steel sectors; reduced demand and pricing pressure on the back of lower international prices in the steel sector; and non-renewal of three gold-mining contracts with lower production on other contracts.

The weaker Australian construction market meant that a large number of major contracts are close to completion without having been replaced. Financial performance was impacted by higher tendering in an increasingly competitive market.

Substantial provisions (of R586 million) were raised during the financial year. These relate to long-standing commercial claims that are under negotiation in Aveng Grinaker-LTA as the claims did not achieve sufficient progress by year end. While the Group remains confident of an acceptable commercial outcome, a prudent approach was taken to de-risk the South African construction operations. Earnings were further impacted by a number of contractual damages (also known as liquidated damages), cost overruns and penalties associated with legacy and large, technically-complex projects.

Solid progress on delivery of key projects
Aveng's poor performance was partially mitigated by solid results from Aveng Manufacturing. This was driven by strong demand for rail and related services in sub-Saharan Africa. Moolmans' solid performance further benefitted the group. As a consolidated business Aveng Mining is now able to market its scale and vast mining contracting capabilities more effectively, making it more competitive in a weak commodity market. Testament to this is the record production levels reached at Nkomati Nickel mine.
McConnell Dowell's non-Australian construction business' performance was also pleasing, with an acceptable margin due to excellent project execution in notably the Middle Eastern projects. The Waterview project, the largest infrastructure development project ever undertaken in New Zealand, is on schedule for completion in late 2016. McConnell Dowell also continues to lead in providing world-class marine infrastructure, with a new Webb Dock West terminal underway in Melbourne and Roy Hill in Western Australia on track for completion.

In Southern Africa, the Nacala section 2 rail link was completed and work continues on the Majuba rail link. Good progress continues to be made on commercial challenges surrounding Eskom related projects. The Mokolo pipeline, which has been a significant contributor to Aveng Grinaker-LTA's losses over the past two years, is substantially complete.

Mall of the South in Johannesburg is nearing completion. Other notable projects which are progressing according to plan include the Sasol head office in Sandton, the Dr Pixley Ka Isaka Seme Memorial Hospital in KwaZulu Natal, the Cape Town International Convention Centre, Aspen's manufacturing facilities in Port Elizabeth, the Old Mutual Stella Road development, the Trompsburg roads project and the ABSA Samrand data centre.

The Sishen solar energy facility in the Northern Cape was successfully completed and exceeded its power generation performance. This 74 MW project has been contributing to South Africa's energy needs since December 2014. Although the Gouda wind farm in the Western Cape achieved its scheduled physical completion date, the unexpected low wind pattern for the specific period in the year caused a significant delay to the testing and technical compliance (sign-off) of the plant

Outlook
Verster concludes: "We do not foresee an improvement in most of the markets in which we operate in the short-term. Given this outlook and our strategy we continue to focus on the stabilisation and recovery of the business, intensifying our claims recovery process and improving project delivery. These initiatives, together with yet to be realised structural improvement benefits, should result in a strong improvement in the Group's operational performance in the 2016 financial year."

There are attractive opportunities in Australia, New Zealand and Southeast Asia in particular. Although substantially lower revenue is expected for the construction business, the Group anticipates improved profitability. The Mining and Steel businesses will remain constrained by a challenging operating environment. Manufacturing will continue to focus on growth opportunities and improved financial performance.

The group continues to intensify efforts to increase its presence in the growth markets of Southeast Asia (road and rail transport infrastructure), the Middle East (oil & gas, petrochemical and water) and the rest of Africa (mining and transport infrastructure).

Aveng's two-year order book (excluding Electrix) reduced by 11% to R28,9 billion in the six month period to 30 June 2015 and 22% since 30 June 2014 (R37,1 billion).

ENDS