JSE-listed construction company Aveng on Wednesday reported solid revenue growth for the six months ended December 31, 2008, but warned that the second half of the financial year would be tougher, especially for its manufacturing and processing division, consisting of Trident Steel and Aveng Manufacturing.
This division faced a very different market when compared with the same time last year, when steel had been in short supply, driven by high demand, and steel prices had been rising sharply.
Aveng CEO Roger Jardine said the recent decline in global steel prices had been much steeper than expected, ranging from 30% to 35% on different products. Demand for steel had also slowed from the high levels experienced in the first half of 2008, especially in the embattled motor industry.
“We are exposed to the steel market, especially given the steel prices seen over the last few months,” said Jardine.
“The way things are moving at the current rate, the outlook for steel is not good for the next two to three years – but really, nobody knows exactly what will happen.”
Consequently, the operating performance of Aveng's manufacturing and processing division was expected to be under pressure, with the group not expecting overall headline earnings for the second half of the 2008 financial year to match the previous year's earnings.
The manufacturing and processing division delivered revenue growth of 29% to almost R5-billion for the six months ended December 31, 2008.
The group's construction and engineering division, comprising Grinaker-LTA, E+PC and McConnell Dowell, lifted revenue by 30% to R11,5-billion.
Open-cast mining, comprising Moolmans, delivered revenue of R1,3-billion, representing 26% growth.
However, a slowdown in the commodities market had seen the retrenchment of 422 salaried staff over the six-month period, added Jardine.
He said that the group was currently not considering further retrenchments.
Jardine expected Aveng's construction and engineering segment, as well as the open-cast mining operations, to continue achieving operating results in line with current levels of performance.
In total, Aveng's revenue increased by 30% to R17,8-billion, with operating profit, before nontrading items, continuing its upward trend with growth of 36%, reaching R967-million for the six-month period.
The group reported net closing cash of R6,1-billion, after some R4-billion was returned to shareholders.
Aveng said it had a two-year order book of R29,2-billion, which represented an increase of 13,2% from the June 2008 level of R25,8-billion.
Jardine said the group had R4,2-billion worth of contracts cancelled over the last few months, mostly in the struggling commodities market in Southern Africa and Australia, but that this had already been reflected in the order book.
He noted that while the tightening global economic environment had affected its target markets, “the group’s diversified capability across the construction and engineering sector has muted the effects of slower demand”.
He added that “the South African government recently renewed its commitment to upgrading all aspects of the national infrastructure, increasing its three-year investment budget to R787-billion.
“Similarly, in Australia, the government allocated R518-billion to infrastructure investments including funds for road, rail and ports in October 2008.
“Aveng continues to benefit from the backlog in infrastructure projects, including coal-fired power stations, roads and dams.”
Jardine said that it appeared to be a common thread among many governments to consider infrastructure expansion as a “leading measure” to stem the economic slowdown.
“This is certainly the case in South Africa and Australia.”