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Aveng seeking to navigate through weak infrastructure, commodities cycle

27th February 2015

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Construction and engineering group Aveng is faced with weak markets almost everywhere it turns, says CEO Kobus Verster.

Continued softness in the local construction sector has made it particularly difficult for the still-struggling Grinaker-LTA to regain its footing.

Aveng earlier this month reported a 19% drop in net operating earnings, to R413-million, for the six months ended December 2014, compared with the same period last year. Revenue was down 14% to R23.9-billion.

Aveng’s South African and rest-of-Africa construction and engineering business, which housed Grinaker-LTA, saw a net operating loss of R229-million for the six-month period.

This restructured division reported a R434-million loss in the full 2014 financial year.

Verster says low national infrastructure spend in South Africa, coupled with overcapacity in the construction market and low margins, has made it difficult for Grinaker-LTA to execute its long-standing turnaround strategy.

Grinaker-LTA showed a R298-million loss for the six-month period, marginally down from a R335-million loss in the first half of the 2014 financial year.

Verster believes the restructured business can break even in the next 18 months as it is finally emerging from a series of challenging contracts, while staff turnover has settled down and the company’s new management have been firmly embedded in their positions.

During the six months under review, the South African and rest-of-Africa construction and engineering business suffered losses on the problematic Mokolo Crocodile Pipeline contract, as well as on the Grootegeluk Cycle Pond contract.

Some good news is that the business’s two-year order book has reached R8-billion, compared with R7.4-billion at the end of the 2014 financial year. Sixty-three per cent of work is in the private sector.

Promising work outside South Africa includes three potential private-sector projects in Tanzania, Rwanda and Ethiopia.

Aveng’s Australasia and Asia construction and engineering business saw net operating earnings drop to R183-million at the end of December, down from R191-million for the comparable six months in 2013.

The most alarming number, however, has been the drop in the two-year order book, from R20.4-billion in the 2014 financial year to the current R13.5-billion.

Aveng is working to diversify into noncommodity-related infrastructure, while also securing increased contributions from outside Australia, such as New Zealand and South-East Asia, as the Australian mining, oil and gas markets continue to weaken, says Verster.

The Australasia and Asian business also remains tied up in long-standing commercial claims the company has lodged on the Queensland Curtis Liquefied Natural Gas (QCLNG) pipeline and facilities project, in which it is a 50% joint venture (JV) partner, as well as on the Gold Coast Rapid Transport (GCRT) project.

The arbitration process timeline on the QCLNG project has been set, with the discovery process in place. However, the GCRT project has not yet entered into arbitration, with Aveng still “developing and putting in its claims”, says Verster.

He expects both processes to be fairly protracted, involving a substantial amount of money.

Aveng Mining saw net operating earnings for the six months under review drop to R241-million, down from R295-million in the comparable period in 2013, owing to margin slippage, labour disruptions and low activity in the marketplace.

However, the business’s order book has increased by 20% from June 2014 to R10.3-billion.

Verster says there is pressure on mining companies to reduce mining costs, with projects being downscaled and delayed as the commodities cycle softens, with no short-term respite in sight.

He says Aveng has a strong focus on regaining mining work outside South Africa, with only 22% of the current order book outside South Africa, down from 47% in December 2013.

Aveng Manufacturing & Processing had a poor six months, reporting a 51% decline in net operating earnings to R79-million.

The company was impacted on by a four-week strike, as well as weak steel demand and pricing pressures.

Verster says the steel business is limited to the local economy and its static demand, and the focus will, therefore, be on rationalisation.

However, Aveng’s other manufacturing businesses, such as railway sleeper production, can expand into Africa.

Aveng’s total two-year order book stood at R32.5-billion at the end of December 31, down from R37.1-billion in June 2014.

Fifty-three per cent of work is in South Africa and other rand monetary areas, compared with 37% at the end of 2013.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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