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Weak markets, problem contracts take toll on Aveng

Kobus Verster

Kobus Verster

17th February 2015

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Construction and engineering group Aveng was faced with weak markets almost everywhere it turned, said CEO Kobus Verster on Tuesday.

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

Aveng on Tuesday 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 said low national infrastructure spend in South Africa, coupled with overcapacity in the construction market and low margins, 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 believed the restructured business could break even in the next 18 months as it was finally emerging from a series of challenging contracts, while staff turnover had settled down, and the company’s new management had 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 was that the business’ two-year order book had reached R8-billion, compared with R7.4-billion at the end of the 2014 financial year.

Sixty-three per cent of work was in the private sector.

Promising work outside South Africa included 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.

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

Aveng was 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 continued to weaken, said Verster.

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

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

He expected both processes to be fairly protracted, involving a large quantum 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, owing to margin slippage, labour disruptions and low activity in the marketplace.

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

Verster said there was pressure on mining companies to reduce mining costs, with projects being downscaled and delayed as the commodity cycle softened, with no short-term respite in sight.

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

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

Verster said the steel business was limited to the local economy and its static demand, and the focus would, therefore, be on rationalisation.

However, Aveng’s other manufacturing businesses, such as railway sleeper production, could 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 was in South Africa and other rand-monetary areas, compared with 37% at the end of 2013.

 

Edited by Creamer Media Reporter

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