South African construction and engineering group Aveng expects to conclude an empowerment transaction within months to further transform its Aveng Grinaker-LTA business, which is on the cusp of moving into the black for the first time since 2011.

CEO Kobus Verster believes the transaction to be necessary to improve the competitive position of a unit that has already undergone far-reaching restructuring in a bid to return it to profitability.

Aveng Grinaker-LTA reported a 21% fall in revenue to R7.3-billion in the year to June 30, 2016, but a far smaller operating loss of R69-million when compared with the R575-million loss of 2015. Verster even expressed optimism that the company could return to profitability during the 2017 financial year.

However, its two-year order book contracted 11% to R6.5-billion, with its civil engineering and mechanical and electrical businesses having surplus capacity, with building comprising more than half of the unit’s backlog.

“For Grinaker-LTA to grow and to be relevant in the South African context in future, it needs to substantially transform, not only from an equity perspective, but also from a look-and-feel perspective,” Verster argues, reporting that Aveng is “quite advanced with discussions on a potential transaction”.

“We are not at the point where we can disclose anything. But we see Grinaker-LTA, in the correct transformation configuration, to be in a position to actually grow as an organisation, whereas in the current configuration it would probably be flattish, if not shrinking.”

The transaction was not driven by Construction Charter or Broad-Based Black Economic Empowerment (BBBEE) Code imperatives, with Aveng already meeting charter and BBBEE thresholds, with a Level 2 rating.

“It’s not for ticking any of the scorecards. We want to change the commercial [value proposition] and the way we conduct ourselves as a group.”

The deal, which is “months not years” away, is likely to include a strategic equity partner, as well as management and other stakeholders.

The Aveng Grinaker-LTA ‘transformational’ transaction is also but one component of a broader clean-up of Aveng, which claims to have completed the recovery and stabilisation phase of a three-stage turnaround.

During this phase, which endured from 2014 to 2016, the group has closed, downsized and disposed of various businesses, having recently announced an R860-million deal to sell four infrastructure investments to Royal Bafokeng Holdings, as well as the R252-million disposal of 70% of Steeledale to the Kutana group of companies.

Verster reports that its still intends exiting Trident Steel, but that it is not a desperate seller and is willing to consider various options to ensure it realises value from the disposal.

He reports that it has already reduced the cost base by over 30% at Trident, but the weak demand outlook will continue to weigh down its ability to deliver “decent returns” in the absence of consolidation in the downstream steel industry.

“Out strategic direction is quite clear: we want to exit steel. But to get real value through an outright disposal in a market that is in over-capacity is difficult,” Verster says, indicating that it is possible that Aveng will enter into a consolidation transaction that dilutes its overall interest in a larger asset base.

Overall, the bigger group, which also has interests in Australia, moved from a net operating loss of R288-million in 2015 to an operating profit of R146-million in 2016, despite a 23% decline in revenue to R33.8-billion. Nevertheless, it still reported a headline loss of 75c a share and no dividend was declared.