Problem contracts, labour unrest take toll on Aveng

25th February 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Grinaker-LTA remained a persistent thorn in Aveng’s side for the six months ended December 31, while several claims on large projects also piled on the pressure.

Aveng CEO Kobus Verster said on Tuesday that revenue for the construction and engineering group increased 11%, to R27.65-billion, for the six months compared with the same period in the previous financial year, while net operating earnings declined by 8%, to R503-million.

The two-year order book at the end of December 2013 reached R36.7-billion, down slightly from the R39.7-billion recorded in December 2012. Half of the order book was to be executed in Australia and the Pacific, and 63% outside South African rand countries. Fifteen per cent was in the public sector, and 53% in general infrastructure.

Aveng also saw a 28% decline in its net cash position, to R2.36-billion.

The construction and engineering South Africa and Africa business, which included the struggling Grinaker-LTA, recorded 11% growth in revenue for the six-month period, to R4.15-billion, but saw an operating loss of R334-million, up from the R70-million loss reported in the first half of the previous financial year.

Former Aveng FD and now CEO, Verster said this fresh loss flowed from legacy contracts that were being executed at low to zero margins, high fixed costs, delays in the resolutions of claims, and labour disruptions which had had a direct cost impact of R96-million on Grinaker-LTA.

The total direct cost of labour disruptions on Aveng’s net operating earnings reached R140-million for the six months, compared with the previous period’s R115-million.

Large projects in the Grinaker-LTA portfolio included work for energy provider Eskom, the Nacala rail contract, in Mozambique, as well as the Majuba rail and Mokolo Crocodile pipeline projects.

The Majuba rail project had been affected by poor weather and labour disruptions, while the Nacala project was behind schedule.

Verster said Aveng had “advanced in the stabilisation of the business”, with Grinaker-LTA expected to break even in the next financial year.

“We still have a long way to go to return to sustainable profitability,” he added.

The turnaround was expected to happen on the back of, among others, strengthened management at the Grinaker-LTA, a fixed-cost reduction programme and improved project execution.

In Australia, Aveng had commercial claims outstanding on the Queensland Curtis Liquefied Natural Gas (QCLNG) pipeline and facilities project, in which it was a 50% joint venture (JV) partner.

Judgment in the first arbitration round handed down in December went against the JV, with Aveng seeking to appeal this ruling.

The second, higher-value round of the commercial claims was, however, still unresolved and outstanding.

The Gold Coast Rapid Transport (GCRT) project is a 13 km, light-rail corridor under development in Australia. Here Aveng faced services and access delays.

The company had “significant claims” around this project, said Verster.

He did not want to disclose the value of any of the outstanding claims within Aveng, as it would “not improve our position when negotiating” a solution. However, he noted that a large portion of the claims involved the GCRT and QCLNG projects.

He said these claims “were receiving intense management attention”.

Verster emphasised that past claims in Australia had been settled soon after the conclusion of the projects and “on an amicable basis”.

He added that “a portion” of the claims would have to be settled for Aveng to wrap up the problem projects “in a neutral position”.

Looking ahead, he said softness in the Australian market might see revenue decrease here in the short term.

Aveng earned R15-billion of its revenue in the six-month period in Australasia and Asia, and R191-million of its operating earnings.

In the local market the building market featured strongly in Aveng’s order book, but there was “a lack of real chunky civil engineering projects”.

“We would like to see an acceleration of real projects coming to the market,” said Verster.

Edited by Creamer Media Reporter

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