Aveng CEO Sean Flanagan
JSE-listed Aveng remains on track to settle the remaining R353-million of its South African legacy debt this year, CEO Sean Flanagan said on February 21.
At its height in 2018, this debt amounted to R3.3-billion. During the six months to December 31, 2022, R125-million was repaid, reducing the debt from R478-million as at June 31 last year.
Flanagan said the objective of ensuring a sustainable capital structure was premised on the group settling the debt.
The remaining amount is expected to be paid off when Aveng finalises the disposal of its Trident Steel business, which is expected to be in June.
“The Triton Steel disposal is imminent and that will be a really significant moment in our lives, because it will allow us to pay down the balance of our South African legacy debt.
“We'll be debt free, and we'll have some additional cash in the business which we can then start prioritising in other opportunities to improve our returns,” Flanagan told Engineering News at the release of Aveng’s interim results for the six months ended December 31.
A short-term trade finance facility of R450-million has been raised in support of organic growth and a new contract at Trident Steel. This amount will also be extinguished when Aveng receives the proceeds from the disposal of the business.
Flanagan said the disposal was progressing well, with the majority of conditions precedent, including shareholder approval and Competition Commission approval, having been fulfilled.
Of the 15 conditions precedent to closing the sale, five remain.
“We are still closing out a sublease agreement with the buyer. Then there is the long list of contracts that had to be ceded across. We've finished the majority of those but there are one or two that are outstanding that still need to be dealt with in the coming weeks,” he explained.
In addition, Aveng needs to finalise confirmation of the buyer’s working capital availability, which Flanagan also expects to be finalised over the next few weeks. In addition, the finalisation of funding can only be achieved when the funds “drop” five days to close.
“We have a highly motivated buyer, he wants to get his hands on the asset and we're obviously a motivated seller so that we can receive the funds and pay off our debt, which takes a load off our shoulders,” Flanagan said.
For the interim period, Aveng reported revenue of R15-billion and headline earnings of R77-million, or 61c a share, compared with headline earnings of R17-million, or 14c a share, reported for the prior interim period.
Flanagan listed several challenges experienced during the period – including the underperformance of construction and engineering subsidiary McConnell Dowell’s Batangas liquefied natural gas (LNG) terminal contract in the Philippines and contract mining subsidiary Moolmans’ previous Tshipi é Ntle manganese mining contract.
Despite the significant headwinds faced by the company, Aveng reported a profit for the period.
“This is our fifth consecutive profitable period in our journey from a loss-making, over-geared business that was underinvested in equipment, systems and people to a cash-supportive, profit-making company with a strong balance sheet capable of investment for sustainable profitable growth,” Flanagan said.
Work in hand across the group remains strong, he added, noting that McConnell Dowell won A$2.5-billion in new work and grew work in hand from A$2.5-billion at June 30 last year to A$3.9-billion as at January 31.
Flanagan said this meant that the business had secured 100% of its planned revenue for the 2023 financial year and 98% of its 2024 planned revenue as well.
“In my 40 years in the industry, I have never been six months away from a new year and already have the new year's revenue secured,” he commented.
Meanwhile, Moolmans grew its work in hand to R7.8-billion as at January 31 after the award of several contracts, including a new Tshipi é Ntle award, a Klipspruit rehabilitation contract and a 12-month extension at Gamsberg.
Moolmans is also continuing to pursue other opportunities in sub-Saharan and West Africa, with a total visible pipeline of work of about R31.7-billion.
Flanagan said the company was pursuing opportunities in the platinum mining sector in Southern Africa.
“We are pursuing a couple of those opportunities and making some really good headway there. We are preferred on a large new platinum project. We're doing a lot of work in terms of ensuring that we secure that contract,” he said, adding that other opportunities in Namibian uranium mining were also being pursued.
Following the award of the new Tshipi é Ntle contract and investment in new equipment post period-end, he said the Moolmans business was now better positioned for growth.
“Key areas of focus here are to improve operational performance and cash generation. The continued investment in new equipment will support the strategy of selecting and entering into long-term and commercially viable contracts and extensive financial and engineering skills remain invested in support of fleet renewal and the continued optimisation of the existing fleet to improve availabilities and save on component spend,” he explained.
Flanagan said that, on the back of the new Tshipi é Ntle contract, Moolmans had invested about R900-million in 16 new 150 t Caterpillar 785 haul trucks.
He said the first five of those had already been delivered to the Northern Cape and were being commissioned ready for site. The remaining 11 trucks will be delivered by Caterpillar through Barloworld Equipment over the next six months.
Moolmans also bought two large excavators from original-equipment manufacturer (OEM) Liebherr, which Flanagan expects will be delivered during the next nine months. An existing Liebherr excavator is also being rebuilt from scratch together with the OEM.
“We also have a very intense programme renewing the existing fleet and identifying the redundant assets which need to be sold, those which need to be rebuilt and which elements of those we need to replace,” Flanagan explained.
The company has also invested in new dozers.
In terms of operational performance, McConnell Dowell achieved a 16% growth in revenue to A$979-million. Operating earnings increased by 15% to A$15-million, led by a strong performance in the Australian business unit and above-planned performance in New Zealand and Pacific Islands, offset by underperformance in Southeast Asia as a result of the Batangas LNG terminal project.
Flanagan said this project had been awarded at the start of the pandemic and, at that stage, the project design had to be done remotely.
“Performance was adversely affected by the inability to get resources to site. In-person senior management oversight required for jobs of this magnitude was not possible for an extended period of time due to travel restrictions.
“Delays in supply chain, exacerbated by the outbreak of war in Ukraine, had a further adverse effect on the performance of the contract, which is now in the final stages, with expected completion in the current financial year. We continue to negotiate with the client for relief,” he explained.
He further noted that the global business environment had remained challenging throughout the interim period, with the ongoing war in Ukraine, adverse weather events and the lagging effects of Covid-19, which was characterised by a rapid rise in inflation, increases in interest rates, labour, energy, raw material and shipping costs, as well as supply chain disruptions leading to logistics constraints and increasing costs.
Business-specific challenges were experienced in the form of the lagging effects of Covid-19 disruptions, particularly in Southeast Asia, where a continuing shortage of semiconductors caused problems, along with local loadshedding and a shortage of skilled artisans. Moreover, a skills shortage in Australia and New Zealand remained a challenge owing to low levels of unemployment.
“While we had no immediate control over these factors, we proactively responded in our approach to winning new work and delivering on our customer contracts, introducing measures to soften their impact and mitigate risk.”
Flanagan commented that the Southeast Asia region remained challenging for McConnell Dowell.
“A post-Covid-19 turnaround plan is being implemented and tendering activities have resumed. A new managing director has been appointed and a strengthened leadership team is in place. Management remains committed to the business unit and the region and is focused on promising longer-term opportunities,” he said.
Looking ahead, Flanagan said Aveng would continue to implement its long-term growth strategies in both McConnell Dowell and Moolmans, along with improving operational performance through the continual investment in people, systems and equipment, fleet optimisation and disciplined project execution.
“A key focus will be on improving margin performance, particularly in McConnell Dowell, which has a strong revenue base for profitable growth and will continue to focus on improved operational performance and cash generation to achieve a consistent operating margin in excess of 3%,” he said.