Wednesday, 24 August 2016 19:51

Aveng turns to Australia and Asia for profit

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Construction group Aveng cuts its reliance on SA for future work drastically, a move that could have negative consequences for employment already at record lows.

 Kobus Verster Aveng

Construction group Aveng has cut its reliance on SA for future work drastically, a move that could have negative consequences for employment already at record lows.

Local building and engineering work would now contribute only 37% of Aveng’s pipelined projects for the next two years, SA’s largest construction company by revenue said on Tuesday after the release of its annual results.

That compares to 56% in 2015.

Australia and Southeast Asia would play an increasingly important role in the group’s strategy to return to profitability, Aveng said. The region now accounted for 60% of its two-year order book of R28bn, up from 40% the previous year.

In the past financial year, Aveng removed 8,500 workers from its payroll as part of a strategic initiative to contain costs and stop the haemorrhage of profit in the subdued domestic economy.

Of the jobs lost, about 2,000 were permanent staff, and the rest were contractors, according to a person familiar with the circumstances, who could not be named.

The sector as a whole shed 13,000 formal sector jobs in the year to June, according to data from Statistics SA.

“There is very limited growth in SA,” Aveng CEO Kobus Verster told investors as he explained the 23% plunge in group revenue to R33.8bn.

Revenue deteriorated as mining companies, such as Anglo American and its iron ore subsidiary Kumba — Aveng’s single biggest contributor to revenue — cut investments to stem losses from plummeting commodity prices. Further pressure was applied by the manufacturing sector after stateowned transport group Transnet revised its infrastructure spending downwards in 2015.

The stock was lambasted on Tuesday, crashing 10.76% to R5.31, paring its gains made since January to 134.96%, according to Iress data.

This was despite Aveng halving its headline loss to 75.2c per share, compared with 144.3c per share in June 2015, mainly as a result of the improved performance from Grinaker-LTA.

The JSE’s construction index has gained 7.56% since January, versus the 4.47% increase of the all share index.

Aveng’s strategy to reduce the reliance on its home market mirrors that of rivals Group Five and WBHO, the third-largest construction company by revenue after Murray & Roberts which is due to report its year-end results on Wednesday.

Group Five’s near-doubling in operating profit to R722m in the year to June came as a surge of income from its tolling concessions business in Europe offset dwindling revenues from the domestic market.

Last week, WBHO said it expected headline earnings per share, the main profit gauge in SA, to rise as much as 30% when it published its results in September, due to the improved performance from Australia, where it operates mainly in the residential building market.

Although Aveng’s net operating earnings in Australia and Asia capitulated to R14m, from R112m in 2015, the factors that eroded margins, namely restructuring costs and problem contracts, had largely been addressed.

The two-year order book of A1.5bn was up 22% on the year, benefiting from several large new projects in Malaysia, Singapore, Australia, and New Zealand. The contracts were mainly in the rail, road, rail, water, and power sectors that were offering significant opportunities following increased government infrastructure spend in that region.

Furthermore, the group expected to receive proceeds of about R4.6bn in claims upon the settlement of two contracts by the Queensland Curtis Liquefied Natural Gas and Gold Coast Rapid Transit projects.

This is expected to occur in 2017 and 2018, respectively.

“Our medium-term outlook for Australia is positive,” Verster said. “We anticipate positive cash flow … and reasonable profitability in 2017.”

Aveng was optimistic about prospects in the Southern African Development Community. Pipelined projects nudged to 4%, from 3% in 2015.

There is very limited growth in SA. Revenue deteriorated as mining companies, such as Anglo American and Kumba, cut investment.

Source: Business Day

Last modified on Thursday, 14 September 2017 13:45

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