Aveng is a survivor in a badly damaged construction sector

While South African President Cyril Ramaphosa is talking about reviving infrastructure spend as a way to catalyse growth in the economy, construction engineering company Aveng has almost completed its exit from the South African construction industry.

The 125-year-old company has completed almost R1-billion worth of disposals in the last 18 months as it works at its bulging debt load. 

Still outstanding is the sale of Trident Steel and its manufacturing operations which will be concluded by June 2020, management hopes.

The company is but a shadow of its former self with a share price of R0.02 and a market capitalisation of R387-million – a far cry from 2007 when a share was worth R71 and it turned over revenues of R50-billion annually.

The demise of Aveng, and probably SA’s construction industry as a whole, is a well-told story of companies that grew fat when times were booming, accumulating global assets and debt seemingly without a care in the world. In the process, revenues expanded mightily, but controls were lost. Cost containment, efficient planning and budgeting went out the window, and bad projects ate into profits.

After the 2010 Soccer World Cup, infrastructure spend slowed down in South Africa, but the construction firms hung onto staff and technical expertise in the hope that the government would release spending. Government has, if anything, tightened the screws, and in 2017/18, SA’s construction sector collapsed.

Group Five, Basil Read and Esorfranki have filed for business rescue, or declared bankruptcy. Steffanutti Stocks is teetering and investor darling WBHO has diversified into trouble in Australia.

After two years in intensive care, Aveng is still standing and is on the brink of profitability – a feat that will please equity investors like RECM, Investec, Kagiso and Flagship, whose fund managers have presumably bought into the company believing it to be a turnaround story.

On Tuesday, 25 February 2020, Aveng management reported that its two core businesses had delivered improved performances for the six months ended 31 December 2019.

Contract miner Moolmans, which operates in South Africa, Guinea and across central Africa, has returned to profitability while McConnell Dowell, the infrastructure business in Australasia improved on its performance, with both entities contributing to an operating profit of R14-million compared to a loss of R484-million in the comparative period.

Net losses were reduced to R170-million from R920-million in the previous period.

 “As we enter the final stages of the strategic plan [implemented in 2018] our focus has now shifted to attaining consistent performance, sustainable long-term profitability and value creation for all stakeholders,” said Aveng CEO Sean Flanagan.

These results were achieved with a monumental effort that saw wholesale changes in management and a massive restructuring of the balance sheet that saw lenders agreeing to take a haircut on their loans.

Over the last two years, Aveng has stabilised its capital base with a combination of early redemption of the R2-billion convertible bond, a R493-million rights offer, the restructuring of bank debt and the issuance of a new term and revolving credit facility note.

R450-million of the debt has been repaid to date, R400-million of which was a super senior liquidity facility and R50-million a term loan.

“The business is now in better shape than it was,” says Quintin Ivan, portfolio manager at Coronation Fund Managers. “It is still quite geared, but management is making good progress on paying that down and has banked R750-million in asset sales this half, with sales still pending, which is encouraging.”

Boding well for the future is that Aveng’s order book across its Australian and African operations is now on a healthier R17,9-billion with 72% of the work international and 28% in South Africa.

In addition, the companies are now better aligned. “The relationship [between Aveng and McConnell Dowell management] has changed,” Flanagan told investors at the result presentation. “There was a disconnect between where they wanted to go and where we as a group wanted to go.  Now we have alignment about what is important and how their performance impacts the group. I’d say they are now poised for success.”  

Management, Flanagan says, is happy with the return to profitability in the core businesses and is now focused on project profitability and the bottom line.

However, “there is still work to be done before we can say we are out of the woods,” he says.

He may as well have been speaking for the SA construction sector as a whole. BM

The original version of this story stated incorrectly that Grinaker LTA had not been divested in 2019. In fact, it was. We apologise for the error.