Shares in Aveng rose over 5% on Tuesday despite the JSE-listed construction and engineering group reporting a significant operating loss of R1.06 billion in the year ended June 2023.
The group reported strong growth in total work in hand, with it increasing by almost 70% to R52.2 billion at the end of June, from R30.8 billion in the prior year. Its operational loss was largely attributable to substantial losses in the Southeast Asia business unit of subsidiary McConnell Dowell, primarily from the Batangas liquefied natural gas (LNG) terminal project.
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Aveng last year reported that FGEN LNG Corporation, a subsidiary of First Gen Corporation and the client on Batangas LNG (BLNG) terminal project in the Southeast Asia business unit of McConnell Dowell, has without notification called on the project guarantees of R528.9 million (around AUD43m) for the project.
An operational underperformance at Aveng’s mining business Moolmans further contributed to the operating loss.
The group operating loss was largely driven by:
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McConnell Dowell’s operating loss of R815 million compared to operating earnings of R385 million in the prior year.
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Moolmans’ operating loss of R110 million compared to operating earnings of R207 million in the prior year.
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South Africa Construction’s operating loss of R59 million (vs a R67 million in 2022).
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An operating loss of R76 million from other operations, including the group’s corporate head office and the accumulated ticking fee of R75 million recognised on the sale of Trident Steel compared to the operating loss of R165 million in 2022.
Aveng’s shares closed 5.72% stronger, at R8.13 per share on Tuesday. Its shares had closed on Monday at R7.69 per share.
Aveng CEO Sean Flanagan said on Tuesday that following the disappointing results in McConnell Dowell, the group conducted a review of the BLNG project and a broader portfolio of current projects.
He said this has led to the design and implementation of improved operational standards and governance procedures for tenders and projects at McConnell Dowell.
Commercial settlement
Flanagan added that subsequent to the group’s year end, McConnell Dowell reached a commercial settlement with FGEN LNG on all contractual claims and has booked a full loss on the BLNG project, which is currently in the commissioning phase and will be completed in the coming months.
He said McConnell Dowell and FGEN LNG have also entered into a services agreement in terms of which McConnell Dowell will use its expertise, experience, systems and capabilities to support FGEN LNG achieve full commissioning of the BLNG project.
Flanagan noted that the financial year has been a year of transition, characterised by a normalisation of operating activities as the group emerged from the global Covid-19 pandemic.
He said the sale of Trident Steel and settlement of the legacy term debt brought the 2018 restructuring strategy to a conclusion and new financing facilities were arranged in support of the investment in new equipment and the partial funding of a project guarantee following its encashment, together with new general banking facilities for the South African operations.
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“These activities provide the foundation for a focused business and balance sheet as we build for the future,” he said.
Commenting on Aveng’s stronger balance sheet, Flanagan said the group has delivered on its strategy announced in February 2018 to simplify its business, de-risk its balance sheet and reduce its debt.
He said the strategy required Aveng to dispose of non-core assets and repay its debt to allow the group to focus on the core assets of McConnell Dowell and Moolmans.
Flanagan said concluding the implementation of the Trident Steel disposal enabled Aveng to continue its journey to a sustainable capital structure by fully extinguishing its South African legacy debt of R478 million and its short-term Trade Finance Facility of R450 million.
“The settlement of South African legacy debt, which at its height amounted to R3.3 billion in 2018, marked a pivotal moment in ensuring a sustainable capital structure and a platform for growth for Aveng,” he said.
‘De-risk’ balance sheet
Flanagan added that with Trident Steel being a working capital-intensive business, the disposal allowed Aveng to further de-risk its balance sheet by terminating over R500 million in ancillary trade finance facilities, including foreign exchange, promissory notes and letter of credit facilities.
He said the company continued to de-risk the balance sheet through the reduction of the South African guarantee exposure from R3.8 billion in 2018 to R82 million at end-June 2023 and the group continues to settle major litigation, historical claims and contingent liabilities.
Both McConnell Dowell and Moolmans significantly grew work in hand.
McConnell Dowell won R38 billion (AUD3.2 billion) in new work and grew work in hand by 40% to R44.2 billion (AUD3.5 billion) at end-June 2023 from R27.8 billion (AUD2.5 billion) at end-June 2022.
The group also reported significant growth in work in hand by Moolmans to R8 billion at end-June 2023, which was awarded R9.4 billion of new work, including a new five-year contract at Tshipi é Ntle.
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Group revenue increased by 28.4% to R28.9 billion in the year to end-June, from a ‘re-represented’ R22.5 billion in the prior year to present Trident Steel as a discontinued operation.
The group reported a headline loss per share of 753 cents compared to headline earnings of 252 cents in the prior year.
Outlook
Commenting on Aveng’s outlook, Flanagan said the group is positioned and equipped to restore itself to sustainable, profitable growth.
“The McConnell Dowell and Moolmans businesses are expected to return to profitability and generate positive operational cash flow,” he said.
Flanagan added that the group enters the 2024 financial year in a strong position, with the combined work in hand of R52.2 billion supporting 100% of next year’s expected revenue of R32 billion.
He said McConnell Dowell is in a strong secured revenue position and focused on managing risk, converting opportunities and delivering margin.
“Disciplined project execution is fundamental to the group’s goal of being a fit-for-purpose organisation capable of sustainable and profitable long-term growth,” he said.
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Flanagan said McConnell Dowell remains focused to convert current tenders of AUD1.4 billion in preferred bidder status to award, with a further AUD 0.9 billion in tenders awaiting award and AUD1 billion tenders in preparation for submission.
He said Moolmans growth agenda continues to be underpinned by investment in heavy mining equipment, people and systems.
“The current work in hand provides a solid revenue platform, with 93% of planned revenue for its 2024 financial year secured. Moolmans total visible pipeline amounts to R65 billion with R47 billion worth of tenders in submission and awaiting adjudication,” he added.
Flanagan said key areas of focus at Moolmans are to improve operational performance and cash generation while the continued investment in new equipment will support its strategy of selecting and entering into long-term and commercially viable contracts.
