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Group performance review and outlook

Chairman's statement

I am confident that Aveng has the necessary capacity and capability to fulfil its vision of being a leader in selected markets in South Africa, the rest of Africa, Australasia and Asia.

 
Angus Band Chairman
 
 

2014 has been a year of recovery and stabilisation with the objective of dealing with underperformance in a number of operations as well as bedding down new management in some key positions.

While the impact of management’s interventions to reposition our South African operations is evident in the improved performance of the majority of these operations, the Group’s results were eroded by significant losses incurred by McConnell Dowell on the Gold Coast Rapid Transit rail contract in Australia, which offset a solid underlying performance by the rest of this business. This contract, as well as the previously reported Queensland Curtis Liquefied Natural Gas Pipeline contract, are both complete but have had a very material impact on both earnings and cash flow over the past two years. Management is pursuing claims with vigour but it is expected that these will take some time to resolve.

The overall effect of these developments was a 2% increase in revenue to R53,0 billion (2013: R51,7 billion), driven by the completion of a number of major contracts in Australia. Net operating earnings increased by 20% to R784 million with the benefit of a better performance in South Africa partially offset by the loss on the Gold Coast Rapid Transit contract. The progress made in Aveng Grinaker-LTA is reflected in a reduced loss and the expectation is that the new financial year will see a material continuation in its recovery. The problematic Mokolo Crocodile Pipeline contract incurred further losses during the year as a result of the heavy rainfall which flooded the area, preventing access to the site since March 2014.

Headline earnings declined by 10% to R421 million due to a substantially higher finance charge incurred as a result of the funding of higher working capital in the form of uncertified revenue, particularly in Australia. In light of recent underperformance, a decision was taken to impair the goodwill and related intangible assets of Aveng Grinaker-LTA and the water operation of Aveng Engineering, which resulted in a loss of R376 million for the period. Headline earnings per share, excluding the impairment, was 112.5 cents, 10% lower than the previous year’s 124.6 cents.

Dividend

The Board decided not to pay a dividend as a result of the deterioration in the Group’s cash resources which is largely due to the commercial issues on two Australian projects. The Group anticipates reverting to the published dividend policy in the medium term.

Overview

Our domestic markets remained subdued as a result of low levels of investment and activity in the mining, steel and manufacturing sectors and a disruptive labour environment. The South African Government’s infrastructure programme remains slow to come to project tender stage and projects are generally taking longer to close. The disruptive impact of the prolonged strikes in various sectors that we operate in has been very costly and has resulted in project delays. It is a matter of extreme concern that these prolonged strikes now appear to be an annual event and an alternative method of engagement has to be developed to prevent the adverse impact of this strike action on the economy in general and our sectors in particular.

The steel sector remains depressed with both volumes and prices constrained by low demand from mining, construction and the automotive sectors. Domestic supply problems have led to a greater reliance on imports. The impact of the automotive strike last year and the recent NUMSA strike have placed further stress on the sector which has seen a number of liquidations within the smaller distribution and processing sector.

Our mining operations have been adversely affected by the rationalisation initiatives of some customers in response to lower commodity prices. This has resulted in contracts either not being renewed or the proposed terms of renewal being uncommercial. Although new work has now been secured there was a gap between contracts terminating and new ones starting which saw revenue in our mining operations decline.

The project pipeline within the domestic operations appears to be reasonable but the time taken to award tenders is prolonged and contract terms are increasingly onerous. Africa remains a real opportunity and management is focusing on prospects in Mozambique and other areas of material size.

McConnell Dowell benefited from a shift in focus to transport infrastructure and other growth sectors in Australia and to other geographic markets in the region as investment slowed in resource infrastructure in Australia. Notwithstanding the completion of a number of major contracts in Australia, the order book remains strong and the opportunity pipeline attractive.

Aveng has experienced substantial losses on a number of the larger projects in recent years but these are, by number, in the minority as we have generated acceptable returns on many other large projects. The impact of these problematic projects has resulted in material losses that have placed undue pressure on the Group’s earnings. In addition, the funding of both these losses and the claims associated with them has strained the Group’s financial position. This has necessitated a review of our risk management, project execution and claims management systems and capacity. Key leadership changes have also been implemented that will strengthen our operational and commercial leadership, particularly in Aveng Grinaker-LTA and McConnell Dowell. In addition, we have implemented measures to reduce our borrowings and improve our liquidity to ensure a stable foundation for growth.

These measures are discussed in more detail in the chief executive officer’s report.

The setbacks referred to above should not invalidate the strong performances in other major infrastructure contracts undertaken by McConnell Dowell and Aveng Grinaker-LTA or the resilience of our South African mining and manufacturing businesses which have grown and remained profitable in spite of extremely difficult market conditions.