Menu

Group performance review and outlook

Chief executive officer's review

Aveng is at an advanced stage of addressing areas of underperformance and the Group is proceeding with a clear plan to stabilise and strengthen its financial position. As we attend to the complex claims processes currently underway, we will maintain our strong focus on achieving the financial performance targets we have set for the Group.

 
Kobus Verster Chief Executive Officer
 
 

This is my first report as Chief Executive Officer of the Aveng Group. I have gained a deep understanding of the Group’s operations and its markets during the four years I have worked as Group Financial Director, combining the role more recently with that of acting CEO. This has given me the advantage of being able to embark without delay on my new role.

Overview

Aveng is a fundamentally strong business with a portfolio of infrastructure, mining and manufacturing-related assets that are well diversified across a range of sectors and geographic locations that offer strong opportunities for growth. However, together with other businesses in its sectors, Aveng operates in market environments in South Africa, the rest of Africa, Australasia and Asia that are currently weighed down by a range of growth-constraining factors. These external pressures have exposed areas of weakness in some of our businesses that have contributed to underperformance relative to our industry peers in recent years. There has been a renewed drive by a reenergised leadership team to address these weaknesses during the 2014 financial year. The actions we have implemented to achieve this form the bulk of my report.

Operational performance

The Group’s South African markets remain weak as a result of limited investment in infrastructure projects, the impact of weaker commodity prices and labour disruptions on the mining sector, and generally subdued manufacturing and steel sectors. These factors were compounded by unusually heavy rainfall across the country in March 2014 which delayed a number of our projects.

In spite of these challenges, our South African operations have been robust and some have performed well. Interventions to stabilise businesses that underperformed in 2013 resulted in a 37% reduction in the losses of Aveng Grinaker-LTA and a turnaround in the performances of Rand Roads, Aveng Steeledale and Aveng Steel Fabrication.

Aveng Mining has remained resilient in a mining market that has been in turmoil since 2008. Moolmans continued to deliver strong financial results as solid performances in its South African projects and new awards in the domestic market limited the impact of the cancellation of two projects in Africa and completion of a third. Shafts & Underground stabilised its performance at many of its South African projects and the Chuquicamata mine in Chile progressed to the main shaft sinking phase.

Apart from those operations with exposure to the platinum industry and its related industrial action, Aveng Manufacturing also performed well. In particular, Infraset and Lennings Rail Services benefited from the award of major construction, maintenance and materials supply contracts for railway projects in South Africa and sub-Saharan Africa, as well as ongoing demand for construction products in South Africa. Aveng Trident Steel remained under pressure in an environment of sustained competition and lower demand which prevented it from achieving the recovery we had anticipated, although both Aveng Steeledale and Aveng Steel Fabrication recovered during the year.

The impact of external market conditions on Aveng Grinaker-LTA was compounded by internal operational and commercial challenges experienced by some of its current projects and legacy contracts. The commencement of work on major rail projects in Mozambique and South Africa and an improved performance in the second half of the financial year contributed to an increase in revenue and a reduction in the net operating loss. This performance was in line with our expectations, and as the stabilisation and recovery intervention gains traction under new leadership, Aveng Grinaker-LTA remains on track to return to profitability.

Revenue by public / private sector

 
Two-year order book by
public / private sector
 
Two-year order book by region


The Group’s Australian operation, McConnell Dowell, operated in challenging market conditions, with declining opportunities in its core sectors and increasingly demanding commercial conditions resulting in higher levels of risk. Major contracts contributed to ongoing revenue growth but earnings were materially impacted by losses incurred on the Gold Coast Rapid Transit (GCRT) contract in Australia which was largely completed in July 2014. Overseas operations in New Zealand and Southeast Asia performed well, achieving strong profit growth on increased revenue with excellent project execution in most areas.

Technical handover of the GCRT contract to the client was achieved in July 2014. While this limits the risk of further material cash outflows, other than those associated with remedial works underway, the cost to completion significantly exceeded budget due to complex design and scope amendments, along with the impact of delays and acceleration requirements. This resulted in the recognition of a substantial loss in the 2014 financial year and a significant increase in uncertified revenue. With completion largely achieved, the process of finalising and resolving claims to recover losses will be intensified. The commercial negotiations are likely to be protracted due to the technical and legal complexities associated with the claims. The final outcome remains an uncertain and material risk.

The Queensland Curtis Liquefied Natural Gas project has been completed but the claims to recover losses incurred on the contract in the 2013 financial year remain unresolved. We continue to discuss a commercial settlement with the client and McConnell Dowell is also pursuing its contractual entitlements through a formal arbitration process. This process is substantially advanced with a second arbitration case submitted in July 2014. Aveng’s interests in pursuing these claims are represented by a combination of Tier 1 legal firms and pre-eminent legal counsel. We are confident that the calibre of the respective teams affords Aveng the best possible opportunity to recover our commercial entitlement. Sufficient liquidity has been provided to enable McConnell Dowell to repay advance payments of AUD142,5 million (R1 429 million) to the client during the first half of the 2015 financial year.

Additional detail is available in the operational review.