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Group performance review and outlook

Financial director's review

In order to guide the strategy of recovery and stabilisation as well as optimisation and future growth, acceptable return parameters have been put in place for each business. Their ability to sustainably deliver against these in the medium to long term will be closely monitored.

 
Kobus Verster Acting Group Financial Director
 
 

Financial performance overview

Statement of comprehensive earnings

Revenue of R53 billion remained largely flat against the prior year’s R51,7 billion, reflecting a period of consolidating growth. The marginal decrease in Australian dollar-denominated revenue at McConnell Dowell is attributable to the completion of mega-contracts such as Queensland Curtis Liquefied Natural Gas Pipeline (QCLNG) and the Gold Coast Rapid Transit (GCRT) project. The weaker South African rand foreign exchange rate contributed R1,6 billion (2013: R3,4 billion) to rand-denominated revenue from the Construction and Engineering: Australasia and Asia and the Mining operating segments.

Aveng Mining reported a decrease in revenue due to the non-renewal and completion of contracts in West and Central Africa, offset by strong growth achieved by the Manufacturing and Processing operating segment, and growth in renewable energy projects in South Africa.

The Group’s 11% increase in gross earnings to R3,8 billion was attributable to good profit margins from Aveng Mining and Aveng Manufacturing, and the improved loss position at Aveng Grinaker-LTA compared to the prior year. The stabilisation and recovery process at Aveng Grinaker-LTA is beginning to yield results, while the Manufacturing and Processing operating segment reported improved results compared to the prior year, mainly due to solid performances by the non-mining-related businesses. The open cut mining business continued to generate acceptable margins albeit on lower revenue due to a reduction in mining activities in the rest of Africa. Margins at Aveng Steel were negatively affected by weak demand, lower-than-expected steel prices and labour disruptions.

Operating expenses of R3,4 billion increased marginally against the comparative period with a below inflation increase. Operating expenses have remained flat as a percentage of revenue. Ongoing optimisation and efficiency initiatives have resulted in savings, specifically evident in the second half of the year.

Group net operating earnings increased by 20% to R784 million (2013: R656 million) as a result of:

Goodwill and related intangible assets arising from the 2001 merger of Grinaker and LTA, with a carrying amount of R756 million, were impaired. In addition, goodwill of R75 million associated with Aveng Water was also impaired. The impairment affected the earnings per share of the Group while the headline earnings per share remained unaffected.

Revaluation of investment property amounted to R15 million, as a result of improved returns from the Group’s stake in the Goldfields Mall property. (Refer to note 3: New accounting standards and interpretations adopted, changes in accounting policies and other reclassifications of the summarised consolidated annual financial statements).

The increase in earnings from equity-accounted investments to R33 million was attributable to an improved performance by McConnell Dowell’s Middle East investments and earnings generated by the renewable energy projects.

Cash and bank balances
R4,1 billion
Increase of 6% from June 2013
Net cash position
R1,3 billion
Decrease of 46% from June 2013

The Group’s investment in N3 Toll Concession (N3TC) Company Proprietary Limited is classified as an available-for-sale investment. The valuation of Aveng’s share in N3TC was determined as R126 million, resulting in a positive impact on reserves of R114 million which was not reflected in earnings or headline earnings (refer to note 3 of summarised consolidated annual financial statements).

Net finance expenses increased to R183 million, largely due to additional financing charges as a result of higher borrowings to fund increased working capital requirements associated with major contracts, and asset-based finance at Aveng Moolmans. Borrowings of R2,9 billion increased by R1,4 billion compared to R1,5 billion at June 2013.

Group earnings before taxation for the period decreased by 134% to a loss of R215 million, mainly attributable to the goodwill and related intangible asset impairments of Aveng Grinaker-LTA and Aveng Water.

Taxation expense decreased marginally to R161 million (2013: R167 million). This resulted in an effective tax rate (excluding the impact of impairments) of 26% (2013: 27%). The reduction was attributable to the recognition of an additional deferred tax asset raised in McConnell Dowell as a consequence of assessed losses derived in the New Zealand region.

The loss per share (LPS) of 101.9 cents decreased 182%, adjusted earnings per share (AEPS) of 120.3 cents decreased 4% (2013: EPS and AEPS 124.6 cents) and headline earnings per share (HEPS) of 112.5 cents decreased by 10%. AEPS modifies LPS by eliminating the impact of the aforementioned impairments.