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Operational review

Construction and Engineering: South Africa and rest of Africa

 
Financial highlights
  2014  
Rm  
2013  
Rm  
Variance  
(%) 
  Gross revenue 8 543   7 392   16  
  Gross earnings 14   (346)  (104) 
  Net operating system (566)  (968)  (42) 
  Capital expenditure 152   47   223  
  Total assets 4 546   4 281   6  
  Total Liabilities 2 450   2 669   (8) 

Aveng Grinaker-LTA offers multidisciplinary services across the construction and engineering value chain to its clients in South Africa, Namibia, Mozambique, Mauritius and selected markets in the rest of Africa. Services include construction services in building, civil engineering, roads and earthworks, and mechanical and electrical engineering.


12% increase in revenue
 
7% Increase in two-year order book to R7,4 billion at 30 June 2014
37% decline in operating
losses
9% Portion of two-year order book outside South Africa
 
     

Aveng Grinaker-LTA operations

 

Chris Botha Managing Director

 
Sectors served
  • Infrastructure
  • Mining
  • Transport
  • Renewable energy
  • Power
  • Water
  • Pipelines
  • Oil and gas
  • Industrial
  • Commercial
  • Retail
  • Geotechnical

Aveng Grinaker-LTA was repositioned in 2013 to strengthen its service offering to clients in its core operations. As a consequence, the businesses of Aveng Steel Fabrication (ASF), Aveng Manufacturing Automation & Control Solutions (A&CS) and Aveng Manufacturing Facades were moved to Aveng Steel and Aveng Manufacturing respectively with effect from 1 July 2013*.

The South African construction industry, which generated 88% (2013: 74%) of this operating group's revenue, remained weak during the year under review. The industry was characterised by low levels of activity, strong competition, persistent labour disruptions and heavy rainfalls across South Africa in March 2014 which disrupted sites in the Lephalale area. The impact of these external factors was compounded by internal operational and commercial challenges experienced in some of Aveng Grinaker-LTA's current projects and legacy contracts. The commencement of work on the Nacala Section 2 Rail project and Majuba Rail Link contributed to an increase in revenue but, while significant improvement was achieved compared to the prior year, performance was negatively impacted by delays at the Mokolo Crocodile Pipeline (Mokolo) contract and other non-contributing legacy contracts that continue to be worked out of the revenue stream.

New executive leadership was progressively appointed during the year and tasked with minimising losses and cash outflows in 2014, strengthening project execution and commercial management and returning Aveng Grinaker-LTA to profitability. A number of interventions were implemented to achieve this over the next 12 to 18 months, including:

* Comparatives have been adjusted accordingly.

These interventions are discussed in more detail under the key focus areas section here.

Operating performance

Aveng Grinaker-LTA comprises four discipline-led business units: Civil Engineering, Mechanical and Electrical, Building and Coastal.

Civil Engineering includes roads and earthworks, civil construction, Karrena (concrete repairs), Rand Roads and Ground Engineering (GEL). The business unit worked on a number of major projects during the year, including the Mokolo contract which achieved good progress during the first half of the year. It had installed 21 kilometres of a total 43 kilometres of pipeline by 31 December 2013 and was on track for completion in May 2014. However, the unusually heavy rainfall in March 2014 caused significant damage and additional delays, making it necessary to extend the completion deadline to December 2015. This resulted in material losses which were partially offset by insurance claims. By 30 June 2014, 35 kilometres (81%) of pipe had been installed.

The Nacala Section 2 Rail project in Tete province, Mozambique, commenced in July 2013, and 76% of the project was completed by 30 June 2014 despite commissioning delays and heavy rains in the second half of the year. A strengthened management team introduced measures to expedite earthworks and project completion is expected in September 2014.

The Majuba Rail Link was also adversely impacted by inclement weather and labour disruptions. A revised programme was agreed with the client and increased resources on the site contributed to an improvement in production output. The project is on track for completion in October 2015.

The Medupi Power Station joint venture contract was affected by ongoing industrial action. Contractual claims were submitted to counter the eroding effect of these actions and are currently being discussed with Eskom. The contract is reviewed regularly with the joint venture partner to streamline the delivery of the project.

 
 

Aveng Grinaker-LTA's contribution
to the Aveng Group's revenue

Progress has been made in key focus areas intended to stabilise Aveng Grinaker-LTA, address its critical challenges in underperforming contracts and return it to sustainable profitability.

 
 

Rand Roads' core competency is in the manufacture of bituminous and asphalt products. The surfacing (paving and seal services) section of the business successfully completed five of the 12 contracts awarded during the year. The heavy rainfalls in March and various delays in the commencement of the Rea Vaya Bus Rapid Transit (BRT) contract adversely impacted the volume output of the business. A new management team was introduced between July and October 2013 and, despite various challenges, managed to improve production volume output and profitability in line with expectations, resulting in a significant reduction in losses compared to the prior year. Internal financial controls were significantly strengthened during the year.

GEL successfully completed the piling installation for the Department of Environmental Affairs' new head office in Pretoria and the Cradlestone Shopping Mall in Krugersdorp. On the renewable energy front, GEL has installed piles for six turbine bases at the Gouda wind farm in the Western Cape and is currently installing approximately 40 800 mini-piles and posts for the Sishen solar facility near Kathu in the Northern Cape.

Mechanical and Electrical (M&E) is involved in Eskom's coal fired power plant projects. The scope of work includes the piping work on the turbines at both Medupi and Kusile, which is done in partnership with Alstom, and the remaining plant work at Kusile. The ongoing industrial action at Medupi caused delays in the project which have proven difficult to recover.

The M&E pipe fabrication workshop in Vanderbijlpark fabricated 276 000 diameter inches of piping during the 2014 financial year (2013: 137 600). This workshop mainly provides internal service to the projects in the power and oil and gas sectors, including an external contract with Alstom to fabricate 350 000 diameter inches of piping for the Eskom power stations. By 30 June 2014, 59% had been fabricated, with 155 900 completed during the year (2013: 50 600).

Inclement weather during March had a major impact on productivity at the Tweefontein coal mine optimisation project in Ogies and caused delays. The project was completed in July 2014.

The Kalagadi Manganese sinter plant project in the Northern Cape was completed during the year. The works included the mechanical, piping, electrical and instrumentation installation at the sinter plant.

Building successfully completed the design-build public private partnership (PPP) contract for the Department of Environmental Affairs' new Pretoria head office in June 2014. The project received recognition as a ‘green' building with high levels of energy and water efficiency. The Cradlestone Mall project in Krugersdorp was completed during the year, while the Vodacom Data Centre in Midrand and the Sandton City Atrium repositioning are close to completion. Infrastructure building works are underway at Sasol's Shondoni Mine and the Medupi Power Station.

Work is progressing well on two new building contracts, a new head office for Sasol in Sandton and the Mall of the South in Alberton, in spite of heavy rains in the second half of the financial year and unforeseen ground conditions at the Sasol contract.

The Coastal operations in the Western Cape, KwaZulu-Natal and the Eastern Cape are primarily building businesses with a growing focus on civil engineering. They performed well generally, securing profits from a range of commercial building, healthcare, renewable energy, rail and road projects.

Key focus areas

Financial performance

Revenue increased by 12% to R7,5 billion, largely as a result of the ramp up of the Nacala and Majuba rail contracts and the commencement of two new building projects, the Mall of the South and the Sasol head office in the second half of the year.

A net operating loss emanated from the execution of legacy contracts, most notably the Mokolo contract, at insufficient margins, labour disruptions which had an impact of R97 million, operational challenges on current major projects and high fixed overhead costs and operating expenses.

Aveng Grinaker-LTA Civil Engineering achieved a 39% increase in revenue to R3,1 billion but its profit margin was heavily impacted by the Mokolo contract which was a significant contributor to the overall operating loss.

Aveng Grinaker-LTA M&E reported a decline in revenue to R1,7 billion. The profit margin was eroded by the mechanical and electrical power projects.

Aveng Grinaker-LTA Building and the Coastal operations reported a 3% increase in revenue, largely as a result of the completion of the Cradlestone Mall contract in the first half of the year and the ramp up of the Sasol Head Office and the Mall of the South in the latter part of the year.

Operating performances had a severely adverse impact on cash flows and Aveng Grinaker-LTA remains reliant on substantial group funding. Working capital and cash management remain a priority.

Strengthen management

Chris Botha was appointed Managing Director of Aveng Grinaker-LTA with effect from 2 January 2014. He has 21 years of experience in the domestic construction industry across a range of disciplines, including civil engineering and roads and earthworks in the building, mining and power sectors. The management team was strengthened further by the appointment of five senior operations executives with between 21 and 40 years of experience in financial management, systems management, commercial management, roads and earthworks and civil engineering. This included the appointment of Richard Evans as Divisional Managing Director of civils and earthworks in November 2013 and Andrew Langham as Financial Director in 2014.

Project teams were restructured during the year to re-energise their focus and increase production capacity on site. Performance contracts were introduced for the top 120 managers to strengthen accountability for performance.

Three of the new senior executives are former employees of Aveng who returned to the business. There have been no departures by senior executives since January 2014, signalling an improvement in management stability.

Return to cash neutral position

Aveng Grinaker-LTA commenced a campaign to reduce fixed overhead costs at its head office in the second half of the year, which included redundancy of certain support function employees. The main positive impact will be experienced in the 2015 financial year.

Addressing underperformance and implementing active risk management to improve project execution and ensure projects achieve required margins

The challenges contributing to underperformance in loss-making projects were identified and interventions were implemented to establish and embed project execution standards across the project lifecycle. The strengthening of project teams, and increased engagement between senior executives and clients to ensure a clear understanding of client needs and how best to fulfil them, have been key initiatives in the bid to improve project execution.

Strengthen commercial management

Commercial risks and opportunities across the portfolio are managed through a commercial forum to ensure robustness and early warning of problems, and provide support for the realisation of opportunities. The forum is attended by commercial, legal, financial and operational managers.

This process has resulted in transparency in the management of progress billings and uncertified revenue and it provides support to commercial teams that experience difficult commercial or legal challenges.

Strengthen labour relations

The material financial impact of industrial action has made it necessary to further strengthen relationships between management, trade unions and the workforce. This has been pursued by proactively engaging with labour across all business units, strengthening the relationship between senior line managers and union leaders and conducting workshops to facilitate more effective communication between the parties.

Plans have been implemented to overcome the delays, increased costs and inefficiencies associated with labour disruption by improving productivity and increasing production time.

Maximise exposure to growth markets

Aveng Grinaker-LTA has identified the sectors that offer it the best future growth potential in South Africa, Mozambique, Namibia and Mauritius. These include mine infrastructure, industrial plants, transport infrastructure (major roads, rail and ports), water infrastructure, retail, commercial and industrial building, healthcare facilities, oil and gas, mine process plants and power plants. The operating group is determining a plan to bridge the gap between its position and the business it needs to become in order to maximise its exposure to these markets.

Aveng Grinaker-LTA is being positioned for opportunities in sub-Saharan Africa, alongside other group operations. Aveng Mozambique Limitada, a Maputo-based building company owned by Aveng, will be the platform for expansion into East Africa. Aveng has an established presence in Mauritius through its 43% holding of the multidisciplinary construction company, REHM-Grinaker.

Safety and environment

Three fatalities occurred during the year. In November 2013, an employee of Rand Roads was involved in a fatal accident while operating a bitumen distributor. In February 2014, a service provider's driver for the Soshanguve stadium project was involved in a truck accident on site. The third fatality in January 2014 involved an off-site road vehicle accident. Aveng Grinaker-LTA regrets these losses of life and has reaffirmed its commitment to a strong focus on safety management.

An overall improvement in safety performance was reflected in the reduction in the LTIFR to 0,14 (2013: 0,28), below the target of 0,2. The AIFR was 1,8 (2013: 2,6). A number of projects achieved commendable safety performances, including 6,5 million LTI-free hours at Sapref, 2,2 million LTI-free hours at Skorpion Zinc in Namibia, 1,7 million LTI-free hours at the Majuba rail project and M&E's Vaal workshop and 1,5 million LTI-free hours at M&E's Medupi projects.

Training in environmental legal liability was conducted throughout the operating group to ensure an understanding of the National Environmental Management Act. Areas of environmental concern were noted in certain workshops and Aveng Grinaker-LTA is implementing actions to address these concerns.

Refer to the sustainability overview at
www.financialresults.co.za/2014/aveng-integrated-report-2014/sustainability for further insight into management actions and focus areas for the year ahead.

Looking ahead

Growth in the South African construction industry is expected to remain subdued in 2015 and profit margins will remain under pressure in an environment in which competition and labour disruptions are likely to continue. There are no immediate signs of a significant increase in government infrastructure investment.

Aveng Grinaker-LTA commenced the 2015 financial year with a two-year order book of R7,4 billion, 7% higher than the comparative in June 2013 but 13% lower than the R8,5 billion reported on 31 December 2013. The order book includes major rail and building projects that will begin to contribute significantly to operating profits in 2015, but it also contains revenue from legacy contracts from which there will be limited profit recognition due to outstanding commercial matters under negotiation.

The bulk of secured work for the next two years is in the infrastructure (50%), power (24%), mining (10%) and industrial and commercial building (9%) sectors, with the balance in the oil and gas (5%) and water and environmental (2%) sectors. This split indicates a marginal decline in infrastructure work and marginal increases in power and mining sector work compared to the 2014 financial year. Much of the work that Aveng Grinaker-LTA has tendered for but not yet been awarded is in the building, roads and mining sectors. The building and civil engineering business units each account for 41% of the order book (82% in total), while the M&E business unit accounts for 17%. Work on hand outside South Africa amounts to 9%, indicating an increase in cross-border diversification, while public sector work, which declined from R3,6 billion in the 2013 financial year to R1,5 billion in 2014, continues on a downward trend.

Progress has been made in key focus areas intended to stabilise Aveng Grinaker-LTA, address its critical challenges in underperforming contracts and return it to sustainable profitability. A strengthened leadership team remains focused on improving project execution and commercial management and aligning fixed overheads with revenue. Senior management will also focus on optimising the balance between the core functions of building, civil and earthworks engineering, and mechanical and electrical engineering to strengthen profit performance, and diversifying the portfolio of projects based on client, country, and competency to mitigate risk.