Delayed tenders, mine strikes to take toll on Aveng

Adverse market conditions, notably in the construction and steel environment, were still impacting on the Aveng Group, said chairperson Angus Band in a statement at the company’s annual general meeting on Thursday.

He noted that the construction market in Australasia had slowed down “substantially” in the first quarter of the new financial year, with “a sharp decline” in tender activity.

“In South Africa, the envisaged R844-billion public sector infrastructure spend has not yet translated into increased tender activity in the local market.”

Band said Aveng’s potential order pipeline remained stable at R111-billion, although tenders were “taking much longer to be awarded and contract terms were increasingly onerous”.

The group’s two-year order book had decreased by 9% from R47-billion at June 30, to R43-billion at September 30.

Around 73% of the order book was from the private sector and 74% outside of South Africa.

Limited New Opportunities

In the construction and engineering South Africa business, Band said the struggling Aveng Grinaker LTA continued to experience difficult market conditions with “limited new opportunities impacting on the order book and margins”.

Despite securing R1.6-billion in new work, the two-year order book had declined by 3% to R6.3-billion.

Band said, however, that a number of tenders were in the final stages of negotiation, which could have a material impact on the order book.

“Aveng Grinaker LTA continues to focus on project execution and embedding the benefits of the restructuring process, all with the near-term objective of returning to profitability,” he noted.

The performance of Aveng Water and Aveng E+PC had been hampered by delays in project awards and a lack of new projects.

This said, though, Aveng E+PC had been awarded “various new projects” which were largely scheduled to start in the next calendar year, reported Band.

While McConnell Dowell was also experiencing tighter trading conditions, the two-year order book remained strong, at $3.2-billion.

A number of contracts had been delayed as the resource sector adjusted its project pipeline to projected demand realities, added Band.

“Although solid progress has been made in resolving the previously reported problematic contracts at the Queensland Curtis liquid natural gas (QCLNG) export pipeline and the Hay Point Berth projects, both from an operational and commercial perspective, McConnell Dowell have yet to reach agreement with the clients on claims and extension of time.

“Until these issues are resolved, these contracts will continue to pose a material risk to the group, both in terms of profitability and liquidity.”

Band said the Adelaide desalination plant project was on schedule to achieve its full capacity of 100 gigalitres of desalinated water a year by the handover date of December, with the Komo project, in Papua New Guinea, progressing well.

Band said Aveng Mining continued to “deliver a strong financial performance, with its geographic diversification being a positive factor”.

A steady workload, improved equipment utilisation and efficiencies continued to underpin this performance, particularly in Africa.

“In South Africa, the impact of the recent labour strikes within the mining industry in South Africa will adversely impact the financial performance for the second quarter of this financial year,” noted Band.

“Despite these events, this operating group is expected to deliver a strong financial performance over the full year.”

In the manufacturing and processing business, Aveng Trident Steel’s volumes were marginally down for the quarter, primarily as a result of the impact of the transport strike on key customers, as well as difficulties in global and domestic steel supply.

Demand was generally muted, which impacted on the unit’s merchant, cutting and tube divisions.

Automotive volumes remained positive, as did the demand for steel by power station-related projects.

“The combined effect of the transport strike, supply constraints and price pressure will materially affect the unit’s financial performance for the first half of the financial year and the outlook for the remainder of the year is dependent on a recovery in demand and price levels,” noted Band.

As for the South African Competition Commission’s fast-track settlement process involving the construction sector, Band said Aveng had submitted a settlement offer, against which a provision had been raised during the 2012 financial year.

The group had, however, not reached a settlement agreement with the commission.

100 000 jobs lost

Band said the medium-term outlook for South African construction would be shaped by the “robust implementation” of government’s national infrastructure development plan.

“The implementation of the infrastructure plan will undoubtedly provide a boost for the industry and create thousands of jobs. Since the peak in 2008, around 100 000 jobs have been lost in the civil construction industry and, in Aveng’s view, the construction and engineering industry is best placed to stimulate growth and create jobs.”

Band added that, while the past quarter had seen a downturn in new business won, particularly in Australasia, the group’s two-year order book remained strong and the project pipeline stable.

“The group would continue to focus on project execution, with a view to reducing the financial impact of challenging contracts. Special attention is being given to improving the overall performance of the local construction segment, as well as the Australian QCLNG export pipeline and Hay Point Berth projects.”

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