After the stock price dropped nearly a third on Monday afternoon following a trading statement, the CEO of infrastructure and services group Aveng moved to reassure investors and clarify the impact of reclassifying its Trident Steel subsidiary.
Aveng’s shares fell as much as 35% to an eight-month low before paring losses. It closed trade 17% lower at R22.
Group CEO Sean Flanagan was at pains to attribute the reaction of the market to its trading statement that warned earnings could fall as much as a quarter in its half-year to end-December.
In a voluntary statement in January, Aveng reported that its three divisions had met expectations for the month period ended January 31 2021 in revenue and operating profit, despite challenging trading conditions. And now it is saying it expects to report operating earnings of R210m for the six months ended December 31 from R280m previously.
On Monday, Aveng announced it had reclassified Trident Steel as a continuing operation for its 2022 half-year, resulting in the recognition of a prior period’s depreciation of R155m, partially offset by a reversal of previously recognised impairments of R103m. This net charge has been included in the earnings figure, the group said.
“I think the misunderstanding from investors today [is they have] not understood the IFRS calculations around Trident Steel, and I think that’s what’s got people hot and bothered and prompted them to start selling down,” Flanagan said.
He said the group needed to complete the disposal of Trident by June 30 for it to remain classified as held for sale, “and we think it’s unlikely that that’s going to happen”.
Group CFO Adrian Macartney said the group had previously accounted for Trident Steel as a “held-for-sale” asset and one of the requirements under IRFS5 was for a company to be able to dispose of the asset classified as held for sale and complete that disposal within 12 months.
“I can’t give that level of comfort to our board or investors that we will have everything concluded and done within 12 months,” said MacCartney, adding that Aveng is now busy with negotiations with various parties that may or may not be completed within 12 months.
“We correctly then reclassified and presented in the financial statements Trident Steel as a continuing business and that brings about a different set of accounting.”
Trident Steel supplies a wide range of steel, including automotive blanks, special steel, structural and plate, as well as pipe and tube.
Aveng said it remained committed to disposing of this business, without giving the market a ballpark figure, but insiders say the business is valued about a 3x multiple of full-year earnings before interest and tax (ebit).
Aveng, previously one of SA’s largest construction companies, says trading continued to be affected by the effects of Covid-19, including travel restrictions and lockdowns.
In addition, SA was hit by riots, a steel industry strike and a global shortage of semiconductors affecting the automotive sector, the group said.
Aveng has given up on construction in SA, where it now focuses on Moolmans, which provides services such as shaft sinking and bulk earthmoving, and is one of Africa’s largest open-cut mining contractors. This business is expected to report a slightly reduced profit, the group said.
The group’s other core business is Australasian engineering, construction and maintenance contractor McConnell Dowell, and it said on Monday this business is expected to report a profit in line with that of the prior period.
“We showed a profit last year for the first time in many years, we will show a profit again in this half-year period, and we fully expect to show a profit for the year,” Flanagan said.
Update: February 14 2022
This article has been updated with Group CEO Sean Flanagan’s statement.
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