Aveng ends seven lean years of debt, losses

Aveng, which these days earns a big chunk of its revenues from its infrastructure, engineering and construction business in Australasia, is seeing daylight at last - this week reporting its first profit in seven years.

The group found itself back in the black for the first time since June 2014 with headline earnings of R751m in the year to end-June from a loss of R950m last year, and revenue surged to R25.7bn from R20.9bn.

This is due in the main to strong performances from its core businesses such as Moolmans - whose activities include open-cast mining, shaft sinking and earthmoving services for the mining sector in SA - and McConnell Dowell in Australia and New Zealand.

This is good news for investors, who must be asking themselves when the market will reward the turnaround with a rerating of the group's share price.

Aveng's shares, which were trading at a lofty R24 in 2007 during SA's construction sector heyday in the build-up to the 2010 Soccer World Cup, later plunged to 1c. Over the past two years the price, albeit still in penny stock territory, has recovered to a range of 5c-7c/share.

Sean Flanagan, who has been CEO since early 2019, said that though he and CFO Adrian Macartney are more concerned with ensuring that Aveng is profitable in all its segments than with share price performance, he is confident there will be a rerating over time.

Aveng’s headline earnings for the year to end-June, from a loss of R950m the year before

—  R751

"We are starting to see that Aveng is moving in the right direction. I think the share consolidation that we announced [on Tuesday] . will consolidate the share price. I think we will move away from being seen as a penny stock," Flanagan said.

"But of course we now have to consistently perform. It's great to be able to say this is the first time in seven years that we've delivered headline earnings. Now the pressure is on us to perform consistently. I think there is more than just hope for a rerating.

"I think there is a belief that we are doing the right things. We have built a really good team and we have two really good core businesses, and if we pay attention the way we have been paying attention, then we can look forward to consistent performance."

Macartney said the main focus has been on "getting the basics right".

"It's about having businesses that generate profits; we turn those profits into cash," he said.

"We pay down our debts. This is doing the basics right. Sean and I don't sit back and say, 'I wonder if that is going to change the share price?' We believe what we have to do is right and that the market will then set the share price and reward us accordingly for getting those basics right."

Adrian Saville, investment specialist at Genera Capital, said Aveng's results were "impressive" across the group's segments and geographies, showing a strong turnaround.

He said that over the past 24 months, Aveng has provided "strong evidence of a compelling turnaround story".

"[If] they can keep that wind in their sails, this business is worth substantially more than the current market capitalisation of just over R4bn would suggest."

Macartney said he and Flanagan have a hands-on approach and are "deeply involved" in the day-to-day operations of the group's businesses.

"We are involved in hiring people, who get onto the executive committees, we meet with excos constantly, albeit electronically these days. We make sure those people are performing and they have the right tools and right resources to get their jobs done."

A lot of changes have taken place at Aveng, not least the way it has largely moved away from the struggling local construction market in the past few years to focus on Moolmans and McConnell Dowell.

Flanagan conceded that, like many others in the sector, Aveng took its "eye off the ball" after the boom years leading up to the World Cup. But he said the same could be said of McConnell Dowell, which had also been reporting losses at the time.

Importantly, the group is now cash flush after years of battling to keep its head above water as its huge debt pile kept growing.

Macartney said the group had net cash of R1.1bn at year-end, compared with net debt of about R1bn at the same time last year.

Flanagan said a lot of the hard work to get Aveng back in the black began in 2017 under the then executive chair Eric Diack and Macartney, who joined the board in 2014.

"The reset and fixing of Aveng didn't start two years ago. It started in August, September 2017 when Eric Diack stepped in as executive chairman," Flanagan said.

"It's been a four-year process to get the organisation back on track. What happened in the first two years was effectively saving the company.

"There was a significant amount of corporate action where Eric as executive chair and Adrian as the financial director had to renegotiate our debt package, they had to raise additional debt, they did a rights issue, they had to settle a R2bn convertible bond.

"They had to do all of that to just get us to the start line to have any hope of finding a path forward."

Flanagan said Diack, Macartney and the Aveng board also developed a strategy of disposing of noncore assets.

He said that though the group's South African construction business, Grinaker-LTA, was a "significant contributor" to the trouble Aveng got into, there were problems right across the group.

"There were also significant losses posted over several years in our Australian businesses. There was a complete reorganisation, restructure and refocus of the Australian business with new people appointed there over the past five-six years.

"And we are seeing now the benefits of all the work that went into fixing that organisation and we've been fortunate insofar as the timing of McConnell Dowell starting to really perform has coincided with some real opportunity that has come about across the regions where that business operates."

He said Aveng's manufacturing businesses, which supplied building materials to the South African infrastructure sector, had also been "somewhat of a drain on the organisation" and that the group has "all but disposed of those now".

"I don't think it's right to necessarily say that it was one part of the organisation that dragged us down.

"I think it was many parts of the organisation and when you have parts of the organisation that aren't performing there are only two places you can look to, and that is the board and executive management. So the board and executive management have had to stand up and be counted in order to turn the group around."