South Africa: Aveng results tells a tale of different market realities
Aveng continues to face challenges in South Africa while its overseas operations have proved more resilient, its 2020 results show.
The company is listed on the Johannesburg Stock Exchange and operates in construction, engineering and mining. Since 2018, Aveng has embarked on a strategy revamp which entails the disposals of non-core business units, most of which are in South Africa and some operate in the rest of Africa. In addition, the company renewed its focus on its core businesses.
Those businesses include: McConnell Dowell, an engineering, construction and maintenance contractor and Aveng Moolmans, an open-cast mining contractor.
The envisaged group structure comprises:
- McConnell Dowell and Aveng Moolmans forming the core businesses
- Aveng Construction: South Africa (formerly Aveng Grinaker-LTA)
- Aveng Manufacturing and Aveng Trident Steel are now deemed non-core
“As at 30 June 2020, management remained committed to a robust plan to exit and dispose of the identified non-core operating groups,” states the company.
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But Aveng does note in its results that COVID-19 has disrupted disposals. Despite this being the case, “due diligence [is] underway by four credible potential buyers” for the steel business.
COVID-19 stress test
In the 2020 financial year, Aveng posted an after-tax loss of R1.1bn ($73m). This included R147m of impairments. “As a result of these losses, the continued difficult trading conditions in South Africa and the impact of COVID-19 on the operations, the group’s available cash resources were negatively impacted,” according to the company’s market announcement.
At group level, the company is focusing on improving operational performance, reducing overheads and improving working capital efficiencies.
Aveng’s diversity across customers, geographies, sectors and commodities provided risk mitigation and ameliorated the impact of COVID-19 disruptions on the overall business performance, it said.
Despite enacting risk mitigation, COVID-19 created a liquidity shortfall in April and May 2020. The “… [pandemic] resulted in a R400m liquidity shortfall in South Africa,” said group CEO Sean Flanagan in the results presentation.
Aveng addressed the liquidity shortfall through a short-term, R200m facility with the group’s South African relationship banks. Aveng repaid the facility in August 2020. In addition, Aveng was able to deal with the liquidity stress by instituting cuts to staff, management and board salaries and wages, which yielded savings of R168m.
“Senior staff across the group accepted 20%-40% salary cuts for three months at the height of the first wave of the pandemic.”
Furthermore, Aveng received “… [support] from clients” in the form of “compensation for costs incurred and time lost … [and] extensions of time for project delays resulting from COVID-19 restrictions and measures.”
Although operations were restricted in South Africa, New Zealand and South-East Asia for varying lengths of time during the period under review, Aveng’s Australian operations continued throughout the period.
Aveng manages its liquidity and cash flow in two distinct liquidity pools: McConnell Dowell and the South African liquidity pool.
In the year under review, “McConnell Dowell’s liquidity benefited from the deliberate action to settle legacy claims, the receipt of advance payments and a growing order book.”
The effect is that McConnell Dowell will report a better cash balance, with sufficient cash and liquidity, to support the growing order book, as well as the growth opportunities that its operating market continues to present for Aveng.