SA, Africa construction Aveng's achilles heel


05 Sep 12

The South African and African construction and engineering division should shoulder a substantial part of the blame for construction group Aveng’s 64% drop in operating profit to R535-million for the financial year ended June 30.


Group revenue was up 19% compared with the previous financial year, to R41-billion.

The local construction division reported a 4% increase in revenue to R9.9-billion, but the flipside of the coin was a R733-million loss for the period, down 265% from the R443-million profit reported in the 2011 financial year.

Aveng financial director Kobus Verster said on Wednesday that this loss could be attributed to “cost overruns and time delays” of around R200-million on a Free State roads project, two Sasol projects and a batching plant project, in Zambia. Margins in the region were also under pressure, with the absence of any big projects completed in 2012 also to blame.

Included in the loss was also a provision for a settlement in the Competition Commission investigation into collusion in the construction industry, and the poor performance of DSE Steel Fabrication. The latter was linked to Eskom’s power programme, with Aveng pursuing a claim against Murray & Roberts company Genrec regarding steel supply to the Medupi and Kusile power station projects.

Aveng CEO Roger Jardine added to this list by saying that the construction company Grinaker-LTA, which formed part of this division, had also been the subject of restructuring spend, as well as holding costs to retain skills in case of increased public sector spend in South Africa.

The restructuring of Grinaker-LTA had shrunk the company by around 150 people, with Aveng’s payroll almost 5 000 people smaller than during the construction boom in 2008.

Overheads at the company were also cut by 20%, and stronger risk management implemented on smaller projects.

“The restructuring has been quite painful, but it is done,” said Jardine. “In the year ahead we look to a substantial improvement in the performance of Grinaker-LTA.”

He added that Grinaker-LTA currently had little public sector work to keep it busy.

Only 3.6% of Aveng’s current two-year order book of R46.9-billion (up from R37-billion a year ago) would play out in the South African public sector, down from 13.3% in 2009. He said this could change as “government’s infrastructure roll-out gained momentum”, but added that this “won’t happen overnight”.

Jardine only expected to see more public sector projects find their way to local construction companies’ order books in 18 months’ time.

He warned that this prolonged investment trajectory had an impact on “employment generation” and “employment retention” at Aveng.

While the South Africa public sector could secure just under 4% of the Aveng order book, Australasia and the Pacific, as a region, had a 57% share. In fact, markets outside the rand-currency sphere made up 74% of the Aveng order book.

Australia was showing signs of cooling down, though, noted Jardine, with a slowing Chinese economy impacting on mining and infrastructure projects in the country.

“You have to keep a close watch if you operate in the commodities space as we do.”

He noted that Aveng was “hedging” against a global slowdown by operating in different currencies and different commodities.

The outlook for iron-ore was “questionable”, for example, said Jardine, while gold was “more positive” than other commodities.

Coupled to the commodities market, Jardine added that Aveng was also “bracing itself” for a softer steel environment “in the short to medium term”, with little or no price increases on the horizon.

Asked why Aveng still managed to show a profit while some competing local construction companies were pushed into the red in the past financial year, Jardine speculated that this could be attributed to the fact that companies which historically had big contracts leading up to the 2010 FIFA World Cup did not replace those with “small and intermediate projects”.