Aveng has in some form or another been involved in building SA infrastructure and altering the local skyline for more than 130 years. The group’s roots go back as far as 1889.
At this stage, with the construction sector particularly tied to the ups and downs of the domestic and global economy, there’s little room for error for Aveng. After the boom years of infrastructure spending that led up to the 2010 Soccer World Cup, activity slowed mainly as a result of lacklustre government spending. Aveng was not well positioned for this slowdown, as it had excess debt and an unsustainable capital structure.
Being an Aveng shareholder from 2010 has not been a great place to be. The group’s enterprise value (which adjusts the market capitalisation for cash, preference equity, minority interest and total debt) has been hammered over this period — from an estimated R6bn to its current estimated R450m. The share price has fallen from around R111 to its current 2c. Outstanding shares in issue have ballooned from 1.2-billion outstanding shares to 19.4-billion (and that’s pre-March rights issue) as the group converted debt to equity and tapped shareholders for cash.
However, part of the solution is admitting there is a problem. After a few years of losses and unacceptable financial performance, Aveng acknowledged in its 2017 year-end results — which showed a net loss of R6.7bn — that it was no longer "business as usual". The group announced a strategic review of its portfolio to identify core assets and create a sustainable balance sheet.
This action resulted in the cutting of head office costs, asking long-suffering shareholders for more cash in the form of rights issues, actively targeting the capital structure of the business and the identification of noncore assets for disposal. The latter process resulted in 14 businesses being identified as noncore — including Grinaker-LTA and the manufacturing and steel business units — to enable the group to focus on its core operations in Moolmans and Australia-based McConnell Dowell.
The business is now well down the road of right sizing and the corporate head office headcount has reduced from a high of 200 to a leaner 37.
Though the Covid pandemic disrupted these restructuring plans — especially the sale of the remaining noncore assets — the latest set of interim results (to the end of December 2020) act as a good report card on how much has been achieved since the start of the restructuring process. A simpler business has emerged which focuses on Aveng’s core operations, McConnell Dowell and Moolmans. McConnell Dowell is an engineering and construction company operating in Australasia, while Moolmans is an opencast mining and shaft-sinking contractor based in SA.
To give an indication of the potential of these two businesses, operating earnings for the six months ended December 2020 comprised R293m of the total operating earnings reported of R280m.
Despite lower interest rates and the restructuring of its debt, which has reduced the interest charge to R177m from R217m at December 2019, further action is under way to restructure and recapitalise the business.
A two-part action plan includes a fully co-underwritten rights issue at 1.5c a share to raise R300m (comprising the issue of 20-billion shares, meaning outstanding shares will almost double). The rights issue is being underwritten by funds managed by Highbridge Capital Management (a subsidiary of JPMorgan Chase & Co) and US-based Whitebox Advisors.
According to the results presentation in February, R215m of the rights offer proceeds will be used to settle R680m of debt and interest owing to certain lenders (at a discount of R465m). The second part of the balance sheet restructuring strategy is a specific share issue of R396m (at 5c a share) to settle further debt owed to lenders. The combined effect of the restructure is expected to reduce SA lender debt from R1.9bn to a more manageable R913m. The balance from the rights offer will be available to the group for working capital.
Aveng showed a significant turnaround in operating performance over this six-month period, with headline earnings of R109m compared with a R950m loss for the full year ended June 2020.
With its more focused structure the group is now well positioned to benefit from any pick-up in infrastructure activity in Australia and New Zealand through McConnell Dowell as well as any increase in mining activity in Africa and SA from Moolmans. There should be a more solid foundation for growth.
*The writer holds shares in Aveng
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