In the March edition of IM we wrote about how, after a collapse of its share price, Aveng was well down the road of right-sizing its business.
It had spent the past three years disposing of noncore assets, cutting costs and actively targeting its capital structure (which included asking long-suffering shareholders for more cash in the form of rights issues). With the share price trading at about 3c at the time we asked whether Aveng was the "ultimate penny stock punt".
The share price is now at around 6c, so this has indeed turned out to be a good "punt". The question now is whether the company has done enough to not merely be a speculative short-term trade but rather a worthy contender as a longer-term investment.
Since the publication of the above-mentioned article Aveng has presented its financial results for the year ended June 2021. It announced the disposal of its Automation Control Solutions business for about R70m and proposed (it needs shareholder approval) the restructuring of its share capital by consolidating every 500 shares into one share (which it aims to have completed by mid December). All this news flow gives investors more colour to assist with making a longer-term investment decision.
The highlights of the full year results for the year ended June 2021 show the group is now benefiting from the implementation of its restructuring and recapitalisation programme, having raised R492m through a rights offer, and reducing its debt by R1.1bn. Further positive signs are the 23% growth in revenue to R25.7bn and at the reported headline earnings level (the first full-year positive number since its 2014 year end).
The group’s long-term focus on its two core businesses, namely McConnell Dowell (which has a construction and engineering focus in Australia, New Zealand, South East Asia and the Middle East) and Moolmans (an open-cast miner operating in SA and further across Africa), has proven to be the correct strategy.
McConnell performed above budget, reporting operating earnings of AUS$28 in its recent results, compared with only AUS$6m last year (adjusted to exclude an AUS$19m impairment and the settlement of legacy claims). A further positive for Aveng is the AUS$6.5m final dividend declared by McConnell, which paid an interim dividend of AUS$5m.
Admittedly helped by a positive commodity environment, the turnaround strategy implemented in Moolmans in 2019 is also bearing fruit for the Aveng group. While Moolmans revenue remained similar to the prior two years, its net operating earnings benefited from better-quality work and bounced from the R38m that was reported in June 2020 to R239m for June 2021.
The future for these two business units remains quite rosy as McConnell (which benefits from government underpinned infrastructure spend and a return of private sector resource clients) has work in hand of AUS$1.9bn and a pipeline of potential work of about AUS$10.5bn while Moolmans has WIH of R5.4bn and R15bn of potential work still in its immediate pipeline.
The balance sheet of the group has been substantially de-risked, with SA total debt and guarantee exposure reduced from a hefty R6bn in 2017 to the reported R1.4bn, and is expected to lessen even further as a result of positive cash generation and the sale of remaining noncore assets.
One such remaining asset is Trident Steel, which produced solid profit growth and cash flow but remains noncore and is consequently still on the sale list. Its relatively strong results should, however, help the group achieve a better price for this asset, which Aveng will be able to use towards reducing group debt even further.
The more than 60-billion shares in issue effectively positions the company as a "penny stock", which usually carries speculative undertones. The 500-to-1 consolidation and fractional entitlement rules proposed by Aveng could therefore potentially improve the perception of the group as a long-term investment.
On a more practical basis, reducing the number of shares in issue will lessen the administrative cost and burden that comes with servicing so many outstanding shares.
The turnaround strategy implemented by Aveng has resulted in a more concentrated and simpler group structure and improved operating margins. This, together with a strengthened balance sheet with improved liquidity, has resulted in IM taking the view that the group has substantially de-risked and is well positioned for future growth.
Despite better cash generation, however, don’t expect dividends in the near term, as Aveng continues to be focused on reducing debt further.
The writer owns shares in Aveng.
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