Aveng: Operational and trading updates ‘factually accurate and aligned’

It’s a pure technical accounting issue, and it’s getting in the way of another good six months’ performance – CEO.
The group says it will provide a reconciliation in its full set of results for the half-year to end-December on Tuesday (February 22). Image: Moneyweb

JSE-listed construction and engineering group Aveng maintains that both its operational update issued last month and this week’s trading statement are “factually accurate and aligned”.

This follows Aveng’s shares plunging more than 17% in afternoon trade on the JSE on Monday to close at R22 a share on the day, after the share price weakened by as much as 35% at one point following the group’s publication of its latest half-year trading update.

Aveng Group CEO Sean Flanagan said on Wednesday: “Nobody is more frustrated than I am around this issue because it’s a pure technical accounting issue, which is getting in the way of another good six months performance.”

Aveng group financial officer Adrian Macartney said the group will be releasing its financial results on Tuesday for the six months to end-December, adding: “You are going to see that McConnell Dowell delivered a dollar number that is very similar to the prior comparable period as did Moolmans as did Trident Steel.

“When you look at it, that is exactly what we stated in our January Sens,” he said.

Explanation awaited

Aveng has been under pressure to explain the differences in its operational update issued in January this year and its trading update published this week, which led to the slump in the group’s share price.

Some analysts this week questioned how the trading update could highlight that Aveng is expected to report headline earnings of between R14 million and R19 million, compared to R109 million in the previous corresponding period, representing a decline of between 83% and 87%, when no mention was made about this in the operating update.

One shareholder said Aveng gave an update less than a month ago indicating that all seemed good and everything was in line with budget but now issues a trading statement that says earnings will be down 90%.

“There’s a R400 million drop in earnings – not just a R50 million drop due to Trident Steel accounting issues. Completely misleading,” the shareholder said.

“What are they thinking? Surely one can’t trust people like this.”

Macartney said it is most unfortunate that these serious allegations have been made by unnamed parties who choose to not engage with Aveng.

Anomalies

Macartney said the trading statement clearly sets out the anomalies associated with the application of International Financial Report Standards (IFRS) 5 accounting.

“This accounting has been discussed with our auditors. The accounting impact in the comparable period was equally drawn to the attention of shareholders in the 2021 presentation.

“We pride ourselves on our transparency with all stakeholders, which in the normal course of business includes complex messages which sometimes include welcome, and sometimes less welcome news.

“It is this transparency that has helped us gain and retain the trust and support of all our stakeholders.

“Any statement to the contrary would be reckless, false and defamatory,” he said.

Macartney stressed that misleading the market is a very specific allegation that Aveng takes very seriously because it has criminal consequences.

He said that in the prior period, there was a R450 million fair value gain and one of the two different concepts of IFRS 5 is that if you hold an asset for sale, it is valued at fair value less cost to sell and any movements in that asset value are recognised through a fair value loss or gain line item in the income statement.

“That was fully disclosed and separately identified and pointed out to the market in our results for the half year in the prior period,” he said.

In terms of IFRS 5, if an asset held for sale is not sold within a year, it has to be reclassified as a continuing asset.

Trident Steel

Flanagan said the accounting standards are quite technical but Aveng is still absolutely committed to selling Trident Steel but will not sell it for below value.

“We are in negotiations with a couple of parties so it’s absolutely still for sale but the financial guys, the accountants and auditors etc, are bound by rules that requires us – notwithstanding that it is for sale – to reclassify it as not held for sale.

“I think it’s madness but I’m not an accountant,” he said.

Macartney believes there is a lack of understanding of a difficult topic and a reclassification of an asset but the asset itself has not performed differently.

“In fact, it has performed better,” he said.

Turnaround

Aveng in August last year reported headline earnings per share of R751 million in the year to end-June 2021 compared to the R950 million loss in the previous year on the back of a 23% rise in revenue to R25.7 billion from R20.9 billion.

This prompted Flanagan to say at the time that they see the year to end-June 2021 “as a very very significant step forward in our road towards returning Aveng to the status it used to hold”.

Flanagan said on Wednesday this is “absolutely” still intact.

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Macartney added that there are particular rules about providing pro forma information to investors and Aveng will provide that reconciliation in its full set of results and presentation but the JSE does not like companies to provide explanations in trading statements of what is referred to as normalised earnings.

“So there is a bit of an issue in that,” he said.

Shares in Aveng declined by 0.58% on Wednesday to close at R22.40.

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The Directors and accountants of Aveng will be held accountable if it is found they did not act in shareholder interest. South African investors should not tolerate this c**p of people in Ivory towers trying to befuddle the ordinary shareholders with “corporatespeak”, absolute BS…

I have3 always believed in Aveng as a shareholder but confidence is severely shaken, I took part in the rights offers of 2020 – 2021 going on the promises of improved performance, trusted them, then my shares are diluted 500 to 1 .. shocking…

I’m out…

Aveng article by Roy Cockayne 17 Feb 22:

I find the graph in the article misleading, showing a Y axis of units in thousands of Rands and the x axis going back to heights of the 2017 share price, leaves the reader with the impression that Aveng’s share price is a flatline since the beginning of 2019. Given that the article does not want to instill panic, surely it would be better to show a graph with a Y axis in Rands and an X axis starting in January 2019?

Hi there. The graph has been updated to reflect the trend over seven days. Our apologies!

In the good old days of accounting methods, all these unrealised adjustments whether up or down did not flow through “earnings” at all. Eg an upward fair value adjustment to an asset that was preously carried at cost would simply add R100m to the asset in balance sheet and the other leg goes to a Non Distributable Reserve.

One look at balance sheet showed a user what is real and what is journals. Similarly the notes to the capital asset would show the R150m cost and R100m upward valuation.

I get that where the underlying item is a trading asset (eg inventory or debtors), it should run through the P&L, but on capital assets the modern treatment confuses many investors and creates enormous opportunity for the hired help to use spreadsheets and journals to massage earnings to what flatters. The past decade in REIT is a classic example. Property revaluations far outstripped actual operating income. All that backs this earnings is a ten line spreadsheet with five management-decided variables.

Maybe we have tinkered too much with accounting. That, or too many users (and analysts) do not understand the cash flow statement’s power for reconciling facts and theory.

End of comments.

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