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Aveng FY HEPS down 10%: Kobus Verster – CEO, Aveng Group

The numbers reflect a sluggish domestic economy.

HANNA BARRY: Construction and engineering group Aveng issued results for the full year through June this morning. Revenue was flat, growing 2% to R53bn, while headline earnings fell 10% to R421m and headline earnings per share were also down 10%. Operating earnings were up 20% to R784m. No dividend was declared and the company’s net cash position has fallen 46% to R1.3bn.
   Joining us now is the chief executive of the Aveng group, Kobus Verster. Kobus, it’s good to have you on the show, although it seems to be tough times in the South African construction sector.

KOBUS VERSTER: Yes, thank you and good afternoon. Ja, locally I think it’s still a difficult environment. The infrastructure spend is not really coming through, so obviously that makes it difficult.
   But I think overall, if you look our operating earnings are up 20%. So the underlying performance of the business has started to improve. But unfortunately we were also affected by still-loss-making contracts in Australia, as well as a very difficult domestic market.

HANNA BARRY: I’d just like to pick up on the Australia business. I notice that you declared R6.7bn in uncertified revenue, which is money owed to the company that’s in dispute. Can you explain to us what’s happening there?

KOBUS VERSTER: Ja, the combined amount consists of the whole group, but a large portion of that pertains to Australia. And the two big contracts are the QCLNG export pipeline project and the Gold Coast rail project. So obviously those projects had substantial cost overruns and currently there is a commercial dispute with the client as to what portion of that is actually owing to us. It will take time to resolve.

HANNA BARRY: When do you expect that to be resolved, Kobus?

KOBUS VERSTER: There are complex issues in both of them, and I expect both of them to take some time – in the region of two years.

HANNA BARRY: Taking a look at the domestic business, Grinaker LTA, your construction company in South Africa, made a R500m-odd loss, which of course is down quite significantly from the loss last year, but it’s still loss-making. When do you expect that to return to profitability?

KOBUS VERSTER: I think that although the loss has reduced by 42%, it’s still a substantial loss. That’s a function of having a range of old legacy contracts that we are still executing at almost no margin. We also had some labour disruptions.

   So obviously we are turning around the business. There have been no additional poor-performing contracts added to that. The order book is relatively strong, but it’s at this point in time difficult to give a precise time as to when we will turn positive. But we are very comfortable that we will have substantial improvement in earnings for that part of the business in the short term.

HANNA BARRY: It’s certainly positive to note that labour disruptions have had less of an impact on group revenue this year as opposed to last year – almost halving as well. Of course, that remains a focus and a concern in the South African environment. For Aveng, where are you most concerned about potential labour disruptions?

KOBUS VERSTER: Although our own labour force has been relatively stable and less disruptive, we are impacted largely by external factors – for instance, the manufacturing and processing side of the business. A lot of sales to the mining industry have been affected in our steel business, and the strikes in the automotive sector obviously had an adverse effect on us. So those are the areas that remain a concern to us and are still very difficult to plan around and to predict.

HANNA BARRY: Let’s talk about opportunities now. Where does Aveng see opportunities on the African continent?

KOBUS VERSTER: In South Africa obviously we require some improvement in the general infrastructure spend, though on the rest of the continent there is a substantial rail-related opportunity. We are quite active in Mozambique in the export and manufacturing domestically there of rail sleepers, as well as the construction of a rail project.

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