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AVENG LIMITED - Trading Statement

Release Date: 02/07/2014 15:06
Code(s): AEG     PDF:  
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Trading Statement

AVENG LIMITED

(Incorporated in the Republic of South Africa)

(Registration number: 1944/018119/06)

ISIN: ZAE000111829

SHARE CODE: AEG

("Aveng", "the Company" or “the Group”)

TRADING STATEMENT

ANTICIPATED FINANCIAL RESULTS FOR THE YEAR ENDED 30 JUNE 2014

Shareholders are advised that in respect of the financial results for the 12 months ended 30 June
2014, the Group anticipates that headline earnings per share (“HEPS”) and adjusted earnings per
share, excluding the impairment of goodwill intangible assets, will be between 0% and 10% lower, at
112.1 cents per share and 124.6 cents per share, compared to 124.6 cents per share in the
comparative period.

Due to the impairment of goodwill intangible assets of both Aveng Grinaker-LTA and the Water
business of Aveng Engineering, a loss per share of between 99.6 cents per share and 112.4 cents per
share is anticipated for the 12 months ended 30 June 2014, compared to an earnings per share of
124.6 cents in the comparative period. This impairment is non-cash in nature and is excluded from
HEPS.

OPERATIONAL AND SEGMENTAL UPDATE

The South African construction and manufacturing markets remain challenging due to the slow
infrastructure-related spend, the impact of lower mining activity resulting from weaker commodity
prices, industry labour disruptions and a generally subdued manufacturing and steel sector. The
building and rail related infrastructure environment in the SADC region offers good opportunities for
the Group. The Australia construction market is experiencing a slowdown in mining-related
infrastructure spend, though it still offers good opportunities, particularly in transport and general
infrastructure.

Notwithstanding these challenges, there has been an uptick in operating group performance with
previously reported under-performing businesses and contracts expected to report a marked
improvement. The Group anticipates a substantial improvement in net operating earnings before
the impact of impairment of goodwill intangible assets. The expected increase in the interest and
taxation expenses however, adversely impacted headline earnings. The overall financial
performance of the Group was adversely affected by the Gold Coast Rapid Transit (“Gold Coast”)
project in Australia. This project was disclosed as a risk during the interim reporting period and has
continued to deteriorate during the second half of the 2014 financial year. The underlying
performance of the rest of McConnell Dowell’s operations was fundamentally sound. The
stabilisation and recovery process at Aveng Grinaker-LTA is beginning to yield results, while the
Manufacturing and Processing operating segment is expected to report improved results compared
to the prior year mainly due to a strong performance from the non-mining related businesses. The
open-cut mining business continues to generate strong margins on lower revenue due to a reduction
in mining activities in the rest of Africa.

Construction and Engineering: Australasia and Pacific

The underlying businesses of McConnell Dowell are generally performing well despite the
challenging business environment in the Australasian and Pacific region and the slow-down of its
core sectors such as mining and pipelines. The financial performance has been eroded by the loss-
making Gold Coast project, resulting in substantially lower earnings against the comparative period.
Overseas operations in New Zealand and South East Asia have performed well, achieving strong
profit growth on increased revenue with excellent project execution in most sectors.

The Australian order book improved by 5% in Australian Dollar and 9% in South African Rand terms
at 31 March 2014 compared to December 2013 reflecting new contracts awarded during the year
particularly in the marine, civil, rail and industrial sectors.

The Gold Coast project has now been substantially completed with technical hand-over to the client
scheduled for July 2014. Consequently, additional cash outflow exposure on this project is limited
but its cost to completion has significantly exceeded budget due to complex design and scope
amendments, along with the impact of execution delay events and project acceleration
requirements. This has resulted in a substantial loss being recognised in the 2014 financial year along
with a significant increase in uncertified revenue. With completion imminent, the process of claim
finalisation and resolution thereof with the affected counterparties, will be intensified. Given the
technical and legal complexities associated with the process, it is expected that the commercial
negotiations will be protracted, and thus the final outcome remains an uncertain and material risk.

As previously communicated, the Queensland Curtis Liquefied Natural Gas (“QCLNG”) export gas
pipeline project was largely completed by December 2013, but the claims position associated with
this project remains unresolved. Although discussions with the client on a commercial settlement
are ongoing, McConnell Dowell is also pursuing its contractual entitlements through the formal
arbitration process, which has commenced. McConnell Dowell will repay the advance payments
received from the client of AUD142.5 million during the first half of the 2015 financial year.

Construction and Engineering: South Africa and rest of Africa

The stabilisation and recovery process implemented continues to gain traction. Aveng Grinaker-LTA
remains well placed to achieve a break-even position during the 2015 financial year, in-line with
previous guidance.

Although the second half of the financial year’s performance has improved compared to the first half
of the year, the impact of the tough external environment and continued labour disruptions in this
and related sectors, together with the challenges experienced on some of the legacy contracts, will
result in a still-significant operating loss for Aveng Grinaker-LTA in the 2014 financial year, though
substantially less than that recognised in the comparative period. Reflecting the delayed
commencement of infrastructure projects in South Africa, Aveng Grinaker-LTA’s two-year order book
declined by 9% to R6.6 billion over the three months to 31 March 2014.
Mining

The Mining segment continues to benefit from its diversified client, commodities and country
portfolio, and notwithstanding the non-renewal of contracts in Guinea, Ghana and Tanzania, Aveng
Moolmans continues to deliver strong financial results, though down on the comparative period. A
large percentage of the recent work lost in Africa has been replaced by new contracts in South Africa
which are at various stages of commissioning and consequently the impact will only be fully felt in
the 2015 financial year.

Aveng Mining Shafts & Underground is expected to deliver a better performance in the second half
of the financial year as some of its projects have progressed to a steady-state shaft sinking phase.

Aveng Mining’s order book as at 31 March 2014 increased by 13% to R8.0 billion due to new
contracts in South Africa in both the open-cut and Shafts & Underground environment

Manufacturing and Processing

Apart from those operations with exposure to the platinum industry and its related industrial action,
the manufacturing-related businesses had a strong year. In particular, the Infraset and Lennings Rail
Services businesses performed well, taking advantage of transport-related opportunities in both sub-
Saharan Africa and South Africa.

Following on from the poor first half of the 2014 financial year, Aveng Trident Steel’s second half
performance was constrained by weak demand, the inability to pass on price increases, increased
competition and lower demand from the automotive industry. The recovery in both Aveng
Steeledale and Aveng Steel Fabrication continues to proceed well.

BALANCE SHEET AND LIQUIDITY

The financial performance and the increased unsettled claims mainly on the QCLNG and Gold Coast
projects have resulted in a deterioration of the Group’s cash position over the past two years.
Notably, the uncertified revenue position of the Group is anticipated to increase by 30 June 2014
from that reported for the interim period ended 31 December 2013, with a consequential
weakening of the operating free cash flow and net cash position for the second half of the 2014
financial year.

The gross debt position for the Group is expected to be approximately R2.9 billion at 30 June 2014,
compared to R2.5 billion reported at 31 December 2013, whilst a net cash position of approximately
R1.3 billion is anticipated, compared to net cash of R2.4 billion at 31 December 2013. Although the
Board remains confident that the claims recognised in uncertified revenue should be positively
resolved, their complexity and the protracted negotiations with the clients may result in their
delayed resolution, which represent an earnings risk to the Group.

Although the Group has sufficient undrawn banking facilities, the Board has decided to diversify the
funding sources, extend the debt maturity profile and reduce the Group’s overall debt levels, thus
enabling the Group to pursue these claims to a positive conclusion and take advantage of growth
opportunities. The Group will therefore:
    -   actively pursue capital market funding alternatives, which do not currently include a rights
        issue, to diversify its funding sources and reduce the Group’s reliance on bank debt. Details
        will be announced closer to the implementation of any such transaction; and
    -   dispose of non-core assets (including properties) with the objective of raising at least R2.5
        billion. Actions relating to these initiatives are well advanced.

The Board believes that the steps proposed above will allow the Aveng Group to manage its liquidity
needs, reduce its level of debt and position the business to take advantage of opportunities in Africa,
as well as Australasia and the Pacific.

IMPAIRMENT OF INTANGIBLE ASSETS

Following financial losses at Aveng Grinaker-LTA for the financial years 2012 through 2014, allied to
prolonged weakness within the local infrastructure environment and the limited evidence of near-
term market improvement, the Board has taken a decision to fully impair the goodwill and related
intangible assets associated with this business, which was initially recognised in 2001 with the
merger of Grinaker and LTA, with a carrying amount of R756 million.

In addition, as a result of lower than anticipated commercial uptake of Aveng Water’s water
treatment technology, particularly due to a depressed mining sector, the Board has decided to fully
impair the goodwill and related intangible assets of R74 million. The impairment will affect the
earnings per share of the Group whilst the headline earnings per share will remain unaffected.

ORDER BOOK

The Group’s two-year order book increased to R38.8 billion as at 31 March 2014, an increase of 8%
compared with the R36.7 billion two-year order book reported as at December 2013.

Within the Construction and Engineering: Australasia and Pacific segment, the order book increased
by 9% to R22.2 billion, the Construction and Engineering: South Africa and rest of Africa segment
order book declined by 10% to R7.7 billion, Aveng Mining’s order book increased by 13% to R8.0
billion, and the order book of the contracting business within Aveng Manufacturing increased by
39% to R0.9 billion



CONCLUSION

The Group has made substantial progress in addressing the operational under-performance in
certain areas. Despite a difficult economic environment, notably domestically, the performance of
Aveng Grinaker-LTA and certain steel businesses has improved, supporting continuing strong
performances by Mining, Manufacturing and the majority of the McConnell Dowell business. The
Board has a clear plan to improve liquidity over the short term and is addressing the overall fixed
cost base of the Group. Whilst addressing the aforementioned claims recoveries, the Group will
continue to focus on improved operational performance with a specific focus on returns and cash
generation.

The Group’s financial results for the year ended 30 June 2014 will be released on 26 August 2014.
The financial information on which this trading statement is based has not been reviewed or
reported on by the Group’s auditors.




Sandton

2 July 2014

Sponsor: JP Morgan Equities South Africa Proprietary Limited

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