South African engineering and construction conglomerate Aveng (AEG) reported a 55% rise in headline earnings per share (Heps) to 34 cents for the six months ended December 2004 compared with the same period a year ago.
Headline earnings increased by 55% to 133 million rand and revenue rose by 12% to 6.7 billion rand for the six months to December 2004.
During the same period the rand appreciated by 10% on both the closing and average US dollar exchange rate.
Aveng said the indirect impact on its mining and manufacturing customers had been more severe.
Since June 2004 working capital has increased by 218 million rand. The principal reason for this was the 288 million rand spent on buying steel prior to price increases.
As a result, the group's net debt levels increased by 199 million rand to 1.502 billion rand resulting in a net debt to equity ratio of 58%, up from 52% in June 2004.
The construction cluster comprising the engineering, construction and mining operations of Grinaker-LTA (Africa and Middle East) and McConnell Dowell Corporation (Australasia and Pacific) continued to experience difficult trading conditions.
Grinaker-LTA has had to deal with the tail end of work previously priced at more competitive rand/dollar exchange rates but significant progress has been made in resolving outstanding contract claims.
McConnell Dowell continues to have to dedicate significant financial and management resources to resolving outstanding claims on completed contracts.
The cluster has, however, turned the corner, delivering an operating loss of 18 million rand for the period compared with a loss of 186 million rand during the six months January to June 2004.
Losses of 17 million rand were made by the construction joint venture operations, during this reporting period.
In the past, construction has earned more than half of its revenue, principally in US and Australian dollars, with a large portion of its remaining business directed at southern African customers in the mining, energy and export sectors.
These have been particularly hard hit by the strong rand, bringing into question the economic viability of many new projects.
A number of mining houses have stated that capital expansion will be deferred. In addition, as marginal and loss-making operations become threatened, maintenance is being curtailed.
In the context of Grinaker-LTA's business, its involvement in the South African residential market has been relatively small.
The group has two road contracts remaining in the rest of Africa, one in Tanzania and one in Zambia, both of which will return a profit.
Some resources are being diverted to South Africa in preparation for increased infrastructure expenditure on both government and quasi-government projects.
The Africa and Middle East regional contribution to Aveng revenue has declined by 10% since December 2003 and is set to decline further.
The company's order book for secured contracts over the next two years has reduced to 86% of revenue, compared with 100% in June 2004, further freeing up construction resources.
McConnell Dowell Corporation continues to make good progress in growing its order book, having secured work for the next two years of AUD316 million which is equal to 75% of annual revenue. A headline earnings loss of AUD1.4 million was reported for the period.
The Steel & Allied cluster, comprising Trident Steel, Grinaker-LTA Manufacturing and the Aveng corporate office performed well, registering a 14% growth in revenue and a 16% increase in operating income for the six months.
Higher levels of activity in the housing and infrastructure markets has benefited this cluster of business.
Recent well-timed capital investment in both these businesses have borne fruit, allowing Aveng to capitalise on current activity levels. Demand for mining products continues to be poor.
Aveng's 46% interest in Holcim (South Africa) (Pty) Limited, has performed well, benefiting from the 13.9% cement industry growth on the prior six-month period.
However, while this is an excellent level of growth it is below the 17.3% growth experienced in the prior six month period, indicating a levelling off in the market.
An additional 500,000 tons of capacity resulting from the recent upgrading of Dudfield Kiln No 3 has enabled Holcim (South Africa) to meet customer requirements with some capacity still in hand.
The buoyant market is also reflected in a good performance by the quarrying and ready mixed concrete businesses.
The disposal by Holcim (South Africa) of its 24.5% interest in Nova Cimangolo gave rise to a capital profit of 14.6 million rand for Aveng.
As previously disclosed, Grinaker-LTA is involved in a dispute with Aquarius Platinum South Africa (Proprietary) Limited (AQP), in respect of the Marikana opencast mining contract.
Aquarius disputes its obligation to pay certain amounts in respect of the escalation of costs which Grinaker-LTA considers to be due and payable.
The amount in dispute at 31 December 2004 is 100 million rand and this claim is expected to increase by approximately 6 million rand per month until resolution. Arbitration is due to commence during April 2005.
In January 2005, Aveng informed the market that it had provisionally secured a 1 billion rand, seven-year convertible bond with an interest rate coupon of 6.125% per annum.
The issue price of 15.27 was at a 22% premium to the group's share price prior to the announcement. When all outstanding issues have been resolved, final documentation will be posted to subscribers.
The final suspensive conditions relating to the Black Economic Empowerment (BEE) transaction with TisoGroup and a number of broadly based empowerment partners were met early in February 2005.
The structure of this transaction includes broad-based beneficiaries with significant opportunities for partnership with the TisoGroup, women's groups, community groups and black business partners.
Aveng's South African subsidiaries, Grinaker-LTA and Trident Steel, are now working with these groups to generate maximum value from this transaction.
It is group policy to consider paying a single annual dividend after its 30 June year-end, so no dividend was declared for the interim period.
The January 2005 trading update stated that headline earnings for the full year to June 2005 were expected to be up by between 40% and 60%. This statement assumed an exchange rate of 6 rand to the US dollar and no significant extraordinary events.
Subsequent to the half year-end publication of this statement, the German construction company, Walter Bau AG, was placed in liquidation.
At the time McConnell Dowell Corporation was subcontracting to this group on two contracts for Sydney Water Corporation.
Initial estimates are that AUD8 million (35 million rand) will need to be written off in respect of services rendered, but not paid for. Despite this event the group is confident of achieving this target.
In accordance with the JSE Listings Requirements 3.4(b) (V1) (2) attention is drawn to the fact that this estimate has not been reviewed or reported on by the group's external auditors.
Looking beyond June 2005, prospects are bullish. Aveng companies are particularly well placed to benefit from the high levels of infrastructure spend expected on 2010 World Cup projects (including Gautrain), capacity upgrading by Eskom and Transnet as well as broader infrastructure investment by government.
