Management reviews > Chief executive officer’s review
 
With our pipeline estimated at more than R100 billion and the strengthened management team, we have picked up fresh momentum to drive the business forward. We are well positioned to take advantage of large infrastructure projects, particularly in South Africa and Australia. Although the timing of the global economic recovery remains uncertain, the long-term infrastructure investment outlook in our key target markets remains positive.
     
     


Introduction

The Aveng Group faced a number of challenges during the 2009 financial year. While the Construction and Engineering segments delivered strong performances and Opencast Mining’s profitability improved further, the global collapse of demand for steel placed significant pressure on the Manufacturing and Processing segment.

Notwithstanding the hurdles presented by the downturn, the Group delivered solid results and made additional investments in its businesses to enhance its capabilities. Aveng experienced good deal flow during the year, increasing the size of its order book to R30,4 billion.

Financial review

The Aveng Group performed well, despite the significant challenges presented by the change in market conditions at the beginning of the period:
  • Group revenue increased 14% to R33,8 billion (2008: R29,6 billion) with the Construction and Engineering and Opencast Mining segments delivering strong growth of 21% and 26%, respectively.
  • Operating profit declined by 13% to R2,1 billion (2008: R2,4 billion) as the Manufacturing and Processing segment came under pressure from sharply lower steel prices and volumes in the second half of the year.
  • Improved operating margins from the Construction and Engineering and Opencast Mining segments helped to compensate for the impact from the steel sector.
  • Net income from investments amounted to R715,3 million (2008: R866,2 million), following a reduction in the Group’s cash position due to the return of cash to shareholders in the form of a special dividend and the share repurchase programme totalling R4,6 billion since March 2008.
  • Headline earnings per share decreased by 11% to 528,5 cents (2008: 591,4 cents) and earnings per share of 538,8 cents (2008: 594,2 cents), reflecting a reduction of 9%.

Despite the adverse operating environment and the negative effect of steel price fluctuations during the year, the Group’s cash flow remains strong with cash retained by operations at R3,0 billion (2008: R3,1 billion).

The Group’s balance sheet remains robust with net cash at June 2009 of R7,4 billion (2008: R8,9 billion) after funding capital expenditure of R2,7 billion and the net cash outflow of R59,3 million relating to the purchase of the Built Environs Group (Australia) and Keyplan (Pty) Limited.

Operational review

Construction and Engineering
Operating profit in the Construction and Engineering division (comprising Grinaker-LTA, E+PC and McConnell Dowell) grew by 35% to R1,3 billion.

Grinaker-LTA revenues improved 12% to R9,8 billion despite lower revenue among its mining clients during the period. Operating margins improved as the benefits of the turnaround project gained momentum and all business units delivered profitable growth, with the exception of mining.

Civil Engineering, Building and Earthworks Engineering business units all delivered strong performances, achieving excellent progress on key 2010 infrastructure projects, including the completion of Nelson Mandela Bay Multipurpose Stadium in June 2009 and the handover of Soccer City Stadium on track for October 2009.

Keyplan operations were integrated into E+PC (Engineering and Projects Company) for the first time in 2009, aiding revenue growth of 98% to R836,8 million. The division operates in remote parts of Africa, continues to leverage off its significant technology base and accumulated intellectual property. McConnell Dowell (the Group’s Australian construction subsidiary) increased revenue by 28% to R12,1 billion and boasts a significant pipeline as a result of new business won in this period.

Manufacturing and Processing
The decrease in revenue in the Manufacturing and Processing segment (comprising Trident Steel and Aveng Manufacturing), from R8,5 billion in 2008 to R8,0 billion, is largely attributable to the pressure on the steel sector as a result of the global economic downturn.

Aveng Manufacturing revenues remained steady at R3,2 billion, in line with 2008, although operating margins tightened with declining steel prices. Steeledale and Infraset suffered lower volumes but were still able to benefit from the division’s low-cost, high-quality producer positioning. Duraset and Lennings Rail Services produced strong results with the mechanised track maintenance and plate laying construction divisions performing ahead of forecast in tough market conditions.

Trident Steel’s revenues declined by nearly 11% to R4,8 billion on the back of weak steel prices which brought with it renewed emphasis on stock level management in the current environment. Performance is expected to improve in line with the early signs of stability in the steel sector.

Opencast Mining
In addition to securing several new contracts in South and West Africa, Moolmans delivered outstanding revenue growth of 26% to R3,0 billion. Capital expenditure of R1,6 billion was incurred to equip Moolmans for the new contracts and to ensure that the plant fleet is balanced in terms of its age and productivity.

Safety

Safety is a core value of the Aveng Group and in 2009 it has been further entrenched with the implementation of stronger procedures and the appointment of additional senior managers to lead the journey towards the attainment of a world-class safety culture.

The steps taken this year, in addition to the formation of the safety committee as mentioned in the chairman’s review include:
  • the creation of a dedicated Group Safety Health and Environment (SHE) department to drive all safety initiatives; and
  • the Aveng Safety Framework has been approved and will be implemented shortly.

In spite of the heightened focus on safety, regrettably during the year under review, 10 people lost their lives across the Group. A single fatality is unacceptable and Aveng is dedicating extensive resources to improve its safety performance and to meet its commitment towards zero fatalities.

The number of disabling injuries has come down by almost 30% to 278, while the disabling injury frequency rate (DIFR) per 200 000 hours, showed a marked improvement to 0,44 from 0,67 in the previous year. The reporting of near misses, a leading indicator of future performance, has increased across the Group, in line with intensive safety training and awareness campaigns.