Management reviews > Chairman’s review
 
Aveng delivered satisfactory results taking account of the adverse trading conditions within its Manufacturing and Processing operations. While both the Construction and Engineering and Opencast Mining segments performed well, lifting their combined operating profit contribution by 40%, this was insufficient to offset the 54% decline experienced in the Manufacturing and Processing segment.
     
     


Introduction

The Aveng Group’s 2009 performance was underpinned by its diversified businesses across the construction and engineering value chain. This enabled it to materially offset the sudden change in market conditions that was experienced in the first half of the financial year. The commodity boom unexpectedly came to an end in the first quarter of the financial year with a consequent sharp contraction in commodity prices and excess supply. The impact of this was compounded by the liquidity crisis and the subsequent global economic recession. The resulting downturn in the construction and engineering market was partially eased by strong infrastructure investments in the public sector.

The Aveng Group reported a 14% increase in revenue to R33,8 billion (2008: R29,6 billion) with operating profit reflecting a 13% decline to R2,1 billion (2008: R2,4 billion), mainly as a result of the reduction in steel volumes and prices. Headline earnings per share decreased by 11% to 528,5 cents (2008: 591,4 cents). Cash generated by operations decreased only marginally to R3,0 billion (2008: R3,1 billion) despite the lower profitability and the Group had net cash on hand of R7,4 billion at the reporting date.

The board declared a dividend of 145 cents per share which is in line with the ordinary dividend declared last year. Notwithstanding the decline in earnings, the board is satisfied that, taking into account the Group’s lack of gearing and cash generation capability, there was no need to cut the dividend. The board remains committed to the dividend cover policy of four times headline earnings.

Industry outlook

The fundamentals for the infrastructure industry, which were positive at the beginning of the financial year, changed markedly in the first half of 2009.

For the first three months of fiscal 2009, the steel industry was still riding the crest of a wave, with record prices and demand. The impact of the global economic meltdown led to a 21% reduction in global volumes while internationally prices came down by as much as 60%, resulting in the industry having to take significant stock writedowns. In addition, the markets serviced by Aveng contracted materially, with some segments down by more than 30%.

While the construction industry has not been as affected as the manufacturing and processing sector, a key impact of the liquidity crisis has been the significant deferral and cancellation of projects. Aveng experienced cancellations of awarded work amounting to R4,2 billion during the year. Strong infrastructure investment flows, particularly from the public sector, supported activity levels but the limited availability and cost of finance resulting from the global credit squeeze are restricting deal flow in public and private sector construction. In addition, lack of funding led to a downturn in industrial and commercial building, including retail developments. In line with the drop off in commodity prices, mining activity has slowed materially, particularly among “junior” miners. The total value of projects that were tendered for but cancelled or deferred before being awarded amounted to R12 billion.

Notwithstanding all of these negative issues the project pipeline in the Group’s target markets remains strong and although the exact timing of the global economic recovery remains uncertain, the long-term infrastructure investment outlook remains positive as evidenced by:
  • The South African government increasing its three-year infrastructure investment budget to R787 billion earlier this year.

  • The African infrastructure market being currently estimated at an annual value of US$22 billion, driven by investments in power, transport and water.

  • In Australasia and the Pacific, major transport, utility and social infrastructure projects being expected to amount to AUS$297 billion over the next five years.

  • The five to seven-year construction pipeline in the Middle Eastern market having been measured at more than US$272 billion.

The Aveng Group’s total project opportunity pipeline in the market is projected at around R100 billion. Aveng is well positioned to take advantage of these opportunities and has invested in major project teams in both Australia and South Africa to focus on the larger contracts.

Strategy

Aveng aims to be a leading infrastructure development company providing a diverse range of construction, infrastructure and engineering products, services and solutions to customers, sustainable profitability to shareholders and a great place to work for employees.

The current business portfolio, consisting of Construction and Engineering, Manufacturing and Processing and Opencast Mining will be managed to generate and extract more value for shareholders. This will be accomplished by focusing on margin improvement and growth in areas where significant market opportunities and competitive advantages exist. Higher return growth-generating businesses in the infrastructure value chain including power, environmental services and concessions will be pursued. These sectors were identified for their long-term growth prospects, as a means to expand the range of construction and manufacturing sectors served by Aveng.

Entrenching values of safety, honesty and accountability

Aveng has heightened its focus on safety, to entrench a world-class safety culture across all operations, as embodied in its safety vision “HOME WITHOUT HARM, EVERYONE EVERYDAY”. The board established a safety committee in March 2009 which has the target of driving the safety policy and practice throughout the Group to achieve zero fatalities.

Breaches of the Competition Law, which culminated in the Infraset settlement with the Competition Commission in February 2009, were in complete violation of the Group’s policies. The findings came as a shock and a disappointment both to the board of directors and the executive team. The Group continues to strengthen its processes to ensure that all employees live by Aveng’s values of honesty and accountability.

The board has emphasised that it will not condone any breaches of the Group’s code of business conduct and will continue to take all the necessary steps to ensure that good corporate governance is practised across all operations.