Aveng chairman optimistic the worst is over after CEO quits

An 18-year chart of construction group Aveng’s share price makes for disturbing viewing: a long, steady build-up, the stock breaks above R12 in 2005, builds to a climax of R66 in August 2008, before a violent, and then steady, collapse to R2.70 now.

Weak confidence was not helped by the abrupt exit of CEO Kobus Verster last week. Business Day asked chairman and acting CEO Eric Diack: should investors see Verster’s departure as the death knell?

It probably is the nature of the industry, it’s a very tough space at the moment. You’ve seen our results, they weren’t good and Kobus decided to move on.

Would they be bad results under anyone?

This year was a bit of a watershed: we had some big noncash write-offs, so the bottom line looked particularly ugly and part of that was the QCLNG [Queensland Curtis Liquefied Natural Gas] award, and part of it was the write-down of uncertified revenue. But we did have a poor operating performance, which we aren’t hiding from.

Is there managerial control to turn operations around?

If you look at the portfolio, we’ve made very good progress in McConnell Dowell in Australia, we’ve got a very good management team in our mining business, manufacturing’s okay. The problem area which surprised us in the second half is Grinaker LTA, the construction business in SA. So I wouldn’t say we’re out of control in any way, but a couple of businesses did not perform and Grinaker LTA was the worst of that bunch.

Are these businesses that can be fixed?

In SA, we’ve downsized quite materially in 2017. So one of the positives was that we took out quite a lot of fixed overheads — they were down R500m compared with the prior year. The positive is that 100% of our order book is secured for 2018, which is very different to what it was this time last year. So that makes us feel a lot more confident about the outcome for 2018.

The impairments make the results look that much worse, but can Aveng survive in its current form?

I think it can and one of the bits of comfort is that we did have a discussion with our banks and they’ve committed their funding lines for 13 months, having looked at the forecasts.

Is 13 months long enough?

We’ve said we’re going to review our balance sheet for the three- to five-year picture but we certainly have enough funding for the next year. We have a bond that matures in July 2019 and we need to look at how we refinance that or pay it back.

How big is that bond?

Around R2bn.

Are you seeing business that would have come from the government being diverted to Chinese firms, as some rumours would have it?

No, there’s a dearth of infrastructure work in SA, so we’ve got the established players as well as the emerging contractors. We haven’t seen any Chinese contractors in our particular space. If you look at the bids that we see adjudicated, there are a hell of a lot of contractors there — a lot of them that we don’t know — but you’ll also see the normal suspects.

Has the government taken a fairly anti-established construction sector stance, particularly after the World Cup stadium collusion? Is there an extended form of punishment being meted out?

No, we don’t think so. I mean we reached agreement on this VRP [Voluntary Rebuilding Programme]. We had to either do an equity deal or you could have a development deal. In our case, we’ve done an equity deal.

Why choose equity?

We just thought it was the better option because the trouble with the development option is we think it just creates even more competitors.

Which is kind of what the government wants …

It would be okay if the pie was growing, but the pie isn’t growing.

Do you think this is then all counterproductive?

The happy ending would be if there was more work out there because then the developing contractors could grow into a growing market rather than us all competing for the same diminishing pool of work.

The carrot for us is that by agreeing to this arrangement, there would be work put out by the government, but so far, we haven’t seen it.

How’s morale?

Look it’s a tough industry. All the players have their challenges, so from our specific point of view, I think everyone was happy to see that we had got the support of the banks and had finally released our accounts and hopefully it’s onwards and upwards.

What is happening to the engineering profession in SA, thanks to this post-World Cup horror period?

We continuously develop people so we put a lot of time and money into developing the technical skills (R50m). We don’t think there’s a shortage of skills, but I can’t speak for the rest of the industry.

Have you got shareholder support?

I’ve been to see all the big shareholders in the last week since the results were out and we had quite a constructive discussion with all of them and we had a very honest exchange as I’ve just done with you.

Are they going to stay on board?

I think so. My impression from the meetings is they would stay on board and we’ve got a very strong shareholder list. None of them said they were going to sell down, time will tell, I suppose.