Can gov­ern­ment spend breathe life into Aveng

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

The con­struc­tion in­dus­try in S o ut h Af r i c a h a s b e e n de­pressed for al­most 10 years a n d c o nt i n u e d to face chal­lenges in 2014, a year fraught with labour un­rest, sub­stan­tial de­lays on some of the coun­try’s ma­jor con­struc­tion projects and set­backs in the econ­omy.

This has put im­mense pres­sure on con­struc­tion com­pa­nies, whose share prices have dropped to lev­els last tested at the turn of the cen­tury.

Aveng Li mite d , t he hold i n g com­pany for a group of com­pa­nies op­er­at­ing pri­mar­ily in the con­struc­tion, en­gi­neer­ing and min­ing in­dus­tries, is no ex­cep­tion.

Through its sub­sidiaries, the group pro­vides a va­ri­ety of ser­vices in in­dus­tries such as min­ing, steel pro­cess­ing, con­struc­tion, prop­erty de­vel­op­ment and civil en­gi­neer­ing. Not sur­pris­ingly, Aveng has been in a six-year bear trend.

When the com­pany an­nounced its re­sults for the year to June ear­lier this month, the mood re­mained de­pressed, with Aveng hint­ing at the pos­si­bil­ity of more restruc­tur­ing should things not look up soon.

One thing that could change the for­tune of the in­dus­try is gov­ern­ment com­mit­ment to in­fra­struc­ture spend. With con­struc­tion a size­able eco­nomic con­trib­u­tor and em­ploy­ment provider in SA, it is in the gov­ern­ment’s in­ter­est to re­vive the in­dus­try. Gov­ern­ment is l ook i ng t o s pend R813bn on in­fra­struc­ture over the next three years – some of which might go through Aveng’s books. The roll-out has been slug­gish so far, but there seems to be a grow­ing in­ter­est in con­struc­tion shares. This could mean the end of Aveng’s bear­ish road.

Another po­ten­tial pos­i­tive could be the cycli­cal na­ture of the con­struc­tion in­dus­try. Af­ter a ma­jor boost in 2010 (when SA hosted the Fifa World Cup), the in­dus­try ex­pe­ri­enced a pe­riod of slow­down ow­ing to the global eco­nomic down­turn. The cy­cle is, how­ever, start­ing to turn. Ac­cord­ing to a re­cent re­port by Tech­Navio – a lead­ing tech­nol­ogy re­search and ad­vi­sory com­pany with global cov­er­age – and many other con­struc­tion re­ports, the in­dus­try is ex­pected to re­gain the mo­men­tum, po­ten­tially driven by gov­ern­ment’s Na­tional In­fra­struc­ture Plan.

An­nounc­ing its an­nual re­sults, Aveng re­ported a full-year net op­er­at­ing loss of R288m to June 2015. Ear­lier, it cited labour dis­rup­tions and an in­dus­try-wide slump at home as rea­sons for the de­cline. It also an­nounced a loss per share of R11.48 (com­pared with R10.19 the pre­vi­ous year), and head­line loss per share of R14.43 (com­pared with R11.25). Key sup­port is at R4.10/share, and the over­sold rel­a­tive strength in­dex (RSI) is likely to trig­ger up­side.

My take: Aveng has breached the third and fi­nal re­sis­tance trend­line of its ma­jor bear trend (a bullish sign) and has fallen to lev­els last tested in 1999. A re­cov­ery above R7.10/share would be a good level to go as long as Aveng could trade to the R10.15/share re­sis­tance level and pos­si­bly ad­vance to t he R14.20/share mark. How­ever, the RSI must fol­low suit by breach­ing its ma­jor re­sis­tance trend­line. Dis­tinct up­side to R25/share could be seen once Aveng over­comes the R14.25/ share mark.

POS­SI­BLE SCE­NARIO:

Aveng could drop fur­ther to its all-time low at R3.50/share upon a re­ver­sal be­low R4.10/ share.

AL­TER­NA­TIVE SCE­NARIO:

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