Aveng worst affected as construction industry bleeds
Some of the major players in SA’s construction industry are undergoing an existential crisis. Probably none more so than Aveng, whose R53bn annual turnover in financial 2014 has now shrunk to about R23.5bn.
Eric Diack, executive chairman and acting CEO of the group, is candid about the problems. These include underbidding on projects amid fierce competition for tenders, bad management, poor project execution and a weak economic environment in SA.
Despite a rebound in mineral commodities and a better outlook for global growth, the group continues to produce poor results across many of its businesses. To this end, it has just concluded a strategic review that proposes selling off noncore assets and restructuring around its Moolmans mining business and the McConnell Dowell civil engineering operations that operate in Australasia.
While Aveng resolved 20 of 24 disputed contracts in the six months to December 2017 and reduced net debt to R555m from R937m in December 2016, gross debt of R3bn remains. This comes mainly from previous operating losses.
Construction, worldwide, is a tough business. Nearly 20% of projects become legal albatrosses around the necks of companies, while margins of between 3% and 5% are considered normal. It is also an industry that draws corrupt conduct like carrion attracts scavengers. Politicians favour it to line their pockets, as do unscrupulous contractors.
Nearly all of SA’s big listed construction groups have fundamentally reviewed their business in recent years. Competition Commission penalties for collusion and the government’s “voluntary rebuilding programme” to drive transformation in the industry have cost about R3bn, adding red ink to many bottom lines.
Like seven other big listed construction and engineering groups, Aveng had to choose to sell at least 40% of its domestic civils and building operations to black economic empowerment partners or to mentor up to three emerging contractors for a period of seven years. It chose the former, but the cancellation of its proposed 51% sale of its struggling Grinaker-LTA subsidiary, which operates in SA and elsewhere in Africa, has shown the difficulties of transforming the industry.
Diack says this deal lapsed because the buyer, Singabakhi Holdings, previously known as Kutana Construction, failed to honour an up-front payment of R20m after such arrangements had become unconditional. Singabakhi said it was the unexpected underperformance by Grinaker-LTA that scuppered the transaction. It said the strategic review announced by Aveng in September 2017 had raised significant concerns about Aveng’s commitment to that business, and feared its investment would not yield the projected return.
For a moment, it looked like Cyril Ramaphosa’s ascension to the top political job in SA would herald a new era of economic growth. That has now been dashed by the proposed support for expropriation of land without compensation.
Aveng said this week as it presented its interim results to December 2017 that it would now focus on becoming an international infrastructure and resources group operating in selected fast-growing markets. Diack says the group might thus sell 100% of Grinaker-LTA.
This sounds a lot like the route Murray & Roberts has taken. It has exited SA’s moribund civil construction and engineering market to focus on global underground mining, oil, gas, power and water projects.
As part of an agreement over transformation struck with the government, Murray & Roberts chose to sell 100% of its construction and civil engineering business in SA to a black-owned consortium led by the Southern Palace Group.
While there are plenty of potential positives to be drawn from such immense structural change to the South African industry, the biggest listed construction groups —Aveng, Murray & Roberts and Wilson Bayly Holmes-Ovcon — now derive most of their revenues and profits from abroad, mainly Australia.
Murray & Roberts CEO Henry Laas says the group is not exiting SA, but a sector. But amid volatile conditions after the 2010 Soccer World Cup, Murray & Roberts, Aveng and Group Five have also been trying to shed domestic steel and manufacturing assets — not always successfully. Aveng group finance director Adrian Macartney says the soccer event left the industry overcapacitated at the same time as the government ran out of money to finish the Medupi and Kusile power stations on time. These projects have been wrecked by huge cost overruns, violent worker unrest and legal contestation.
SA’s construction sector used to take up about 50% of local steel production. But the closure of the country’s second-largest steel maker, Evraz Highveld Steel and Vanadium, and a spate of massive losses at SA’s largest steel group, ArcelorMittal SA, show the industry is bleeding.
Despite the government having now designated structural steel for use in infrastructure development, recent ArcelorMittal SA data indicate steel used in construction makes up little more than 30% of group sales. Since financial 2016, Aveng has struck thousands of workers from its payroll, including about 2,000 permanent staff. Construction is one of the most industry-intensive employers in SA, albeit not on a permanent basis.