Aveng earnings plummeted by 34% to 70,6c

Aveng CEO Roger Jardine

Headline earnings per share at Aveng plummeted by 34% to 70,6c in the six months to December, despite a revenue increase of 13,4% to R19,1bn.

Problem contracts are hindering the ability of large construction companies to shake off the effects of a dismal building recession. Following soon after interim results from Murray & Roberts, SA’s biggest construction group, Aveng, unveiled results that were knocked by poorly performing projects.

Headline earnings per share at Aveng plummeted by 34% to 70,6c in the six months to December. This is despite a revenue increase of 13,4% to R19,1bn. Operating profit sank 35% to R332m.

Problem construction contracts where losses have escalated because of delays, changes to the scope of projects or even adverse weather conditions have become a nuisance, says CEO Roger Jardine Like M&R, Aveng has outstanding claims for work conducted at Eskom’s Medupi power station.

Floods in Australia have caused delays at the Queensland Curtis liquid natural gas project, driving up costs. The project could affect the group’s full-year profitability.

But work in Australia has been Aveng’s lifeline. Geographical diversification away from SA’s depressed construction market has been part of the reason that the rest of the company’s fundamentals look healthy.

Aveng’s work in Australia has risen to R30,6bn or 62% of its order book over the past six months, compared to SA construction work, which is just 24%. By December, the company’s two-year order book was valued at R35,9bn.

Margins in Aveng’s SA business, which has been the worst affected by the downturn, dropped to 1,2% in the first six months of the 2012 year, compared to 5,1% in the previous comparable period.

Jardine expects the margins to increase in the next 18 months, despite his belief that conditions during this time will remain under pressure. His aim is for margins to range between 4% and 5% for the SA business.

The company has been able to secure a number of new contracts, though most are smaller than those of the 2006/2007 sector boom. Large infrastructure contracts, the litmus test for industry conditions, are few and far between.

Still, Aveng’s balance sheet is healthy and it has R4,8bn in cash. Investors should exercise caution. Those willing to buy Aveng stock, however, could strike it lucky.