Author: Patrick Cairns|
28 March 2012 03:20
Article from Money Web
Is the wheel turning for infrastructure development group Aveng?
While executives at South Africa's big construction companies are hardly all smiles at the moment, there may be fewer frowns than there were a couple of years ago. The sector is still facing a heavily subdued local environment, but things may be starting to look up.
Since work on projects for the 2010 FIFA World Cup came to an end, companies have found work difficult to come by. However, with government promising huge amounts of spending on infrastructure and orders in the rest of Africa growing, the construction sector on the JSE has enjoyed a bouyant start to the year.
“The market believes that we have gotten over the worst in terms of loss-making contracts and that we should start seeing an improvement from a low base,” says Momentum Asset Management equity research analyst Khanyisa Ngesi. “Although there is scepticism on implementation, the market is encouraged by government viewing infrastructure spending as a serious issue. We are also anticipating an announcement about nuclear sometime during the middle of this year, and this will mean more jobs.”
As the largest construction stock on the local bourse, Aveng is a pretty good gauge of where the industry stands. Its 13% gain since the start of the year is therefore indicative of investors growing more positive about the sector's prospects.
Aveng operates in over 30 countries, with its primary geographies being Australia and South Africa. It owns 100% of McConnel Dowell in Australia, 75% of Aveng Africa and 75% of Aveng Trident Steel.
History
The formation of Aveng dates back to 1944 when Anglovaal Industries separated its interests into three distinct entities – mining business Avmin, consumer products company AVI and engineering services business Aveng.
Over the subsequent decades, the company steadily increased its exposure along the engineering value chain through acquiring businesses in a number of sectors. It acquired 51% of Trident Steel in 1977 and took a majority stake in construction company Grinekar in 1981.
The Anglovaal group unbundled Aveng in 1998, the same year in which Trident became a fully owned subsidiary. It also took a 46% interest in cement producer Alpha Limited, which subsequently changed its name to Holcim.
Aveng bought out Grinekar's majority shareholders in 1999 and de-listed the company from the JSE. Aveng listed itself on the local bourse later that year.
In 2000 the group acquired construction business LTA from Anglo American, which included its 63% interest in Australian-based McConnel Dowell. It combined this business with Grinaker to form Grinaker-LTA.
The group bought out the remaining shares in McConnel Dowell in 2003 and disposed of its shareholding in Holcim in 2007.
Aveng Water was launched as a subsidiary in 2011.
Dividends
For the last four years – from 2008 to 2011 – Aveng has kept its dividend steady at 145 cents per share. This translates into a dividend yield in the region of 3.9%.
Aveng also paid out a special dividend of 145 cents per share in the 2008 financial year.
Which funds hold this stock?
A number of South Africa's leading unit trust funds over the last three to five years have exposure to Aveng. Two of the three top performing value funds over that period include the stock in their portfolios. The Momentum Value Fund gives it a weighting of 1.2% and the Prudential Dividend Maximiser Fund 0.7%.
Two of the best targeted absolute and real return funds also have a liking for Aveng. The Cadiz Equity Ladder Fund holds 3.3% of its assets in the counter, while the Coronation SA Capital Plus Fund gives it a weighting of 1.4%.
However, of the three best performing industrial equity funds, only the Stanlib Industrial Fund has a holding in the group. The counter was the fund's third largest holding at the end of 2009, but its weighting has since dropped and it currently makes up 3.3% of its assets.
Similarly, only one of the leading general equity funds includes Aveng in its portfolio. The Absa Select Equity Fund gives the stock a weighting of 1.8%.
To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.
Why would an individual consider investing in this company?
Aveng has an excellent track record of delivering large projects in both the public and private sectors. Its expertise covers roads, ports, pipelines, railways, conventional and renewable power generation and mining.
By diversifying away from South Africa, Aveng has also mitigated against the effects of the prolonged slump in the local market. McConnel Dowell has become the biggest contributor to group revenues and the market in Australia is more robust than that in South Africa.
“Orders from Australian resources, power and transport companies are supporting this business,” says Momentum's Ngesi. “This is combined with a positive outlook driven by investment in the mining, oil and gas sectors in South East Asia and New Zealand.”
Although Aveng is best known for its construction work, it is a well diversified business with exposure across the engineering value chain. Through Trident Steel the group is one of the leading producers of steel products in South Africa, and it also has interests in water treatment, open pit contract mining and engineering services. This has also played a part in lessening the impact of adverse market conditions.
Despite the trying industry conditions, Aveng has also managed its balance sheet well and has a very healthy pile of cash. This liquidity gives it added flexibility and a base from which to pursue growth as fundamentals improve.
What risks does this company face?
Construction is a cyclical industry, and the bad times can be very bad. When the global meltdown hit in 2008 and construction companies saw their order books nearly erased, Aveng's share price dropped by 75%.
The sector in both South Africa and Australia is also extremely competitive, with very thin margins. This is made worse by large clients expecting contractors to take on more and more of the risk associated with projects, without offering any greater returns.
This was recently highlighted in Australia, where work on the Queensland Curtis Liquid Natural Gas (QCLNG) pipelines project was delayed by unseasonal flooding. McConnel Dowell has had to carry the cost of making up on lost productivity.
“Aveng's biggest risks are around the execution of major projects,” Ngesi says. “Given the early phase of the project, the delay in the construction of the QCLNG pipelines poses risk to earnings in the medium-term.”
Where does this company’s growth potential lie?
The 2012 State of the Nation address prioritised infrastructure development, and Aveng has a long history of winning large government contracts. Railway development is also one of the group's core competencies, and with Transet set to spend significant amounts on improving the local rail network, this could be a boon for Aveng.
The group has also positioned itself to benefit from local investment in new power infrastructure. It is involved in the construction of the Medupi power station and is growing its expertise in both nuclear and renewable energy to take advantage of opportunities in those areas.
While the group has highlighted this potential in the public sector, it has however warned that contract awards are likely to be slow. It is therefore likely to rely on private sector work in South Africa for at least the next 18 months to two years.
The rest of Africa may however be a key growth area for the group, with the mining and oil and gas sectors being its primary focus. The group is also enjoying growing demand for its contract mining services on the continent and will benefit as many countries work to overcome their infrastructure backlogs.
Nearly two thirds of Aveng's two-year order book is however in the Australasia and Pacific region. Through McConnel Dowell, the group will continue to benefit from capital expenditure in the Australian mining sector, as well as projects in surrounding countries such as Papua New Guinea. There is also likely to be continued expenditure on infrastructure projects in power and transportation.
“The bulk (77%) of the group’s R46bn two-year order book is offshore, and this is likely to be the largest generator of earnings over that period,” says Ngesi. “The South African construction sector conditions are expected to remain depressed for the next 12 to 18 months.”
For more, visit Moneyweb's click-a-company profile on Aveng Ltd.
Article from Money Web
