A big hole to dig out of
seems likely, Aveng would have to
rely on the disposal of assets and/
or financing activities to finance
ongoing operations and pay off
maturing debt.
Our projections for unleveraged
free cash flows also do not paint an
exciting picture. Gross debt is still
elevated at R2.46bn (2014: R2.87bn)
against negative free cash flow of
around R393m. While possible cash
realisations from planned property
disposals will certainly ease the
pressure, our projections show that
free cash flow is likely to remain
in the negative at least for a few
more years.
Putting this into the perspective
of ongoing delays in state
infrastructure spending, a volatile
labour environment and execution
risks relating to projects, we
certainly don’t think Aveng’s
shares will be a good fit for a retail
investor’s portfolio.
Aveng faces multiple
challenges
Aveng boasts a hefty net asset value
more than five times its market
capitalisation. Such a metric is rare
and under normal circumstances
would have seen value-inclined
investors piling in. But to buy
into the construction sector you
definitely need to be a long-term,
deep-value investor.
Aveng executives have been doing
a great job to reassure the market
that the company has sufficient
liquidity to sail through the tricky
tide. It successfully issued a R2bn
convertible bond and also sold its
Australian subsidiary, Electrix, from
which it raked in close to R1.5bn in
cash. While these efforts might have
provided breathing space for now,
we still feel the company is not yet
out of the woods.
The recently released results for the
year to end-June show a company
bearing the pain of a sluggish
economy, struggling mining sector
and limited government spend on
infrastructure. Most performance
indicators for the year to end-June
were unfavourable.
The group completed several of its
major mining infrastructure-related
contracts in the Australian and
Asian markets. That, plus depressed
steel prices, were instrumental
Despite our valuations showing
that fair value for Aveng’s shares is
way over the current share price,
we issue a sell recommendation.
Wary investors are likely to remain
hesitant to throw money at a
company trapped in a waiting game
for large build projects in SA so its
shares might be stuck at current
levels for a while.
Also working against its investment
case is a stressed balance sheet and
weak cash position.
With the currently depressed
construction environment starting
to look more and more like a new
normal, investors are starting to
put more focus on the balance
sheet and cash flow analysis. These
offer a snapshot of the health of
the company.
What would make most investors
nervous is that its core operations
are failing to generate positive
cash flows. The recently released
annual results show that its cash
flows from operating activities
were in the red for the third year
in a row. If this continues, which
in lowering revenue to R43.9bn
(2014: R52.95bn). Operating profit
plummeted 136% partly due to
cost overruns, lower earnings from
the mining sector and a generally
poor performance. A headline
loss of 144.3c/share (2014: 112.3c)
was recorded.
ISSUE 6 – SEPTEMBER 2015
21