Aveng interim results 31 December 2014

Tuesday 17th February, 2015
Revenue decreased by 14% to R23.9 billion against the comparative period's R27.7 billion primarily as a result of:
* completion of multi-year major mining and infrastructure-related contracts within the Construction and Engineering: Australasia and Asia segment; and
* non-renewal of three gold-mining contracts at Aveng Moolmans.

The decrease in revenue was marginally offset by the weaker rand to Australian dollar exchange rate, which contributed R602 million (2013: R1.6 billion) to rand revenue from the Construction and Engineering: Australasia and Asia operating segment.

Net operating earnings decreased by 19% to R413 million (2013: R510 million), while the earnings margin decreased slightly to 1.7% (2013: 1.8%). This result was characterised by:
* further losses on the Mokolo Crocodile Pipeline contract (?Mokolo?) as a result of difficulties in returning to higher productivities following severe flood damage, causing an extended close-out of the contract; as well as increased costs and penalties associated with remedial action to address operational difficulties relating to a water purification contract;
* unforseen losses on the Grootegeluk Cyclic Pond contract due to weather delays and scope changes;
* an 18% decline in the Mining segment's earnings due to the non-renewal of three gold-mining contracts in the open-cut business and lower-than-anticipated productivity levels in the shaft-sinking unit;
* a tough steel sector culminating in a weak result from Aveng Steel, being largely responsible for the 51% reduction in the Manufacturing and Processing segment's earnings. This was driven by labour disruptions, reduced margins due to weak demand and increased price competition, and restructuring costs to re-align the fixed cost base; and
* in mitigation of the above:
** solid results from Aveng Manufacturing due to strong demand for rail and related services in sub-Saharan Africa; and
** fair value gains of R94 million included in other earnings - representing gains on infrastructure investments reaching a marketable maturity level allowing for their reclassification as financial assets held at fair value, and gains on investment properties.

Earnings from equity-accounted investments of R30 million was down by R14 million against the comparative period due to losses incurred on McConnell Dowell's Middle East investments, as well as certain investments being reclassified as infrastructure investments (held at fair value), effective from 1 July 2014. McConnell Dowell disposed of its shares in Electrix on 31 October 2014 for R1,3 billion. The profit on the sale of this subsidiary (treated as a disposal group and not a discontinued operation) amounted to R777 million before taxation. The Group recognised the impairment charges described below following a review of current business performance, a consideration of the prevailing market conditions, the resultant pressure on the relevant order books, and the Group\"s view of the subdued economic conditions in the nearer term.

Goodwill of R291 million and intangible assets of R33 million associated with the Built Environs business in the Construction and Engineering: Australasia and Asia segment was fully impaired. While management have implemented a robust turnaround plan for this business, there is uncertainty around the business' ability to generate the required returns within a reasonable timeframe based on the current order book. The timing of this impairment is aligned to the Group's renewed focus on the return on assets within the direct control of management, as opposed to legacy intangible assets. An impairment charge totalling R213 million was recognised against ancillary operations, comprising plant and equipment in the Construction and Engineering: South Africa and rest of Africa (R152 million charge), Manufacturing and Processing (R32 million charge) and Mining (R29 million charge) segments.

Net bank and related finance charges of R50 million were in line with the comparative period. Transaction costs of R57 million were above that of the comparative period (R30 million) in order to maintain access to previously arranged loan facilities in South Africa and Australia in support of the Group's liquidity position. The net convertible bonds interest expense - including the accretion of interest at the effective interest rate for the share redemption amount - equalled to R59 million. This charge was reduced by a R36 million fair value gain on the carrying amount of the equity option embedded in the convertible bonds. Following shareholder approval (on 19 September 2014) to equity settle the bonds, the option was reclassified to equity and will no longer be fair valued.

The taxation expense increased to R125 million, with an effective tax rate of 25,7% from R114 million (26,7%) in the comparative period. Headline earnings decreased by 55%. Items excluded from the calculation of headline earnings include the profit on sale of Electrix, impairment charges and fair value gains on investment property. Earnings per share (?EPS?) of 89.3 cents (2013: 83.9 cents) increased by 6% and headline earnings per share (?HEPS?) of 34.5 cents (2013: 82.1 cents) decreased by 58%. The per share amounts were reduced as a result of the impact of dilution caused by the issuing of shares to conclude the Group's BEE transaction on 30 June 2014.

Outlook and prospects
It is expected that the outlook for the Group will be influenced by:
* order book replenishment by McConnell Dowell;
* the anticipation of an improved performance from Aveng Grinaker-LTA;
* generally positive prospects for the Mining and Manufacturing and Processing segments; and
* the realisation of benefits from the cost-saving initiatives already undertaken.

QCLNG and GCRT commercial negotiations remain protracted processes, thus their final outcome continues to be a material risk to the Group. The process of disposing of the majority of the Group's property portfolio in South Africa is well advanced. The transaction is expected to be finalised in the second half of the financial year.