Construction and engineering group Aveng on Tuesday said it expected a fall in earnings for its six months to December‚ though analysts say a turnaround is possible as problematic contracts are worked out of the order book.
New CEO Kobus Verster faces difficult market conditions in both Australia and South Africa‚ with competition keeping margins low.
Aveng’s share price fell as much as 3.85% to an intraday low of R22.45 on Tuesday after the group said it expected to report a 20%-25% fall in headline earnings per share for the interim period.
Net operating earnings were 8% below the comparative period‚ with local division Aveng Grinaker-LTA "generating a materially higher loss" and the group’s mining operating segment’s contribution declining due to its smaller order book.
Net financing expenses in the period were materially higher mainly due to greater borrowings which funded working capital‚ primarily on the large Queensland Curtis liquefied natural gas project in Australia.
Aveng’s update follows Wilson Bayly Holmes-Ovcon’s (WBHO’s) statement last week that it expected a 17.5%-22.5% fall in headline earnings per share in its six months ended December.
Meanwhile‚ Group Five on Monday reported an improved six months to December‚ with its operating profit from continuing operations up 27.5% to R328m.
RMB Private Bank head of portfolio management Suraj Sookdhew said on Tuesday that while WBHO surprised the market with its update‚ Group Five reported "fantastic numbers" and Aveng’s update was expected.
But Mr Sookdhew said the market seemed to be expecting a better second half for Aveng.
He said a major problem for Aveng during the period was the Australian Queensland Curtis liquefied natural gas project‚ where financing costs weighed on results.
"I get a sense that that’s close to complete now — we will wait to get confirmation on that when the results are released."
RMB Private Bank was waiting to see whether the contract was fully behind Aveng‚ "and thereafter we should see a turnaround".
Other Australian contracts which had been problematic for the group included work on the Adelaide desalination plant.
Mr Sookdhew said there was scope for improved performances at Aveng‚ and the market felt Mr Verster "has the ability to turn the business around".
But the construction industry was facing difficulties‚ with no evidence yet that South Africa’s infrastructure roll-out was materialising.
He said opportunities for contractors lay in the rest of Africa.
Although Aveng was not as geared towards the rest of the continent as firms such as Group Five were‚ "being much larger than Group Five they have the ability to shift resources to Africa should they see opportunities — bearing in mind that Africa does have better margins".
Mr Sookdhew said margins in South Africa and Australia were "paper thin" due to overcapacity‚ making African opportunities attractive.
Kagiso Asset Management investment analyst Ross Heyns said this month that large South African contractors had significant exposure to Australia and had grown their Australian businesses in line with investments in iron ore and gas projects.
But Aveng and Murray & Roberts had incurred substantial losses on large projects there and Australia’s slowing economy and slowdown in resource investments was concerning due to resultant overcapacity.
"However‚ if Aveng and Murray & Roberts are able to complete some of their very large projects without significant further losses and return the rest of their business to more normal levels of profitability‚ they could get to a situation where they earn similar profits on a significantly lower revenue base‚" Mr Heyns said.