The early redemption of R2bn convertible bonds, the successful rights issue and the renegotiation of bank debt by Aveng have raised hopes that the construction group’s downward spiral may be reversed.
The past few years have been unkind to Aveng. A year ago, the company probably reached its lowest ebb when former CEO Kobus Verster resigned in a huff as it reported a wider full-year loss.
Chair Eric Diack immediately assumed the duties of interim CEO, with the responsibility to steady the sinking ship. Diack has previously described 2017 as an extraordinarily difficult year.
With its back against the wall and facing an uncertain future, in 2017 Aveng initiated a strategic review process to derisk the balance sheet, improve liquidity and set the company on a sustainable path.
This strategy forced the group to take a hard look at its financial and operational structure. Key elements of the strategy were improving liquidity and unlocking value from the group’s core assets.
It came as no surprise that the group decided to dispose of noncore assets such as Aveng Trident Steel, Aveng Grinaker-LTA and Aveng Manufacturing. Proceeds from these disposals, which Diack is confident will be wrapped up before the end of June 2019, will be used to reduce debt and create additional liquidity headroom for operational activities.
The review, which the company has described as a no-holds-barred exercise, also proposed improving the company’s liquidity by settling all of or a portion of its R2bn convertible bonds before their July 2019 maturity date, as well as a rights issue.
The group has implemented the transactions, hence Diack’s upbeat demeanour after the group reported the 2018 full-year financials on Tuesday.
With a stronger balance sheet, Aveng can now prioritise the disposal of its noncore assets.
"We have had a lot of interest for the assets. We have been approached by a number of parties for Grinaker LTA. The trick is to conclude the disposals as quickly as possible," he says.
An improved balance sheet is also Aveng’s chance to improve operational performance. Improving the order book for core businesses Australian contractor McConnell Dowell and open-cast mining business Moolmans will go a long way in raising operational performance.
Diack says he is happy with the progress the group has made to improve its capital structure. "We were heavily criticised. But we kept our heads down and did what we had to do. We have a solid balance sheet to execute our strategy," he says.
In July the group raised R493m through a rights offer. Aveng raised the money in order to partly redeem some of the company’s convertible bonds early.
The group has prioritised the early redemption of the bonds as part of the steps to restructure the balance sheet.
"The early bond redemption has removed a net R1.5bn of debt from the balance sheet and, together with the related interest burden, has brought Aveng’s debt to a much more sustainable level," Aveng said.
Aveng was a takeover target of engineering and construction group Murray & Roberts (M&R) until German engineering group, and M&R’s biggest shareholder, Aton scuppered the transaction.
With the M&R and Aveng tie-up now dead in the water, Aveng must get back on its feet unaided by a bigger partner.
A solid balance sheet is a good starting point to launch the recovery and unlock value for long-suffering shareholders.
Aveng’s share price has so far in 2018 slumped 95.37%. The share price on Wednesday was down 25% to 3c.