Aveng costs and competition

Posted On Friday, 18 September 2009 02:00 Published by Commercial Property News
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Aveng faced a collusion probe earlier this year, now it is cited as one of the accused in a further competition commission probe into the construction industry.

Aveng GroupAveng faced a collusion probe earlier this year, and in April had to pay a fine for uncompetitive behaviour. Now it is cited as one of the accused in a further competition commission probe into the construction industry.

CEO Roger Jardine had nothing to add to the speculation at the time of the announcement of the company’s annual results last week, saying only that the market would be kept informed if further issues arose from this investigation.

For now the company is focusing on its strong order book as it works to boost profitability. It posted a 13% drop in profit to R2,1bn for the year to June, compared with rising profits in the rest of the sector during financial 2009.

Aveng, Africa’s second-biggest construction group, says it is signing enough new projects to counteract the downturn and its fortunes should improve next year. The company is looking to 2010 with an order book worth R30,4bn, which is up 18% compared with the same period last year. Aveng has also won back R1bn worth of work in the mining sector which had been cancelled.

It lost R4,2bn worth of work in the year to June.

But higher commodity prices and an increase in more affordable finance have increased confidence.

The fluctuating steel prices — the steel business accounted for 50% of the group’s annual profit last year when steel prices and demand climbed to record highs — and lower sales knocked profit from that unit.

The group’s headline earnings per share fell 11% to 528,5c in the 12 months to the end of June.

Oryx Investment Management analyst Rhynhardt Roodt says the results are good given the current conditions. “Steel has probably seen the worst, and prices are expected to have bottomed.”

Jardine says: “Tight business conditions have allowed us to focus on getting back to basics.” The company has had to focus on getting the most out of its construction business and cutting costs.

More competition from other construction players will put pressure on margins.

Private-sector investment in construction also shrank considerably but still constitutes the bulk of Aveng’s order book. Of the order book, 60% is from the private sector. New investment by government and public corporations, which economists had hoped would keep fixed capital formation high, has also dipped. Nedbank’s capital expenditure project listing released this month shows a significant reduction in new projects announced in the public sector (see Features September 11).

Roodt says the change in government has resulted in a delay with new public sector projects.

“The six-month delay in announcing new tender awards is causing a bottleneck, which will mean the sector will experience some pent-up demand running into next year,” he says.

But Jardine says infrastructure development still has considerable runway in SA. Public spending on roads, energy and water is expected to form the bulk of Aveng’s future projects.

Meanwhile, the competition commission’s probe puts the industry under the spotlight. Aveng together with Murray & Roberts, Grinaker, Aveng, Stefanutti Stocks, Group Five, WBHO and others will be investigated. The commission suspects that construction companies could be guilty of price fixing, allocating projects using score cards, and submitting uncompetitive bids.

Joint ventures will be under particular scrutiny. “Because they bring competitors together, joint ventures may be used as a platform to engage in collusive practices. Some joint ventures have permanent status and are used as a platform for sharing sensitive competitive information,” deputy competition commissioner Tembinkosi Bonakele says.

Aveng’s share price has risen 37% since January, against a 16% rise from the construction industry index on the JSE.

When the steel price ticks up further and projects increase, Aveng’s share performance may give those of its peers a run for their money.

Last modified on Monday, 24 June 2013 23:19

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