The swan dances but there’s a tough road ahead

The swan dances but there’s a tough road ahead


By Ryn De Klerk

In February this year I said Aveng was transforming from an ugly duckling to a swan. Aveng surprised the market on the upside by reporting headline earnings of R751 million of 2.0 cents per share for the year ended June, 30 2021, compared to a restated headline loss of 4.0c per share in the previous year. The swing was a massive R1.7 billion. Really?

The group reported a profit after tax of R988m for the 2021 financial year and R723m if the exchange losses on translating foreign operations are taken into account. Yes, it was supported by operating earnings swinging to a positive R536m from a loss of R532m in the prior year. But the 2021’s profit after tax was massively impacted by once-off or abnormal items that were unrelated to the group’s underlying operations.

The 2021 income statement reflects positive fair value adjustments of R611m on properties and disposal groups classified as held for sale in its manufacturing and processing segment. It mainly refers to Trident Steel.

Furthermore, an impairment loss of R102m on goodwill, intangible assets and property, plant and equipment was taken in the manufacturing and processing segment. The fair value adjustment can only be made if the independent auditor is satisfied that the assets will be sold over the next 12 months.

What it means is that Aveng has already booked an effective profit of R509m on the sales of Trident and the other smaller companies in that segment.

The restructuring and recapitalisation transaction that allowed the group to reset its capital structure and de-leveraging the balance sheet resulted in a once-off gain of R486m on the early settlement of debt at a discount.

If the effective “profit” on the assets held for sale in its manufacturing and processing segment and the once-off gain on the early settlement of debt are subtracted from the stated profit after tax, I arrive at losses of R7m after tax and R272m if the exchange losses on translating foreign operations are taken into account.

What I am saying is do not stare blindly at Aveng’s massive swing in headline earnings and do not value the stock by using a price-to-earnings multiple (PE) on the reported headline earnings for 2021.

Aveng’s balance sheet at the end of the 2021 financial year is more important as it reflects the restructuring and recapitalisation transactions that allowed the group to reset its capital structure.

The rights issues as well as the conversion of debt for shares saw the number of issued shares increase by more than threefold to 64.74bn. Shareholders’ value or interest increased to R3.674bn while borrowings dropped to R1.4bn from R2.8bn with a cash or near cash pile of R2.5bn.

The market capitalisation (number of shares in issue times share price) jumped more than sixfold to R3.7bn. Yes, at 6c per share Aveng is trading at shareholders’ interest and has wiped out the huge 50 percent discount at which the share was trading to shareholders’ interest a year ago. Those investors who followed their rights during the two rights issues at 1.5c per share have reason to smile.

The big question is, where to from now? As things stand, the continuing businesses of Aveng, Moolmans in mining operations in Africa and McConnell Dowell, an Australian-based specialist infrastructure subsidiary, produced operating earnings of R551m on revenue of about R21bn in the 2021 financial year. McConnell Dowell is a relatively low-margin business with a profit margin of about 1.8 percent, while Moolman’s margin is about 6 percent.

Both McConnell Dowell and Moolman’s have solid new business pipelines but the latter’s revenues are unlikely to grow in the short-term as it is replacing tapering contracts with new ones while renegotiating new deals with existing customers. Interest expenses will drop substantially and boost Aveng’s bottom line.

Yes, Aveng is past the first hurdle – it is well-capitalised, well-run and gained the respect of Mr Market. Now the company faces the next hurdles of improving its rating as measured by the ratio of market capitalisation to shareholders’ interest and to grow shareholders’ interest.

The first step on the horizon is a consolidation of shares to facilitate improved liquidity and reduce volatility. The swan is dancing but a tough road lies ahead from the current levels.

*Ryk de Klerk is an analyst-at-large. Contact [email protected] He is not a registered financial adviser and his views expressed above are his own. He has a direct interest in Aveng. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results.

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