When a CEO leaves the building, their successor often uses the opportunity to clear out all of the cobwebs. There could be something of this in the numbers Aveng released today. But even a spring clean cannot fully account for a horrible reverse at the construction group during the second six months of its financial year to end June. Headline earnings which were up 48% in the first half ended the full year 6% lower. Worse, after doing so well in the first six months, Aveng had such heavy cash outflow for the full year that the board took the drastic decision of not paying a dividend. Little wonder the market took a dim view of all this, dropping the share price 3% today, taking the last six month’s fall to 18%. This interview with Aveng’s acting CEO Kobus Verster explores the reasons for the awful second six months. It also uncovers that Roger Jardine’s departure was out of the blue both internally and externally. Verster confirms that the board hasn’t even started calling for nominations for the CEO position yet – so he hasn’t decided whether to throw his hat into the ring. This is a company in a tough spot. While WBHO’s Mike Wylie was confident the lower margins in the year to June 2013 will rise strongly in the current financial year, there’s no such confidence from Aveng. I know where I’d prefer to have my construction sector investment. – AH
To watch the CNBC Power Lunch full interview click here.
ALEC HOGG: We have Kobus Verster who is the Acting Chief Executive of Aveng. That is after his predecessor Roger Jardine, resigned and left the building at the end of August. It was pretty sudden, Kobus. What’s the sentiment been like within the organisation?
KOBUS VERSTER: Hi Alec. It was indeed a bit sudden, but once the decision had been taken, the view was to have a new reporting structure with the new financial year. The Board accepted that Roger actually should go a bit quicker than normal.
ALEC HOGG: As the Financial Director, are you still holding that role, as well as CEO right now?
KOBUS VERSTER: That’s correct. I still am the Financial Director and Acting CEO.
ALEC HOGG: And have you thrown your hat in the ring for the new position?
KOBUS VERSTER: Alec, no. I think the Board subcommittee will follow the process to search widely – externally and internally and we must find the correct/best person for the job.
ALEC HOGG: But are you up for it? Did you say ‘yes, me. Me too, please. Consider me’?
KOBUS VERSTER: We’re not there yet.
ALEC HOGG: You’re not even there yet? Okay, well where you are, is that you passed your dividend. Not happy: the share price down 3.75% . There’s a story behind that?
KOBUS VERSTER: Obviously we didn’t take this type of decision lightly, but given the performance during the financial year, a substantial negative cash flow and the losses in Grinaker LTA, the Board decided that we’re not going to declare a dividend. I think that’s it.
ALEC HOGG: But you looked so good at the half-year stage. You had operating profit up 56% and headline earnings up 48%. Now we get to the end of the year and it’s all chaos. (headline earings down 6%)
KOBUS VERSTER: Yes. In the latter part of the year, two main things happened: We did a review of some of our contracts, and had to take a substantial loss provision in the few of them, obviously which was negative towards the end of the year. We also took a view on the recoverability at this point in time of the impact of labour disruptions on the financial year, which mostly impacted us in the second half.
ALEC HOGG: This is the kind of turnaround that loses CEO’s their jobs, yet we were told that Roger Jardine willingly decided to leave. What’s the true story?
KOBUS VERSTER: We publicly stated that he resigned due to personal reasons. He’s going to take a sabbatical and there’s nothing more to that.
ALEC HOGG: Alright. Well, let’s have a look at the similarities with your results this year to Wilson Bayley (WBHO). Big increase in your revenues but a decline in your bottom-line. That tells us that your margins were really squeezed. Wilson Bayley thinks that they’re going to push their margins up in the year ahead. Do you?
KOBUS VERSTER: Obviously having made a loss in the South African operations we should improve that position substantially. If you look at the Australian part of the business, which in the past has had some problematic contracts, we believe that the operating margin will improve in the next year and overall group margins should improve due to a positive outlook on most of the businesses. And hopefully a reduction in the negative performance by Grinaker LTA.
ALEC HOGG: And a dividend? Are we likely to see that coming back next year?
KOBUS VERSTER: Well, as a group, we would like to return to a dividend-paying position as soon as possible.
ALEC HOGG: There’s a small thing that really did stick out in the results. You took a R71m position in the GoldFields Mall and then also in the numbers, you say you sold. It is unusual to see a construction company actually owning a shopping mall. What’s the story behind that?
KOBUS VERSTER: We always had a shareholding. On a concession basis, we as a company, tend to take minority stakes in those types of developments and then do the construction work. At the appropriate time we sell. So there was a change in the Gold Fields holding structure which basically just moved from one position on the balance sheet to the next.
ALEC HOGG: Alright.
KOBUS VERSTER: We still have a shareholding. It just moved.
ALEC HOGG: So you’re still invested in there and hopefully you’ll offload that at a big profit in future. Something else that you did mention; you did warn us in your interim results that there was about R120m of costs from the labour disruptions at Medupi. Have you got a final figure on that?
KOBUS VERSTER: Alec, yes. I think in the group overall who were impacted by strikes, not only at Medupi but all over – around R350m. Grinaker LTA was affected – R270M and most of the rest was at Medupi.
