Aveng analysis – patience is a virtue
Construction survivor Aveng posted a worse-than-expected earnings guidance, which caused its share price to dive 17% in a single trading day. Analysts and investors were spooked by the headline earnings figure, the primary measure of performance for Aveng, but there's more than meets the eye. Long story short, there is a lot of noise in the numbers. In financial years 2020 and 2021, there were corporate actions that led to shares in issue increasing (rights issue) and decreasing (share consolidation). During all of this, subsidiaries were categorised from discontinuing to continuing, which further complicates matters. The accounting treatment for all of the above is far from straightforward. Lastly, restructuring and advisory fees on the above corporate actions may need to be factored in, too.
The sole reason for the 17% dive was because headline earnings per share is expected to be between 12c and 15c. This is incredibly low for a mature, low-growth business on a share price of over R25 (at the time). However, there's more to it. Yes, the headline earnings figure strips out one-off exceptional items, but before we see the full interim results – due to be released Tuesday next week – there's too little information to make an informed investment decision. The financials will provide the necessary disclosure in order to make such decisions. On a call with the bean counter at Aveng, CFO Adrian Macartney outlined the JSE Listing Requirements relating to trading statements, and the complex IFRS standards on the aforementioned issues made disclosure difficult. A normalised headline earnings number, one that removes all the noise from the numbers, is the key metric to look out for in the financials.
The fact that Trident Steel has been reclassified into continuing operations doesn't mean much as it's seen as a 'non-core' asset by the group. It is important to note management still intends to dispose of Trident Steel; however, the timeline on that sale is unknown. The sale of Trident Steel has been delayed by Covid-19 market-related conditions, making it tough to achieve expected disposal values and will bring down debt further. Given that Trident has become profitable and this is not a 'fire-sell' scenario, management should be able to fetch a market-related value for this asset. The two core business units remain Moolmans and Australasian operation McConnel Dowell. Trident is not in the company's future plans, evidenced by page three of Aveng's latest annual report.
"Our strategy is to be an international infrastructure resources and contract mining group operating in selected markets and capitalising on the expertise and experience of McConnell Dowell and Moolmans. The core businesses, McConnell Dowell and Moolmans, represent the Group's future. Both are on a path of profitable long-term growth, with strong order books sustained by sound growth prospects in their markets."
The bull case for Aveng is in the hands of next week's interim results, which will be telling. McConnell Dowell has grown a strong order book but is still dealing with legacy issues. Moolmans continues to benefit from strong commodity prices and the net positive effect of this on mining capital expenditure will be a tailwind for the business. Given all the restructuring efforts and that group consolidation is almost complete, head office costs – which remain hefty – have room to come down significantly. There are also huge tax losses from previous years.
Patience is a virtue. The full interim results may provide us with a more detailed understanding of the numbers.
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