Strong cash flow generation confirms success of turn around

Aveng Limited’s Interim Results for the six months ended 31 December 2005 released today confirm that the group has maintained the momentum of its recovery programme. While the group reported a 14% increase in total revenue to R7,6 billion (Dec. 2004: R6,7 billion), the operating margin has shown a turnaround to 2,2%. Headline earnings increased by 52% to R202 million.

“Not only did we improve our profitability, but we produced a pile of real cash,” explains Carl Grim, Chief Executive, Aveng. “The businesses generated R592 million from operations, compared to the R92 million produced during the comparable last interim period. Our debt to equity ratio has decreased from 58% to 21% which is well within target.”

Australian construction subsidiary, McConnell Dowell Corporation (MCD) delivered 35% revenue growth to R1,2 billion following a successful strategic repositioning initiative. This subsidiary showed a return to profitability with an operating margin of 2,4% compared to a loss in the comparable period. MCD’s order book delivers the promise of continued growth in the next 24 months in its key focus areas of marine and civil, pipelines and electrical maintenance operations. Chinese demand is driving the Australasian and South East Asian minerals boom, with downstream demand benefiting McConnell Dowell in sectors including transport infrastructure developments, utility sector projects and investments in oil and gas.

Grinaker-LTA Construction which comprises the group’s South African construction activities, opencast mining (Moolmans) and engineering & project management (E+PC) delivered a 5% increase in revenue to R3,6 billion. This increase reflects the group’s more selective approach to new contracts during the past 18 months. The core activities produced a profit of R12m (from a comparable loss of R12m) which attests to the success of a more stringent risk management process. A review of operating efficiencies and structures is in progress to gear the company operationally for higher levels of activity.

“Grinaker-LTA Construction’s reported results reflect a loss of R93 million after we took a provision relating to the dispute on the Marikana Mine contract. We believe that Aveng has a strong case and have adopted a conservative approach in these results. We are working hard to resolve the issues with Aquarius Platinum,” clarifies Grim.

Aveng’s Steel & Allied cluster, comprising Trident Steel and Grinaker-LTA Manufacturing reported a 21% increase in revenue to R2,8 billion. The continuous focus on operational efficiencies has paid off with a 2,7% improvement in the operating margin to 8,1%. Strong housing infrastructure activity and a buoyant motor vehicle industry continues to benefit the cluster.

Strong demand for cement and aggregates delivered a 12,4% increase in volumes for Holcim (South Africa) which is 46% owned by Aveng Limited. Revenue increased by 15% to R2,3 billion and operating profit by 11% to R603 million. The Dudfield Kiln No.2 (DK2) refurbishment is progressing according to schedule.

Grim observes that “All our key ratios strengthened in the first six months of the 2006 financial year. Working capital per rand of sales has decreased substantially from 5 cents in June 2005 to 3 cents in December 2005. Annualised return on average equity of 13,2% is close to our target of CPIX + 10% and our average growth in headline earnings per share is ahead of target at 19,7% over an average of six comparable periods. We are making excellent progress in delivering on our financial objectives.”

The outlook is positive with Government gearing up to meet its 25% gross fixed capital formation (GFCF) to GDP target ratio by 2014. There are challenges to delivering these infrastructure investment targets, but the improved trend in spending during the past six months bodes well. The rate of private sector development is accelerating with a number of substantial projects announced by resource companies of late. The positive outlook for interest rates is set to support continued consumer demand.

“We are poised to benefit from the anticipated growth in the public, private and consumer segments of the economy. We continue to evaluate all opportunities to ensure that the momentum of improved profitability is maintained while extracting cash to return value to our shareholders,” concludes Grim

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