The swan is dancing but there is a difficult road ahead
By Ryn De Klerk
In February of this year, I said that Aveng was turning from an ugly duckling into a swan. Aveng surprised the market on the upside by reporting an aggregate profit of Rand 751 million of 2.0 cents per share for the fiscal year ended June 30, 2021, compared to a restated aggregate loss of 4.0 cents per share for the year. former. The swing was a whopping R1.7 billion. Truly?
The group reported an after-tax profit of 988 million rand for fiscal 2021 and 723 million rand if foreign exchange losses on the conversion of foreign operations are taken into account. Yes, it was supported by operating profit rising to 536 million rand after losing 532 million rand the previous year. But the after-tax profit for 2021 was massively impacted by one-off or abnormal items that were unrelated to the group’s underlying operations.
The 2021 income statement reflects positive fair value adjustments of R 611 million on properties and groups held for sale classified as held for sale in its manufacturing and processing segment. He mainly refers to Trident Steel.
In addition, an impairment loss of R 102 million on goodwill, intangible assets and property, plant and equipment was recorded in the manufacturing and processing sector. The fair value adjustment can only be made if the independent auditor is satisfied that the assets will be sold within the next 12 months.
This means that Aveng has already recorded an effective profit of R509 million on sales of Trident and other small companies in this segment.
The restructuring and recapitalization operation that allowed the group to reset its capital structure and deleverage the balance sheet resulted in a one-time gain of R486 million on early debt settlement at a discount.
If the actual “profit” on assets held for sale in its manufacturing and processing segment and the one-time gain on early debt settlement are subtracted from the reported profit after tax, I end up with losses of 7 million rand after tax and 272 million rand if the exchange losses on the conversion of foreign operations are taken into account.
What I am saying is not to blindly look at the massive variation in Aveng’s earnings and not price the stock using a price / earnings multiple (PE) on reported earnings for 2021.
Aveng’s balance sheet at the end of the 2021 financial year is more important because it reflects the restructuring and recapitalization operations which have enabled the group to overhaul its capital structure.
Rights issues as well as the conversion of debt into shares saw the number of issued shares increase more than threefold to R64.74 billion. Shareholder value or interest rose to R3.674 billion while borrowing fell to R1.4 billion from R2.8 billion with cash or near-liquidity of R2.5 billion.
The market capitalization (number of shares issued multiplied by the share price) has more than six-folded to reach 3.7 billion rand. Yes, at 6 cents a share, Aveng is trading for the benefit of shareholders and has wiped out the huge 50 percent discount the stock was trading for for the benefit of shareholders a year ago. Investors who followed their rights during the two rights issues at 1.5 cents per share are right to smile.
The big question is, where from now? As it stands, the ongoing activities of Aveng, Moolmans in mining operations in Africa and McConnell Dowell, an Australian infrastructure subsidiary, generated an operating profit of Rand 551 million on one single figure. business of approximately R21 billion in fiscal year 2021. McConnell Dowell is a relatively low margin company with a profit margin of around 1.8%, while Moolman’s margin is around 6%. %.
McConnell Dowell and Moolman’s both have strong new commercial pipelines, but the latter’s revenue is unlikely to increase in the near term as it replaces declining contracts with new ones while renegotiating new agreements with existing customers. Interest expense will decrease significantly and increase Aveng’s bottom line.
Yes, Aveng has passed the first hurdle – it’s well capitalized, well managed, and has earned the respect of Mr. Market. Today, the company faces the next hurdles to improve its rating as measured by the ratio of market capitalization to shareholder interest and to increase shareholder interest.
The first step on the horizon is a consolidation of stocks to help improve liquidity and reduce volatility. The swan is dancing but a difficult road awaits us compared to current levels.
* Ryk de Klerk is a general analyst. Contact [email protected] He is not a registered financial advisor and the opinions expressed above are his own. He has a vested interest in Aveng. You should consult your broker and / or investment advisor for advice. Past performance is no guarantee of future results.