Aveng (JSE: AEG) Research Update

Highlights:

• Arrowhead is updating its coverage on Aveng Limited (“Aveng” or “the Company”) with a fair value bracket of ZAR 26.13 – ZAR 31.94 (Share Price on March 27, 2023: ZAR 13.40) based on Discounted Cash Flow Valuation and Comparable Company Valuation.
• Aveng is a diversified business group providing infrastructure development, contract mining, steel beneficiation, and a wide range of related products and services through its subsidiaries. The Group is headquartered in South Africa and its projects are primarily in Australasia, South-East Asia, and Africa. The Company is listed on the Johannesburg Stock Exchange – (JSE: AEG).
• Aveng reports its revenue under four segments, namely Construction and Engineering (Australasia and Asia), Mining, Construction, & Engineering (South Africa and the rest of Africa), Manufacturing and Processing, and Other & Eliminations. The Construction & Engineering and Mining business divisions accounted for approximately 85% of the Group’s Total Revenue in H1’23. These two businesses are undertaken by group entities McConnell Dowell and Moolmans, respectively.
• Until 2018, Aveng had several business units providing manufacturing, construction & engineering, and steel beneficiation services across several countries. However, the large number of businesses led to inefficiencies and the Group faced significant challenges in its operations and was unprofitable from FY’14 to FY’20.
• To achieve profitability and deleverage its balance sheet, the Group devised a comprehensive plan in 2018, whereby it decided to focus exclusively on its key operating units and dispose of its unprofitable business verticals. Since the implementation of this plan, the Group has started emerging from the significant challenges that it faced in recent years.
• The Group is progressing well with the restructuring plan initiated in 2018 to dispose of the unprofitable units and reduce debt on its balance sheet. To continue being profitable and focus on its potentially viable and profitable business units, the Group will be focusing exclusively on McConnell Dowell and Moolmans and selling all the other entities. Pursuant to its strategy to narrow down its focus, on October 4, 2022, the Group announced that it has entered an agreement to sell Trident Steel. Trident Steel’s disposal is expected to be completed by the end of June 2023.
• Aveng has ZAR 353 million of South African legacy debt on its balance sheet and plans to pay it off using the proceeds from the sale of Trident Steel.
• Moolmans incurred losses on its initial contract with Tshipi é Ntle which was terminated in H1’23. After prolonged negotiations, the company entered a new five-year contract with Tshipi é Ntle which is valued at ZAR 7 billion.