Aveng, a JSE-listed construction and engineering group shares drop 19.83%

Aveng, a JSE-listed construction and engineering group, saw its shares drop 19.83% in value due to problems reported by its Australian subsidiary McConnell Dowell. FGEN LNG Corporation, a subsidiary of First Gen Corporation, without notice called up R529 million in guarantees on the Batangas LNG terminal project in Thailand. Aveng’s Australian bankers settled these guarantees, and McConnell Dowell settled R123M with its Australian bankers. Repayment terms for the remaining balance are being negotiated, with McConnell Dowell reporting Au$168 million in cash on hand. Aveng continues to have faith in McConnell Dowell’s management team and their ability to build a profitable and sustainable business.

Aveng announced in October 2022 that it had signed an agreement to sell Trident Steel for approximately R700 million, resulting in the cancellation of all South African legacy debt and the availability of surplus cash. The sale of Trident Steel is still on track to be completed in the current fiscal year, and the proceeds are expected to help the group’s balance sheet and liquidity.

Aveng also reported that the McConnell Dowell-led Batangas LNG (BLNG) project has been delayed and disrupted by the Covid-19 pandemic, including supply chain disruptions and the inability to mobilize people to work efficiently. Travel to the BLNG site in the Philippines and other locations where equipment was being manufactured was made impossible due to international and domestic border closures. The Russia-Ukraine conflict exacerbated supply chains even further.

Negotiations with the client are ongoing to account for the impact of Covid-19, the Russia-Ukraine war, and the resolution of certain contract claims, including claims for time extensions. To date, internal resources have been used to cover the BLNG project losses and work in progress. Aveng had received practical completion of the offshore and onshore civil/structural facilities as of March 22, 2023, with final electrical and instrumentation work and commissioning work still ongoing to achieve “gas in readiness” and final facility completion.

McConnell Dowell continues to collaborate with FGEN to achieve the best possible outcome for both parties, including minimizing project time and cost, resolving contractual claims, and recovering outstanding certifications due to Aveng under the contract. As a result, the BLNG project’s loss provision has increased, and McConnell Dowell is expected to report an operating loss for the fiscal year ending June 30, 2023.

The problems that Aveng is having with its Australian subsidiary appear to be similar to those that Murray & Roberts (M&R) and Wilson Bayly Holmes-Ovcon (WBHO) have recently encountered. Following severe challenges over the last decade, WBHO discontinued financial support for its investments in Australia. Over three years, the operating losses and eventual de-recognition of WBHO’s Australian operations eroded approximately R4.5 billion in equity. In December 2022, M&R voluntarily liquidated its Canadian subsidiary and its Australian holding company. Following that, an agreement was reached under which the multinational Italian industrial group Webuild would take effective control of Clough entities and projects on February 16, 2023.

Aveng’s problems also highlight the contractual difficulties of operating in Australia, with contractors bound by contracts that are typically much more onerous in Australia than they are in South Africa. This emphasizes the importance of understanding the legal and regulatory environments of the countries in which businesses operate.

Finally, Aveng’s stock has plummeted as a result of issues reported by its Australian subsidiary, McConnell Dowell. FGEN LNG Corporation without notice called up R529 million in guarantees on the Batangas LNG terminal project in Thailand. Aveng’s Australian bankers settled these guarantees, and McConnell Dowell settled R123m.

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