TEXT-Fitch affirms Aveng at 'A(zaf)';outlook stable

Fri Dec 7, 2012 9:31am EST

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(The following statement was released by the rating agency)

Dec 07 - Fitch Ratings has affirmed Aveng Limited's (Aveng) National Long-term rating at 'A(zaf)' and Short-term rating at 'F1(zaf)'. The Outlook on the National Long-term rating remains Stable.

The affirmation reflects Fitch's expectation that the company will maintain its balance sheet flexibility over the medium term despite the adverse trading environment. Whilst financial metrics are still in line with the 'A(zaf)' rating guideline, Fitch notes that the increased competition, deterioration in margins as well as an increase in working capital has led to a deterioration in the funds from operations (FFO) adjusted net cash position. Should this trend persist in the following two years the rating may come under pressure. Under Fitch's forecasts, the surplus cash position is expected to decline over the medium term due to projects delay and an increase in competition. Factors such as the growth of working capital and ongoing capital expeditures including in the open cut mining business are expected to reduce the group's net cash balance to levels that still afford the group adequate headroom for the current rating. Strong order book growth seen over the past few years might be reversed by a mining slowdown and delays in public infrastructure projects.

KEY DRIVERS

Surplus Cash Position:

The affirmation of Aveng Limited's ratings is based on the expectation that the company will maintain its balance sheet flexibility and strong liquidity over the medium term, primarily supported by a surplus net cash position of ZAR3.9bn at FYE12 ( FYE2011: ZAR5.3bn).

Improved Order Book:

Aveng's two-year order book grew by 27% to ZAR47bn on a year-on-year (yoy) basis, primarily driven by its Australasian operations- McConnell Dowell - winning New Zealand reconstruction projects. Projects in Australasia and the Pacific region accounted for the majority of the order book at 57% while South Africa and Rand monetary area accounted for 26%. On a sector basis, public sector infrastructure, commercial and industrial accounted for 50% of the order book with a further 36% from mining. Fitch expects an anaemic development of the order book due to the subdued outlook in both the Australian mining sector and South Africa construction market.

Delays in Public Infrastructure Projects:

Domestically, Aveng is supported by the sizeable government budget for public infrastructure projects in sectors such as electricity and water supply. The agency believes that Aveng is well positioned to secure a significant share of this business. However, Fitch expects the delivery rate of infrastructure projects to be low as compensation of public employees continued to increase and Fitch is not expecting a recovery until 2014. From the South Africa National Budget of 2012, top government priority will be on improved conditions of service for government employees in 2012/2013, while the focus is expected to shift to infrastructure investment in 2014/2015.

Risk of Mining Slowdown:

With 36% of Aveng's order book exposed to mining activities, Fitch believes that an accelerated slowdown in commodity demand from emerging economies and decline in spot prices could affect capital expenditure committed by miners, impacting the group's order book stability and cash flow generation.

Operating Margin Pressure:

With relatively few major projects and heightened competition, South African construction companies have experienced operating margin pressure over the past two years. Fitch expects margins to remain under pressure in the near term despite growth in Aveng's order book in 2012.

RATING SENSITIVITY GUIDANCE:

Negative: Future developments that could lead to negative rating action include:

- Aveng's ratings may be affected by a significant weakening in its balance sheet flexibility, as evident from an erosion of cash reserves or a significant increase in gross debt, leading to a shift from a net cash to a net debt position (FFO adjusted net leverage position moving above 0.5x).

Positive: Future developments that could lead to positive rating actions include:

Positive rating action is considered unlikely over the short to medium term. Fitch however notes that a positive rating action could be brought about by a significant increase in scale and diversification whilst keeping adjusted leverage at the current low levels.

LIQUIDITY & DEBT STRUCTURE

- Strong liquidity

Aveng has borrowing over its three functional currencies: ZAR, USD and AUD. Most of the borrowings are secured by equipment. There is no major maturity in the short to medium term. Aveng's strong cash balance will support the company to repay its medium term debt obligation. However, the agency notes that the currently depressed margin has affected the company's free cash flow (FCF) and Fitch is not expecting FCF to return to positive level in the short term

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