(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.
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
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