by Hashmeel Suka & Zimele Mbanjwa
| Ticker | AEG |
| YDT Return | 23% |
| 1 Year Return | 71% |
| 12 Month Forward PE | 5 times |
Established in 1889, Aveng is a South African-listed international engineering-led contractor focused on infrastructure, resource, and contract mining in selected markets, capitalising on the expertise and experience of its subsidiaries.
Aveng has two operating businesses, McConnell Dowell and Moolmans, which operate across three main brands that ultimately make up three distinct segments:
| Infrastructure (McConnell Dowell) |
Building (Built Environs - McConnell Dowell) |
Mining (Moolmans) |
|---|---|---|
| An engineering-led specialist in multidisciplinary contract work, infrastructure solutions in the resources, energy, marine and water and civil and transport sectors. Geographically, McConnell Dowell has exposure to over 15 territories spread across Australia, New Zealand, the Pacific Islands and Southeast Asia. | An infrastructure-led specialist offering widespread building services which include, but are not limited to, design consultation and management, construction and fit out. The group has serviced the sport, health and science, defence, education, residential, commercial, retail, industrial and infrastructure sectors. Built Environs operates in Australia and New Zealand. | A tier-one contract mining business operating primarily in South Africa, with a footprint in the greater SADC region as well as West Africa. The unit's primary focus is on offering specialised services to the mining industry. |
The recent strategic review
The group recently announced a strategic shift to restructure the group. In particular, the group determined that McConnell Dowell (incl. Built Environs) and Moolmans are operationally and strategically distinct with limited synergies between each other and as such, should pursue independent and separate operating and growth strategies.
The group is considering unbundling and listing McConnell Dowell on the Australian Securities Exchange (ASX) and Johannesburg Stock Exchange (JSE). Moolman's will remain within the Aveng brand while the group explores various options regarding the ownership of the business which may involve bringing on a potential BBBEEE partner, or an outright sale. The potential introduction of a BBBEE deal in Moolmans may aide in improving its competitive position when seeking new work or securing contract extensions.
McConnell Dowell
Operational breakdown
McConnell Dowell was established in 1961 in New Zealand and consolidated into Aveng in 2003. The business bought Built Environs in 200. The business operates and runs projects across four business units, namely: Australia (71% of revenue, 61% of Work in Hand [WiH]), New Zealand & Pacific Islands (11% revenue, 17% WiH), Southeast Asia (5% revenue, 9% WiH) and Built Environs (13% revenue, 17% WiH). It specialises in construction engineering and infrastructure solutions across various industries including the transport, water and wastewater, ports and coastal, energy, resources, and commercial building sectors.
Macro considerations & outlook
As McConnell Dowell services both the public and private sector, the group has benefitted from capital investments in both these spaces. Since 2019, the company's revenue growth has consistently outpaced the rate of growth in the value of work done in the Australian Engineering Construction industry, its biggest market. The group has evidently benefitted from continuously positive investment activity by the public sector even during periods of slowing activity in the private sector (see 2020 to 2022 on the chart below). In FY24, McConnell Dowell saw revenue growth of 27%, which again was well ahead of public sector activity growth of 9.5% private sector activity growth of 1.7%.
Notable, however, is that Australian engineering construction activity growth slowed down significantly in 2024, which is evident in the marked decline in the business' work in hand to $2.6 billion in FY24 from $3.5 billion in FY23. Management ascribed the slowdown to a tempering in infrastructure awards in both Australia and New Zealand, which is expected to continue into FY25 primarily due to the impact of cost escalations on client budgets.
Even though McConnell Dowell estimates ~86% of FY25 revenue has already been secured, it has noted that recent government changes in Australia have seen a widespread review of priorities and major projects. Investment in social infrastructure (schools, hospitals, public housing) is set to increase in some key states, with some of this investment likely to replace funding for transport infrastructure (a key competency for McConnell Dowell).
The business is exposed to and is susceptible to various macro and secular trends that tend to affect investments in capital projects by customers. Additionally, the relatively long-term nature (three-to-five years) of projects the company undertakes may expose it to various cyclical elements. More recently, margins on projects entered during the Covid-19 period have come under significant pressure due to inflationary pressures. However, these projects are nearing completion and recent contract awards are expected to perform well on the back of slower inflation.
In the Building business, the bid pipeline remains healthy, specifically in the health, education, and recreation sectors. The pipeline at the end of FY24 consisted of work in hand of A$443 million, A$600 million under adjudication where it holds preferred bidder status, and A$580 million in tenders submitted or in progress.
For the Infrastructure business, transport infrastructure work has been softening; however, there has been strength in the energy transition, water, climate resilience, and defence sectors. Work in hand fell to A$800 million, with a further A$1.9 billion under adjudication where it holds preferred bidder status and A$3.4 billion in tenders submitted or in progress. The margins for the current project portfolio overall are projected improve.
Moolmans
The tier-one contract mining business was established in 1950, and is, in its current form, an integration of what was, until 2019, Aveng Moolmans, an open-cut mining contractor, and Aveng Shafts & Underground, an underground mining contracting business. Moolmans offers a set of specialised services across the mining value chain that include open-cut mining, shaft sinking and access development, and underground mining projects. Moolmans has worked on several projects in Africa, particularly the SADC region. Project concentration is currently in South Africa, with the largest commodity exposure being manganese at the Tshipi manganese mine.
Moolman's focus for the long term is to continue improving volumes, diversifying its operations across various geographies, customer types and commodities, as well as extending existing contracts with clients. Diversification would help minimise concentration risk across commodities and geographies. While not explicitly stated, management has recently noted that prospective diversifying projects within the SADC region have been identified together with further opportunities with existing clients at existing projects
The business had work in hand of R5.3 billion at 30 June 2024.
Tshipi é Ntle
Tshipi has collaborated with Moolmans since as far back as 2011. Tshipi Manganese Mining operates an open-pit mine in the Kalahari Manganese Field in the Northern Cape. Tshipi is the largest single manganese mine and exporter from South Africa and is also one of the five largest manganese ore exporters globally. In 2023, the two entities entered what is currently Moolman's biggest active project - a five-year contract worth R7 billion for Moolmans to mine 1.6 million bank cubic metres (BCMs) per annum. Following the awarding of the new contract, Moolmans invested R900 million into new heavy equipment as well as in people and systems to support the project. However, the delay of delivery of material to the site had a negative effect on the business' last operating result, leading to an operating loss of R110 million in FY23. The segment has also recently been, by extension of its clients, impacted by issues related to rail and road infrastructure, challenges at ports, and the now fading energy crises in South Africa.
Moolmans continues to invest in heavy mining equipment, with expansion and replacement capital expenditure of A$35.0 million in FY24. The equipment has aided an increase in production levels. As such, in FY24 Moolmans returned to profitability, but margins were still under pressure despite improved volumes at Tshipi due to weak manganese market conditions. Manganese prices have been under pressure due mostly to soft end-steel demand in China and high levels of supply. After a spike in prices between May and June 2024 due to the temporary closure of the cyclone damaged GEMCO manganese mine in Australia, prices have softened and were about 34% lower by the end of September relative to peak levels in early June.
Macro considerations and outlook
In its most recent mining production and sales report, StatsSA reported that overall South African mining production, not seasonally adjusted, increased by 0.3% y/y in August, following a revised 1.0% y/y contraction in July (previously -1.4% y/y). The largest positive contributor was manganese ore with a 16% increase in production, while the largest negative contributor was iron ore (-15.2% y/y). To understand the robust increase in manganese production, management at Tshipi reported that mining of manganese increased 27% q/q for the quarter ended September, due to improved equipment utilisation and performance as the miner set to ensure the building of stockpiles before the expected rainy season of the quarter ending December 2024.
A mentioned above, manganese ore prices were pressured by persistently weak global steel demand as well as high manganese ore supply, particularly from South Africa. Factors affecting global crude steel demand include high input costs, geopolitical uncertainties and tighter monetary policies impacting costs and demand. Major markets, particularly China, continue to grapple with weakened demand from the industrial sector and residential construction. According to the Worldsteel Association, global steel demand is expected to fall by 0.9% in 2024 but rebound by 1.2% in 2025.
Group financial review
For Aveng, results for the year ended 30 June 2024 were mostly positive:
Management overview
The group's management team includes:
The remainder of the executive committee includes Steve Collett (B.Ec Hons, Chief Strategy Officer and Chief People Officer), Dr James Glastonbury (B.Eng and PhD, Chief Engineering and Innovation Officer) as well as John Meggitt (B.Com and LLB, Chief Commercial Officer). The team is well supported by a host of specialists within the underlying subsidiaries.
Summary investment Case
| Market Cap (A$) |
12M Forward PE | |
|---|---|---|
| Aveng | 1.32bn | 5.0 |
| Monadelphous | 1.24bn | 17.6 |
| Downer EDI | 3.77bn | 14.4 |
| Lendlease | 4.70bn | 11.6 |
| NRW Holdings | 1.75bn | 13.0 |
Risks
Valuation
We valued the group using a discounted cash flow (DCF) model on conservative assumptions - including a near-term slowdown in gross fixed-capital formation across the Australasian and Southeast Asian markets, where the bulk of the group's activities are conducted (i.e. the McConnell Dowell business). We assumed steadily improving margins, prudent capital allocation and a continued reduction in debt. Although some cash flow pressure is projected over the next few years (to some extent this is a function of market cyclicality) we anticipate a strong recovery over the medium term, with growth set to benefit from better management of contract/project costs
| AUD | FY25(E) | FY26(E) | FY27(E) |
|---|---|---|---|
| Revenue | 2.7 billion (-11%) | 2.9 billion (+6%) | 3.1 billion (+7%) |
| Gross Margin | 8.9% | 9.0% | 9.0% |
Accordingly, we derive an estimated fair value on Aveng of A$1.15 (~R13.31) per share, offering good upside (~26%) from the current share price of A$0.92 (~R10.58).
