By Ryk de Klerk
IN SEPTEMBER last year I penned that Aveng was turning the corner for the better and growth in the net asset value per share or shareholders’ interest was on the horizon. Well, this ugly duckling is undergoing a magical transformation that will blossom into a graceful swan.
The onset of the Covid-19 pandemic resulted in delays in the sales of non-core assets and resulted in debt restructuring and the recapitalisation of Aveng. The balance sheet restructuring inter alia involves the restructuring of its existing debt facilities, whereby 39.5 percent of principal debt will be settled through the issue of Aveng ordinary shares at 5 cents per share, some debt will be settled in cash by Aveng utilising the proceeds from a pending rights offer, while the remaining debt will be restructured in terms of a restructured term and overdraft facility with a term of three years.
The net effect of the restructuring is that the debt to equity ratio will fall to 41 percent from a relatively unsustainable 135 percent at the end of June last year. The outlook for the company as such is that the board of directors forecast that the remaining debt of R1.2 billion will be repaid over the next three years.
The rights offer has been postponed for a few weeks due to a technicality, but it is evident that Aveng’s future is driven by heavyweight JP Morgan Chase & Co and Whitebox Advisors, an SEC registered investment advisor.
The rights offer involves an offer of 103.122 shares for each 100 ordinary shares held at an issue price of 1.5c to raise R300 million. The offer is fully underwritten by Highbridge Funds and Whitebox Funds. Highbridge Funds are managed by Highbridge Capital Management, an indirect wholly-owned subsidiary of JP Morgan Chase, while Whitebox Funds are managed by Whitebox Advisors.
On January 14 this year Aveng announced that Highbridge and Whitebox owned 19 percent and 11.9 percent of the issued shares, respectively. Two other subsidiaries of JP Morgan Chase held 6.5 percent, meaning that JP Morgan Chase’s effective holding before the rights issue at that stage was 25.5 percent.
The underwriters also require a specific issue of shares in order to achieve minimum subscription requirements of R83m in respect of the Whitebox Funds and R120m in respect of the Highbridge Funds. Any shortfall will be made good by the specific issue of Aveng A shares and although the A shares will not carry any votes they are convertible into ordinary shares at the request of the holders.
My calculations indicate that, if the rights offer is fully taken up by shareholders and after certain debt is settled through the issue of Aveng ordinary shares, Whitebox’s effective holding will increase to more than 15 percent from the most recent 11.9 percent, while Highbridge’s holdings will move to 23 percent from 19 percent, thereby increasing JP Morgan’s effective holding to 28 percent from the current 25.5 percent. Whitebox and JP Morgan will, therefore, control 44 percent, 6.7 percent of shares are held in escrow for a management incentive plan and are under control of the board of directors. The board, together with JP Morgan Chase and Whitebox, will be in control of the company.
If, however, nobody follows their rights, Whitebox’s holdings will increase to just more than 20 percent, while JP Morgan’s total holdings will amount to about 33 percent. Yes, the underwriters would effectively take total control of the company with a combined holding of 53 percent – a bloodless coup d’état.
The banks get their shares at a slight discount to the net asset value per share and are subject to an equity lock-up, but we know that they can borrow shares and sell them short in the market to fix a price.
The theoretical share price pursuant to the rights offer after taking into account a current share price of 3c per share works out to be 2.273c per share and 1.773c given a current share price of 2c. That compares to 5.7c per share after the balance sheet restructure transaction and 4.5c per share if it is assumed that existing claims to the amount of R652m are recognised as uncertified revenue and written down and impaired.
I expect that, when listed, the nilpaid letters of allocation will trade at 1c. The effective price that a new investor will pay for a share would, therefore, be 2.5c. After the balance sheet restructuring, the market capitalisation at the theoretical prices based on the current share price of 3c per share will amount to R1.2 billion and R0.93bn if the share price falls to 2c cum the rights offer. Yes, huge discounts to the estimated shareholders’ interest of R2.99bn or R2.34bn if existing claims are impaired.
But what is the real value of Aveng? The group operates under two reportable segments, including Construction and Engineering (Australasia and Asia) and Mining, and is in the process of disposing of its Manufacturing and Processing business divisions.
The big attraction is unquestionably Aveng’s subsidiary, McConnell Dowell, a construction contractor, delivering projects in the infrastructure, resource and building sectors for clients in Australia, Southeast Asia, New Zealand and the Pacific Islands. 90 percent of McConnell Dowell’s project portfolio is made up of government projects across all core geographic markets with Australia the growth engine.
At the end of June last year the company’s work in hand was A$1 843 million (R21bn), up 60 percent from the previous year and supports 90 percent of budgeted revenue for the 2021 financial year.
NRW Holdings, an Australian-listed company, which operates in relatively similar industries as McConnell Dowell, trades at a price/free cash flow ratio of 6.4 times. McConnell Dowell had operating free cash flow of A$44m in 2020.
By using NRW Holdings’ price/free cash flow ratio of 6.4 times it implies a possible market value of A$281m. The net assets (total assets minus total liabilities) of McConnell Dowell in 2020 was A$181m.
The value or potential value of McConnell Dowell alone underscores Aveng’s shareholders’ interest post restructuring and recapitalisation.
Moolmans, the group’s other core holding and wholly-owned subsidiary, is a South African-based leader in opencut contract mining, offering services across the mining value chain.
Moolmans’ work in hand was R4.9bn at June 30, 2020, and supports 81 percent of budgeted revenue for the 2021 financial year.
In my opinion, Aveng at 3c per share is trading at a deep discount to its possible intrinsic value and the current balance sheet restructuring significantly lowers the risk of investing in the company. I will definitely take up my rights in terms of the offer.
Ryk de Klerk is analyst-at-large. Contact [email protected]. His views expressed above are his own. He has a direct interest in Aveng. You should consult your broker and/or investment advisor for advice. Past performance is no guarantee of future results.
*The views expressed here are not necessarily those of IOL or of title sites
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