KAP banks on expansion and restructuring

Diversified manufacturing and logistics group KAP Industrial is banking on expansion and restructuring to enhance its operational performance and improve returns after a mixed bag of results in the year to June.

CEO Gary Chaplin said on Wednesday the completion of major capital projects and the consolidation of Unitrans are set to improve returns and accelerate a reduction in debt from the 2025 financial year.

The JSE-listed group reported a 6% increase in revenue to almost R30bn, though earnings before interest, taxes, depreciation, and amortisation (ebitda) fell 11% to R3.9bn, and operating profit before capital items declined 19% to R2.4bn.

Headline earnings per share slumped 43% to 42.7c on higher finance costs, largely as a result of higher interest rates.

KAP’s net interest-bearing debt increased by R568m to just over R8bn — well above its R6.2bn market capitalisation — due to continued capital expenditure to complete projects.

Chaplin said the group’s debt was incurred mainly to fund expansion projects and KAP expects them to wrap up in the 2024 financial year and make significant contributions to the bottom line.

“Those expansions are progressing according to plan and within budget, and will all be completed in the 2024 financial year. Thereafter we will see a material degearing as those expansions come into operation and we have a lower capex profile,” he said.

“We expect the aforementioned activities to support stable net debt levels during the 2024 financial year and expect the group to degear from the 2025 financial year as the capital expenditure profile tapers off alongside the expected positive contribution from the PG Bison Mkhondo medium-density fibreboard (MDF) plant.”

The group has earmarked R2.3bn in capital expenditure in the 2024 financial year, including R1.9bn for PG Bison’s particle board manufacturing plant in Mkhondo.

The move will see it expanding the range of products from the plant by increasing MDF output. Commissioning is planned for March 2024.

MDF is a manufactured wood product used in furniture, cabinetry, flooring and even speaker boxes.

“That is a significant expansion which allows us to then displace imports, be more competitive in the local market and export profitably,” said Chaplin.

“The plant will result in a 33% increase in PG Bison’s production capacity, on a basis that it is globally competitive.”

The industrial group specialises in manufacturing wood-based decorative panels, bedding, automotive components, and polymers.

In the year under review, KAP said it had to contend with rising interest rates and inflation, subdued consumer confidence and continued infrastructure disruptions, including increased load-shedding.

It reported improvements in its PG Bison, Restonic and Feltex divisions, but the Safripol unit struggled as global polymer margins narrowed from the previous year.

The Unitrans business performance was also disappointing, primarily due to poor performances by the agriculture and food operations.

Chaplin said the rationalisation and restructuring of Unitrans, which lost a major food contract in the previous year, would also be important for the survival of the business.

The logistics business was changing, he said, with long- and fixed-term contracts increasingly being replaced with ones on lower margins and on different terms.

The company has so far consolidated three businesses into a single business under Unitrans. Management has also identified cost savings of more than R100m per year that being implemented.

A restructuring specialist has been appointed to assist with repositioning Unitrans as a smaller, better business with improved returns.

At the same time the group would be simultaneously tightening its belt to cut costs and improve optimisation, Chaplin said.

That includes reducing KAP’s cost base across the group, keeping working capital levels as low as possible, discontinuing underperforming activities and curtailing non-essential capital expenditure in favour of a few large projects.

“We are disposing of low-return assets,” Chaplin said.

KAP shares were trading 1.19% lower at R2.49 at 1.30pm. 

gumedemi@businesslive.co.za