How Afrimat lifted its second-quarter game
Building materials and commodities company says political events in first three months of financial year hurt business confidence
Afrimat CEO Andries van Heerden played down talk that the supplier of industrial minerals, commodities and construction materials was feeling the pinch of SA’s downgraded economy in its interim results for the six months ended August 2017.
Instead, he said on Thursday, about R320m spent on getting the group’s iron-ore mine set to export 1-million tonnes a year to China helped take the gloss off the numbers. That said, Afrimat acknowledges tough economic conditions and that heavy rainfall and a clump of public holidays had knocked the March to May 2017 quarter.
"The second quarter, however, delivered exceptionally good results, almost compensating for the first quarter," Van Heerden said. The group’s diversification strategy had enabled "very good results" from relatively newly acquired subsidiaries such as Infrasors and Cape Lime, and good results from the construction materials business in the Western Cape.
Headline earnings per share in the latest six-month period were up 7.4% to 102.2c. This was a far cry from the 25.4% rise registered at year end in February 2017 and in preceding years, and comes even though Afrimat’s recently launched construction and building index continued to outperform the economy.
The first quarter was affected by "major political events", which severely hurt business confidence, Van Heerden said.
Afrimat had entered the iron-ore industry with the 100% buyout of a small iron-ore mine, Diro, in the Northern Cape. Before the acquisition the mine had been in financial distress. It was placed into business rescue in June 2016, exiting this in August 2017. It had since started delivery of iron ore.
Analysts pointed to higher risks for the group. "We believe that the Diro iron-ore deal is a much riskier deal than deals of the past seven years," Neil Brown, co-head of Electus Fund Managers, said on Thursday.
Afrimat’s dividend policy of maintaining 2.75 times dividend cover remained in place and an interim dividend of 20c a share was declared in the period, Van Heerden said. Return on net operating assets was 22.3%.
"Don’t get me wrong, Afrimat is an astonishing business with exceptional management," said Vunani Securities analyst Anthony Clark.
"[But] I saw the results as disappointing and question management’s forward-looking enthusiasm. I maintain my short-term sell. Poor revenue growth and a slight drop in the gross profit margin added to [a] loss in commodities [iron ore] and, again, the unpredictable swing factor of concrete products. Afrimat has always been a cash-flush biz. [First-half] cash fell like-on-like and gearing is 42% ... so very un-Afrimat," he said.
The result was in line with market expectations, despite a difficult operating environment, said Cratos Capital portfolio manager Ron Klipin.
"It appears to be a tale of two quarters, with a turnaround in the second quarter, buoyed by a diversified portfolio and driven by acquisitions," he said.