Ratings agency shrugs off AECI profit warning
Ratings agency Global Credit Ratings (GCR) on Wednesday brushed aside AECI’s warning of lower interim earnings and maintained a positive outlook on the listed manufacturer of mining explosives and chemicals.
GCR analyst Sheri Morgan said the expected drop in AECI’s earnings did not change the rating agency’s positive outlook on the firm.
In June, GCR published a credit rating report on AECI in which it lauded the firm’s prospects, saying AECI was poised to benefit from the geographic diversification of its revenue.
AECI has a presence in Africa, Europe, South East Asia, North America, South America and Australia. The group has operations in mining, chemicals, water processing, plant and animal health, and food and beverages.
Morgan said GCR’s report covered AECI’s operations over a 12- and 18-month period. “The trading statement does not change our views. (The expected fall in earnings) is a correction,” Morgan said.
GCR, however, said AECI’s margins were likely to show “little” progress over the next year “as weak trends in some sectors persist, combined with anticipated restructuring costs at certain businesses”.
AECI, whose mining explosives business is one of the five largest global suppliers of commercial explosives, on Wednesday said headline earnings per share and earnings per share for the six months to June were expected to decline by between 18% and 22%.
The expected fall in earnings is in contrast to the strong performance in the year ended December 2018, in which the group reported record profit from operations of R2bn, thanks to a strong performance of the mining solutions and chemicals businesses.
AECI, which in February reported a 26% increase in full-year revenue to R23.3bn, attributed the expected fall in earnings to “strategic realignment projects” by the explosives business in the mining solutions segment and by ImproChem in the water and process segment.
AECI in February said subsidiary African Explosives Limited (AEL) was reviewing its product and service offerings for SA’s narrow reef mining, whose volumes have been declining over the years. When it announced the review, two of AECI’s customers had closed two shafts.
“ImproChem realigned its go-to-market model to enhance its capabilities and improve service delivery and efficiencies,” AECI said.
“Both these projects were completed by June 30 2019, at an aggregate non-recurring cost of R156m for the period. The total cost of these projects was R204m,” the company said.
AECI said the projects would offset the incurred costs in the second half of the financial year. “In future years, the sustainable annualised pretax benefit is expected to be at least R300m.”
The company is expected to release interim results on July 24.
In its report, GCR said it expected that AECI’s stable profitability and ability to generate strong cash flows would lead to the reduction of the firm’s debt.