KAP expects earnings to fall because of restated results

Diversified industrial, chemical and logistics group KAP has warned shareholders to expect earnings to drop when it publishes half-year results at the end of February.

This comes as the JSE-listed group had to restate results for the six months ended December 31 2022 and its 2023 full-year to correct a supplier’s error, which effectively increased the previously reported earnings.

Headline earnings per share (HEPS) will be between 19.8c and 23.3c, representing a decrease of 25%-36%, KAP said in a statement. However, once HEPS were restated, the fall would be 31%-41%.

“Management detected that a raw material supplier had incorrectly applied a contractual pricing formula for the period of February 1 to September 30 last year, which resulted in Safripol being overcharged by R183m for raw material purchases, of which R163m relates to the 2023 financial year and R107m to the current period,” KAP said.

“The error was immediately corrected, and the overcharges recovered from the supplier ... effectively increasing the previously reported earnings.”

Stellenbosch-based KAP has been grappling with weak global polymer margins and loadshedding, affecting operations. It was also affected by a challenging operating environment with high inflation, elevated interest rates and subdued economic growth contributed to lower consumer spending.

This resulted in lower domestic demand for the group’s products and services.

KAP, formerly known as KAP Industrial Holdings, has a portfolio of businesses that span wood-based decorative panels, sleep products, automotive components, polymers, supply chain and road safety.

It has three large businesses in PG Bison, Safripol and Unitrans, with smaller businesses in Feltex and Restonic, while Optix is a fairly small start-up in the group.

Notwithstanding the headwinds, KAP said it had brought the elevated working capital levels of December 31 2022 back in line with historical levels, which had resulted in a reduction in debt levels by the end of December.

“The group remained within its financial covenant ratios as at December 31 2023 and raised a R3bn revolving credit facility to refinance upcoming debt maturities,” KAP said on Thursday.

KAP has released R2.3bn in working capital since December 2022 and has invested in expansion of R1.3bn in the 2023 full year. About R1.9bn was injected into PG Bison’s new Mkhondo medium-density fibreboard (MDF) plant, which is expected to increase production capacity by 33% after completion.

Commissioning is planned for March.

With net debt of R8bn — representing a debt to earnings ratio before interest, taxes, depreciation and amortisation (ebitda) of 2.1 times and within its debt covenant range — the group has been looking for ways to service that debt while maintaining its investment growth objectives.

Last year CEO Gary Chaplin said curtailment of non-essential capital expenditure to concentrate on large projects would be key, coupled with discontinuation of underperforming assets and disposal of others in a bid to improve returns.

On Tuesday, Bloomberg reported that Unitrans might be sold for up to R6bn.

Chronux Research analyst Rowan Goeller said KAP’s decision to exit Unitrans if a decent offer was made “is probably sensible”.

“The division has been identified as noncore and a sales process is not surprising,” said Goeller.

Highlighting that the eMkhondo MDF expansion would cost a further R1.2bn in the 2024 financial year, which would be mainly funded through internal cash generation, he cautioned that “there is some risk of having to increase debt further should the expected weak firsthalf operational performance, especially in chemicals, continue into the second half”.

Goeller said that while KAP was well within its debt covenant ratios, it was at relatively high levels for a cyclical industrial group.

KAP shares were unchanged at R2.30 on Thursday.