Ac­qui­si­tions open path to pros­per­ous fu­ture

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

When Afrimat was formed and listed on the JSE in 2006 it had lit­tle more to of­fer the mar­ket than its quar­ry­ing and con­crete block op­er­a­tions. Afrimat founder and CEO An­dries van Heer­den had far more am­bi­tious plans.

Afrimat is di­ver­si­fy­ing on a broad front, in­clud­ing its lat­est move into iron ore.

It made its first move along the path of di­ver­si­fi­ca­tion in 2010, through the ac­qui­si­tion of met­al­lur­gi­cal dolomite pro­ducer Glen Dou­glas. Two other key ac­qui­si­tions fol­lowed. Clinker pro­ducer Clinker Sup­plies came on board in 2012 and dolomite, lime­stone and sil­ica pro­ducer In­fra­sors a year later.

The ac­qui­si­tions were to prove that Afrimat had the abil­ity to in­te­grate ac­qui­si­tions, to ex­tract value from them and, with In­fra­sors, to re­store a trou­bled com­pany to health.

Since 2010, growth has been ex­cep­tional.

In its year to Fe­bru­ary 2010 Afrimat gen­er­ated rev­enue of R778m and head­line EPS (HEPS) of 51.3c. Six years on, in its year to Fe­bru­ary 2016, rev­enue had grown to just short of R2bn and HEPS at an an­nual av­er­age of 20.4% to 156.6c. With­out ac­qui­si­tions, growth would have been 6%/year.

In its six months to Au­gust 2016, Afrimat lifted rev­enue 15% to R1.15bn and HEPS and in­terim div­i­dend by 25.3%. These re­sults spurred on a strong rise in its share price, which has reached a new high. It brought its rise since Fe­bru­ary 2010 to more than 800%.

With in­te­gra­tion of its first three ac­qui­si­tions com­plete, Afrimat went back on the di­ver­si­fi­ca­tion trail last year, snap­ping up Cape Lime in a R276m cash deal closed on March 31.

A pos­i­tive con­trib­u­tor from day one, Cape Lime added rev­enue of R70m in its first five months in Afrimat’s fold and taxed profit of R12.9m. “We are very happy with Cape Lime,” says Van Heer­den. “It has good man­age­ment on board.”

Con­sol­i­dated for a full year, Cape Lime should pro­vide a boost of about 12% to Afrimat’s bot­tom line, a con­tri­bu­tion Afrimat is look­ing to grow sig­nif­i­cantly.

An­other de­ci­sive di­ver­si­fi­ca­tion move came in Oc­to­ber — Afrimat’s R276m of­fer to ac­quire a 60% stake in Diro Man­ganese & Iron Ore, which had been placed in busi­ness res­cue in June, was ac­cepted.

“We iden­ti­fied our high ex­po­sure to com­mod­ity prices de­nom­i­nated in rand as a risk,” says Van Heer­den. “With Diro we will have di­ver­si­fi­ca­tion through US dol­lar price ex­po­sure.”

With Diro, Afrimat gains con­trol of an open­cast iron ore mine near Kathu in the North­ern Cape, with proven re­serves of 5.6Mt and a fur­ther 1.3Mt of sell­able fine ore stock­pile.

Be­fore min­ing op­er­a­tions can com­mence a lot of restora­tion work is needed, for which R50m of the pur­chase price has been al­lo­cated.

When the mine comes on full stream its an­nual output will be 1Mt, he says.

A con­tract is in place with Transnet for this amount on the Sishen to Sal­danha rail­way, which has its north­ern ter­mi­nus near Kathu.

“An iron ore price of more than R600/t is good for us,” says Van Heer­den. “It is now at about R1,100/t.”

On a for­ward p:e of around 16, Afrimat of­fers solid value.

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