Tak­ing the gas

Afrox & Ren­er­gen

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

J ust three years ago things were look­ing bleak for Afrox, with head­line earn­ings fall­ing 87% be­tween 2005 and 2014. The in­dus­trial, med­i­cal and con­sumer gases group has since put the dis­as­trous decade firmly be­hind it.

Afrox re­bounded in its year to De­cem­ber 2015, lift­ing head­line EPS (HEPS) by 285%. It fol­lowed this up last year with a 36% rise. The re­cov­ery re­stored HEPS to above pres­lump lev­els.

Afrox’s dis­as­trous decade was brought about by years of fail­ure to ad­dress a se­ri­ously in­flated cost struc­ture. The turnaround was en­trusted to Schalk Ven­ter, who came aboard as MD in May 2015. He over­saw an ag­gres­sive cost­cut­ting ex­er­cise that in­cluded plant clo­sures and job cuts. It en­abled Afrox to achieve a re­duc­tion in an­nual costs of R450m — R144m in 2015 and a fur­ther R306m in 2016.

But Ven­ter con­cedes there are lim­its to cost re­duc­tions as a growth driver. Times are also tough. “The mar­ket in gen­eral is sub­dued,” he says.

Afrox’s 2016 re­sults left no doubt about this, with to­tal group rev­enue grow­ing by a mere 1.2% to R5.54bn.

The best per­former was at­mo­spheric gases, Afrox’s largest di­vi­sion, which lifted rev­enue by 9.9% to R2.32bn. The rise came with the help of R165m paid to Afrox by ArcelorMit­tal SA as set­tle­ment of a sup­ply con­tract dispute.

Ex­clud­ing the set­tle­ment, the di­vi­sion’s rev­enue reg­is­tered a mere 2% im­prove­ment.

But im­proved pro­duc­tiv­ity flow­ing from cost cut­ting worked magic for the di­vi­sion, which lifted gross profit af­ter distri­bu­tion ex­penses (GPADE) 27.5% to R868m, just on half of the group to­tal of R1.78bn.

Though it is a tall or­der to ex­pect a re­peat per­for­mance in 2017, Ven­ter holds out hope of rea­son­able growth from at­mo­spheric gases. De­mand from a re­cov­er­ing min­ing sec­tor is look­ing strong, with sales to the sec­tor up 8% this year. But min­ing re­mains a sec­tor with a ques­tion mark over its fu­ture.

Afrox is look­ing to con­sumer-led mar­kets to gen­er­ate more sus­tain­able growth for its gases di­vi­sion. Ven­ter says Afrox is po­si­tion­ing it­self for growth in ar­eas such as car­bon diox­ide, used by the soft drink and beer in­dus­tries; liq­uid ni­tro­gen, used to flash-freeze foods; and in­ert gases, used as spray-can pro­pel­lants.

Its sec­ond-largest di­vi­sion, liq­ue­fied petroleum gas, also put in a strong show­ing in 2016, lift­ing GPADE 15.1% to R369m.

There was one Afrox di­vi­sion where even cost cut­ting could not save the day. Rev­enue in the hard goods di­vi­sion, which dis­trib­utes prod­ucts such as weld­ing equip­ment, fell 15.5% to R666m and GPADE slid 14.7% to R232m.

Out­side SA, Afrox’s op­er­a­tions pro­duced a 9% rise in rev­enue and a 4% rise in ad­justed GPADE to R306m.

The stage ap­pears set for Afrox to pro­duce solid rather than spec­tac­u­lar growth in 2017. It is also on track to re­store its blue-chip sta­tus, a sta­tus un­der­pinned by other fac­tors, in­clud­ing be­ing a 53%owned unit of Linde Group, the world’s largest in­dus­trial gas com­pany.

Adding at­trac­tion is Afrox’s ungeared bal­ance sheet, mod­est capex and abil­ity to pump cash. In 2016 it gen­er­ated free cash flow of R301m and ended the year with cash hold­ings of R1.153bn.

Trad­ing on a mod­est 10.4 p:e, Afrox is a share to con­sider as a core long-term port­fo­lio hold­ing.

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