Taking the gas
Afrox & Renergen
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.