THE LISTING of this materials supplier last November was both spectacular and unusual. Debut price was 805c/share, a large premium to the 500c/share pre-listing private placement. At 965c/share last week, Afrimat’s share price keeps rocketing.
Unusual in that Afrimat issued a cautionary announcement on the same day it listed. That unravelled earlier this month when the company, which supplies the building and construction industry, confirmed it had bought Malans quarries in the Western Cape for R125m.
The acquisition is in line with Afrimat’s strategy to source raw materials from within the group. It also raised money to help fund the acquisition – R60m through the issue of 6,5m shares to institutions, one an empowerment shareholder to keep the BEE profile of the company at 25,1%. Afrimat also indicated that further acquisitions were being considered.
It’s a rollicking start for a small cap share that’s placed in the right corner of the booming construction industry. The large building and construction groups are very expensive (though Afrimat is too) and earnings can be volatile if one or two large contracts fall through. Suppliers are more stable and still enjoy the benefits.
But such rapid growth and what looks like an aggressive acquisition strategy also make investors nervous. That’s understandable, but while this is a new listing it comes from the merger of two established companies – Lancaster and Prima – that both have a 45-year history in the Cape and enjoy dominant positions on the East Coast and inland, as well as Namibia.
Sceptics might also question the longer-term growth of a small company up against a large and dominant brick manufacturer like Corobrik. However, Afrimat has a diverse product range, including aggregates, ready-made concrete, concrete blocks and bricks. And the company is extending its geographical presence, even quarrying an area at Kommetjie in the Western Cape, which we’re sure has caught the attention of our writer who lives on that remote part of the peninsula.
But the problem is how do you justify paying a historic p:e multiple in the upper twenties? Barnard Jacobs Mellet’s Private Client Services, which also likes the company, suggests waiting for “a pullback or a re-rating in the sector”. That’s sensible advice, but it might be years before the sector re-rates. More speculative investors could consider getting in now and enjoying the ride.