WITH THE IMPROVED INFLATION outlook and with its improved sentiment, investors might want to pre-empt the SA Reserve Bank’s Monetary Policy Committee’s actions in a falling inflation regime by investing in interest-rate sensitive stocks. African Brick is one that would benefit from an improved inflation outlook and the renewed confidence that would follow.
The construction materials supplier has clay mining, clay brick manufacturing and retail arms. It manufactures and sells more than 100m bricks/year. Its 24 retail outlets (some owned, others franchised) in five of South Africa’s provinces distribute its products, plus cement and wood, used in the building and construction industry. At listing in late 2007, African Brick promised to add another six retail outlets.
Due to Eskom’s inability to supply reliable power, African Brick indefinitely postponed commissioning its Zuurbekom manufacturing plant. It had bought the property for R15m just before listing and had hoped to produce another 40m bricks/year.
However, the plant wasn’t its only missed target. Its pre-listing forecast of R32m profit for the year to February 2008 didn’t materialise. It managed to miss the target by 34%, only managing profit of R21,1m. For that African Brick has been severely punished, with its listing price of 100c dropping to the current 25c/share after reaching a high of 150c.
But has the correction not been exaggerated? Its R21m profit translates into headline earnings per share of 10,9c at the current price. That’s an earnings multiple of 2,29 times and a net asset value per share of 46,6c. Add to that the R36,5m in cash on its books at end-February and it translates to 11c/share.
At its current price, investors only pay for the cash and the profit to February, getting everything else as part of the package. However, in its results to February, African Brick said the brick market experienced an oversupply and therefore couldn’t increase brick prices during the year. The situation couldn’t have changed much in the current financial year, with the housing market still under pressure. However, with inflation having almost peaked and interest rates steady (and perhaps set to fall by the mid-2009) could African Brick be a sitting duck for a takeover?
AFRICAN BRICK CENTRE