Sit­ting duck?

Finweek English Edition - - Companies & Markets - SIKONATHI MANTSHANTSHA

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?


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