Buy the property
AECI LIMITED INVESTORS LOOKING TO GRAB bargains offered by the recent devastation in equity markets won’t see any shortage of candidates. In fact, the bluest of blue chip shares can still be bought cheaply on the JSE. One of those that can be added to power up a portfolio is chemicals and explosives supplier AECI, although it can’t exactly be called a bargain in the current context.
Headline earnings per share of 325c at the interim period give AECI an estimated forward earnings multiple of about 10 times (on the price of 6100c/share) at the full reporting period in December. Its June HEPS figure was 35% higher than the last corresponding number. That was achieved on revenue growth of 43%, which AECI attributes to improved performance by all its business units. Particularly impressive was its chemical services (Chemserve), the biggest unit with a 68% contribution to group revenue, which delivered a 53% improvement to its operating profit.
AECI’s main business is to supply the mining, industrial and agricultural sectors with chemicals and explosives. While the current market climate might provide more gloom for the mining sector, agriculture is set to benefit from current high food prices, and more farmers are bound to plant more and therefore use more chemicals. Though SA’s mining sector has shrunk by about 14% so far this year, improving profit margins at AECI are set to compensate for the decreased demand from mining. Group margins remained steady at 9,3% in June (Chemserve’s improved to 10%).
Value investors might want to climb in at the current levels of 6100c/share and enjoy the ride while hoping for a separate listing of the property portfolio in the future. Standard Bank and McGregor BFA’s analysts respectively expect AECI to bring in HEPS of 593c and 600c in the year to December. The following year would see those climbing to 790c/share then 994c/ share by 2010. Those would have paid for the property portfolio if bought now.