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R97m CO plant will help halt re­cent luck­less fate

Finweek English Edition - - COMPANIES & MARKETS - SVET­LANA DONEVA svet­lanad@fin­

THERE’S SOME­THING to be said for be­ing in the wrong place at the wrong time. That’s been the luck­less fate of one of South Africa’s chem­i­cal ma­jors – Afrox – over the past few years, char­ac­terised by a south­bound share price and earn­ings stream. How­ever, Afrox’s lat­est at­tempt at res­ur­rect­ing its for­tunes demon­strates sound man­age­ment – al­though mar­ket com­men­ta­tors say it’s un­likely to send them hur­ry­ing to buy the share.

The ac­qui­si­tion in ques­tion is of technology and equip­ment worth R97m for a new car­bon diox­ide plant. Car­bon­ated soft drinks mak­ers are the main con­sumers of car­bon diox­ide and, to a lesser ex­tent, in­dus­tries in­volved in me­tal­lurgy. “The plant it’s re­plac­ing is old and in­ef­fi­cient rel­a­tive to the cur­rent tech­no­log­i­cal­ad­vanced plants,” says Slab­bert van Zyl, re­search an­a­lyst at Oa­sis Group. “The new plant will have a use­ful life of around 20 years and with CO de­mand ex­pected to re­main strong, it will gen­er­ate at­trac­tive re­turns for the com­pany over the medium to long term.”

An­other an­a­lyst says car­bon diox­ide pro­duc­tion ser­vices the sta­ble side of the busi­ness, which is tra­di­tion­ally less sus­cep­ti­ble to eco­nomic cy­cle vari­a­tions. “It’s not a bad strat­egy, but it still doesn’t mean I’d rush out and buy the stock,” he added.

So what’s gone wrong at Afrox? Some of its prob­lems are un­timely man­age­ment de­ci­sions: for ex­am­ple, Afrox in­vested heav­ily in ca­pac­ity in its sig­nif­i­cant cylin­der busi­ness at the peak of the cy­cle in 2006. The cylin­der busi­ness sup­plies con­sumer in­dus­tries, such as restau­rants, so when the re­ces­sion took a grip in 2008 Afrox was stuck in an ex­tremely over-ca­pac­i­tated busi­ness. To an ex­tent it’s still op­er­at­ing in that en­vi­ron­ment. The con­sumer re­cov­ery has been slow on the up­take, which means Afrox has suf­fered along­side the in­dus­tries it sup­plies.

Man­u­fac­tur­ing is an­other key sec­tor, whose de­cline over the past two years has been to the com­pany’s detri­ment – al­most so, says Van Zyl, that the steady de­cline in its earn­ings over the same pe­riod has been “in­evitable”.

The rand’s strength has been an ad­di­tional ag­gra­vat­ing fac­tor and Afrox found it­self un­able to com­pete with im­ported prod­ucts from Asia. Weld­ing prod­ucts proved to be its Achilles heel. Late last year Afrox an­nounced write­downs at its man­u­fac­tur­ing plant in SA – in ef­fect, ex­it­ing the weld­ing prod­ucts busi­ness and go­ing the al­ter­na­tive route of im­port­ing branded rods from Asia at a cheaper price than it could pro­duce them here. “It was a tough and brave de­ci­sion by man­age­ment,” says Van Zyl.

An­other set­back for Afrox was the fact the Depart­ment of En­ergy placed a limit on the price of liq­ue­fied petroleum gas (LPG) – which the com­pany dis­trib­utes un­der the HandiGas brand – of around R5 218/met­ric ton in mid-2010. The price ceil­ing has con­trib­uted to neg­a­tive sen­ti­ment about Afrox’s share price, says one an­a­lyst. Its price speaks for it­self and any LPG-re­lated bad press was just a blip over a long-term neg­a­tive trend.

Afrox’s share price has con­sis­tently un­der­per­formed the JSE All Share for the past five years. As­sum­ing 2007 as the base year, its share price has fallen over 20%. Over the same five-year pe­riod the All Share has ap­pre­ci­ated by close to 80%.

So af­ter a com­bi­na­tion of bad luck and some dif­fi­cult de­ci­sions, Afrox is un­likely to turn the corner this year. The medium and long term will have a more op­ti­mistic prog­no­sis. Afrox is still a mar­ket leader in many of the fields in which it op­er­ates and its in­creased man­u­fac­tur­ing ca­pac­ity will fur­ther act in the group’s favour once man­u­fac­tur­ing gains sus­tain­able mo­men­tum.


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