New-look AECI still offers investors bang for their buck
Does anyone remember the AECI of the old days? It was predominantly an explosives and fertiliser company and its nickname on the JSE trading floor was “Bang Bangs” in reference to its involvement in mining industry blasting.
Principal shareholder was the now-defunct Imperial Chemical Industries (ICI).
In recent times it has undergone a profound metamorphosis and today enjoys a wide institutional shareholding.
The first signs of a change in direction for the group came some years ago, with the largescale sale of surplus land at Modderfontein and Somerset West. With advancements in explosives technology, it was no longer necessary to have vast swathes of unproductive land near its production facilities to cater for unforeseen explosions.
Additionally, the background environment for most of AECI’s businesses has been on the up and up, especially in mining solutions. The improvement in gold and copper prices has helped its explosives volumes in SA and the rest of Africa, as have increases in prices of base metals and minerals.
It has also tapped into the national disaster of cumulative rainfall in the Western Cape being well below historical averages. AECI has been able to supply small-scale desalination infrastructure to Cape Townbased companies such as Sea Harvest and Lucky Star.
And in the rest of Africa, satisfactory progress has been made, especially in public water treatment. Volumes into the rest of Africa now account for 30% of revenue in the water and process division, a big rise from 20% in 2016.
On the down side, the price of platinum, which accounts for more than 20% of revenue in the mining solutions segment, has languished for several years. Also, the relative strength of the rand has worked against the group, as 60% of explosives are sold outside of SA and are priced in US dollars, and a strong rand is not good for profits from its mining segment.
Continuing with the list of detractors, the world price of ammonia has been in secular decline, which is not good for AECI as this is a feedstock for explosives. A low ammonia price negatively affects the top line in terms of the group’s ability to charge higher prices for its final products.
The latest set of results marks a change in reporting, from a four-segment operation (being explosives, chemicals, property and corporate) to a sixpillar analysis comprising mining solutions, chemicals, plant and animal health, water and process, food and beverage, and group, reflecting the evolutionary change in operations.
Mining solutions is by far the largest contributor to both revenue (52%) and operating profit before group adjustments (69%), followed by chemicals (19% and 24% respectively), plant and animal health (13% and 8%), water and process (8% and 12%) and food and beverage (6% and 4%).
AECI has been active on the acquisition trail recently, buying Schirm, a German contract manufacturer of agrochemicals and fine chemicals, as well as hot- and cold-mix asphalt operation Much Asphalt.
In financial 2017, headline earnings per share hit 959c and the dividend was increased to 478c for the year.
The outlook for AECI in 2018 and beyond looks reasonably promising, according to management. Company executives believe an improved domestic, political and economic sentiment should provide a stable backdrop for continued growth, while a commitment by stakeholders to negotiation of a workable Mining Charter should add extra stimulus to the mining industry.