Afrimat’s stellar results fail to woo the market
In a decimated construction sector, the little gem of Afrimat stands out, boasting a nicely balanced portfolio of construction materials, bulk commodities and industrial minerals.
For the interim period to August 2019, revenue rose 20% to R1.7bn; the operating profit margin increased from 14% to 19%; operating profit rose 57% to R318m; headline earnings per share (Heps) rose 94% to 181.9c; the interim dividend doubled; and net debt-equity plummeted from 36% to 9%.
Bruce Williamson, chief investment officer at Integral Asset Management, cannot see any apparent weaknesses in the group. “It has a unique asset base of strategically located open-pits; a wide range of quality construction materials and industrial minerals; an experienced, hands-on board and strong middle-upper operational management; and a focus on training and skills across its workforce, all combining to deliver a great service to customers.”
He credits its pragmatic culture as a crucial factor that enables Afrimat to prevail during difficult times.
He highlights that the acquisition and successful development of the high-quality Demaneng iron ore mine, when most investors were sceptical, speaks to the skill level and entrepreneurial ability of the board. My sentiments as well. Some observers argue that Afrimat just got lucky by buying a bankrupt iron ore mine at precisely the right time and then participated in the subsequent exponential price rise in that commodity.
But such a conclusion ignores the immense amount of hard work that went into the identification and turning around of that mine.
Williamson likes that Afrimat is well positioned in the Northern Cape to explore or acquire other iron ore or manganese assets that are too light in size for the majors and is equally well placed to benefit from any uplift in government infrastructure and water rehabilitation expenditure.
“And as a slightly longer shot, it is well positioned to benefit from any contracts it might sign with the likes of Anadarko and ENI-Exxon, which are looking to develop large LNG [liquefied natural gas] projects in the Rovuma Basin in northern Mozambique, with management being well aware of the potential risks” he says.
Another admiring analyst is Anthony Clark of Small Talk Daily, who rates these results as “barn stormingly” good and cannot understand why investors disregard the counter.
“You give the market a 94% rise in Heps, a 192% rise in cash flow with gearing falling to single digits to move into net cash in the second half. However, the market waves it off with a 1.08% fall in share price.”
Looking for a justifiable reason for this reaction, Clark suggests that there could possibly be some concern over the second period, especially because the iron ore price in the past couple of months has fallen from $120 (R1,756) a ton to the prevailing $90.
With this volatile commodity being a significant contributor to group revenues and profits, Clark understands there may be some jitters.
“However, this solid cash cow and trump card is a low cost of operation of around $30 a ton, recently gained an increase in its export line rail tonnage allocation and has a startling payment cycle which boosts cash inflows.”
THERE ARE NOW TWO QUESTIONS: WILL AFRIMAT CONTINUE MAKING CLEVER ACQUISITIONS; AND WILL THE IRON ORE PRICE HOLD UP?
At R33, the share price has risen 12% this year, almost double the 7% posted by the JSE all share index. It has also more than doubled over the past five years, while the JSE has gone sideways. On a priceearnings ratio of just over 10, it is not expensive.
There are now two questions in play: will Afrimat continue making clever acquisitions; and will the iron ore price hold up?
Clark points to possible deals in industrial minerals to balance more equally the skewed iron ore portfolio. And there is certainly the money for this. “It would be reckless to do anything else other than acquisitions with the cash,” says CEO Andries van Heerden.
As to the iron ore price, who knows. Though now below its July 2019 peaks of $120, it continues at healthy levels of about $84, significantly higher than the company’s break-even price.