Anthony Clark

Afrimat strategy coalesces

M“Universal … takes Afrimat into a new commodity which has long-term potential

aterials business Afrimat is a business I have analysed and reported on since its listing in November 2006, when it priced its shares at 500c to raise R125m to value the business at R621m. It’s come a long way, with its market value now about R4.4bn.

At the time of listing Afrimat was mainly involved in aggregate stone products, ready-mix concrete and related concrete products. Its pro-forma listing revenue was R471m and its profit before tax R88m, with headline earnings of 50.5c a share.

Today Afrimat is substantially larger, with revenues of R2.5bn and profit before tax of R324m. In early April the group issued a sparkling FY2019 trading statement, indicating its earnings for the year would be ahead by 20%-30% in what has been a tough time for the local construction sector.

What has Afrimat done to set itself apart? The answer: its conservative and disciplined management. They are nononsense, cost-conscious mining engineers.

In the run-up to the 2010 Soccer World Cup, as its competitors were on an acquisition spree, Afrimat stood back. It kept operations lean and pretty much debt free. Even so, its share price was not immune to the calamitous sector derating that occurred as the froth blew off the World Cup construction boom.

Still, in the ensuing years there were plenty well-priced opportunities for a financially astute and strong Afrimat. It acquired strategic quality assets at knock-down prices and through its strict operating structure and cost controls turned around lame-duck assets.

One of the greatest buys was Glen Douglas, a mine owned by Exxaro, in mid-2010 for about R35m. That mine today makes materially more profit than its acquisition cost. In late 2011 it acquired Clinker Group for R124m, then in 2014 it acquired fellow JSE-listed Infrasors. Cape Lime was acquired in October 2015 for R276m and Diro Iron Ore in November 2017 for R320m. Diro, now renamed Demaneng, was Afrimat’s largest acquisition to that date.

Each deal added new profit and revenue streams to Afrimat, and widened its geographic footprint and product mix to end the reliance on the cyclical construction materials sector. Today, Afrimat is a diversified mix of construction and industrial materials with a growing element of base commodities.

Every move under the astute leadership of CEO Andries van Heerden was strategic: to de-risk but grow Afrimat.

All of this has been done with the minimal issuance of paper. Only 15% more shares are in issue today compared to the IPO, and Afrimat has used its cashgenerative abilities to acquire businesses for cash and debt while preserving its conservative balance sheet. Gearing in 2019 is a modest 36%.

After the robust 2019 trading update, Afrimat surprised the market with its largest acquisition deal to date. It said it had made a R2.1bn offer for Universal Coal, an Australian listed business whose assets are all in the Mpumalanga and Limpopo coal belts. Universal is profitable, has expansion potential and takes Afrimat into a new commodity which has longterm potential, given demand in SA from Eskom and the growing export market for quality coal and coking products.

The transaction will necessitate a material rights issue and structuring to get the deal away. If consummated it will add some R500m in profit to Afrimat and a new growth silo.

At 3,049c, Afrimat is by no means a steal on a trailing earnings multiple of 13 times. Iron ore and coal will diversify the company and aid its rand hedge benefits — but both commodities have their cycles and investors will need to take this into account. At current levels Afrimat remains attractive. I have a long-term value target of 3,600c on the stock.