PICK of the MONTH
frimat has been recommended by IM since this publication began. The counter has seemingly defied the highly cyclical nature of its operations and has consistently delivered excellent shareholder returns.
With operations in construction materials, industrial minerals and, lately, commodities via iron ore, the company, through tight operational performance and judicious, welltimed acquisitions, has risen head and shoulders above its peers in the sector.
Results to February 2020 were out of the ball park in terms of performance.
Group revenue rose 11.4% to R3.3bn and operating profit for the year increased 27.5% to R601m Headline EPS went up 48.5% to 347.7c. Because of strong cash generation, gearing was pared from 24% to 8% and Afrimat deferred its normally generous dividend policy, as has been the Covid-19 trend.
The star performer was again iron ore. The second half brought lower prices for the company as the global iron ore market cooled after a bumper first half. However, iron ore as a division contributed 31% to group revenue and a healthy 53% to operating profits. The bulk commodities division (it includes other minerals as well), reported a 60% rise in profit to R322m.
It offset softness in some of Afrimat’s traditional markets due to the weak economy. For the year, construction materials
Aincreased profits 1.2% to R192m, and industrial materials, through new markets, pushed profit up 22.5% to R96m.
Today the Afrimat revenue pie is made up of construction materials (52%), industrial minerals (17%) and bulk commodities (31%). The last-named two divisions have been added since the company listed on the JSE in November 2006 at 500c a share.
Afrimat’s flawless deal prowess has powered earnings and earned management the respect of the market. Management’s rigorous due diligence and spadework on deal targets has allowed it to snap up assets judiciously at bargain prices.
While many of its competitors were mired in debt and weak operating performance, Afrimat’s conservative ethos, allied to rigorous cash generation and a low-debt mantra, has allowed it to side-step much of the sector’s decadelong earnings slump.
The transformative deal that led to recent stellar results was the acquisition of a 60% stake in Diro Iron Ore in 2016 for R276m out of administration.
In 2017, Afrimat acquired full control of Diro. The iron ore mine was losing R96m on acquisition.
After a period of investment and modernisation, together with improved mine operational techniques and performance, Diro, renamed Demaneng, quickly returned to profit. Today the iron ore mine produces 900,000t of high-quality lumpy iron ore which, because of its low level of contaminants, sells at a premium to the export market.
Afrimat is debt free and will emerge from Covid-19 in a far stronger position operationally than many of its competitors. It has already snapped up a small coal business via Unicorn Capital Partners for R110m. This should in time be another winner for Afrimat.
In the year to date Afrimat has declined 1.6%, far outperforming the mid-cap sector, but there are challenges ahead that now temper IM’S former enthusiasm.
Despite excellent financial 2020 results, the Covid-19 lockdown and cessation of much of Afrimat’s operations in April before a partial reopening in May will inevitably hit profitability at interim results to August. A weakened domestic economy will have an impact on the counter.
Some counterbalance will come from an improving iron ore price, which from its late2019 low has rallied by 57%.
The materially weaker rand will aid export earnings from bulk commodities, also offsetting some of the lockdown effects, and further benefits should come from the giant gas fields under development in Mozambique.
Since the 2020 results, in the past 30 days, Afrimat has risen 26%. On a historic earnings multiple of 9 the stock appears great value. However, the first half of the 2021 financial year will bring a material decline from earnings of 347.7c a share in financial 2019.
The sharp run in the share price since the results, we feel, though justified, has taken much of the easy money off the table in the short term.
We recommend Afrimat for any long-term growth portfolio. But given the current economic uncertainty as we emerge slowly from Covid-19, we rate Afrimat a hold.
Some counterbalance will come from an improving iron ore price, which from its late-2019 low has rallied by 57%