Patience is advisable as AECI restructures
IM’s most recent comment on chemicals and explosive company AECI, colloquially known by traders as “bangbangs”, was the review of the interim results to June 2023 in the August 2023 edition of the magazine.
At that juncture, results were a mixed bag, with solid double-digit growth in revenue and profitability as mining powered results. But the chemicals division had spluttered.
Despite top-line growth, headline earnings rose only 5%, the result of a whopping increase in finance costs at the debt-heavy company. To counter gearing then at 47%
AECI slashed its dividend by nearly 50% to 100c a share.
AECI, grappling with a hefty restructure and the reorganisation of its German Schirm business, was only firing on half its cylinders at the interim stage. In the previous review, IM believed the reorganisation would start to gain some momentum and the valuation of AECI shares did not appear aggressive.
At about R105 at the time of that review, IM stated that shareholders needed faith in the stock stressing that it was for patient long-term investors who could afford to wait out the turnaround strategy coupled with AECI’s strong rand hedge capabilities.
By late September 2023, AECI touched R115. However, that was the stock’s zenith; the counter has dropped 21%, to the current level of R91.11, as the company announced a muted voluntary trading update in early November 2023 allied to its capital markets day. The stock went pop and deflated on the update.
AECI had a tougher second half and results for the year ended December 2023, released in mid-February, showed a 12% drop in headline earnings to R11.37 a share. The debt pile was tackled, with R1bn sliced off the balance, but higher finance costs bit into earnings.
A final dividend of 119c a share was paid, parlaying to a total yearly payout of 219c a decline of 79% year on year.
Despite a 5% rise in group revenue to R37.5bn with strong growth from mining and its offshore expansion, the macroeconomic conditions in the South African business were challenging and held back overall performance.
CEO Holger
Riemensperger is overhauling the behemoth to focus the company more towards its mining division and predominantly offshore, where the company has had considerable success.
The domestic chemicals company operates in a challenging environment and is being run purely for cash in a low-growth context with reduced demand and weak profitability.
Most of management’s effort is being directed towards mining, which is where the reduced capital expenditure is being spent. AECI is targeting aggressive offshore growth to maintain the momentum seen to date.
Riemensperger notes that the group has three focus areas of growth. Australia and Asia Pacific has been a success for AECI mining and there has been a move, via a small acquisition, into South America, specifically Brazil. AECI also plans to “set foot” in North America by the end of 2024, either in Canada or the US, to enter what is seen as an important and growing market. The group has an ambition to be a top three global specialist company in its field.
South Africa and its chemicals division will be repositioned, trimmed to focus on higher-margin products and underperforming units, of which there are many. Much Asphalt, Schirm, Animal Health and Sans Fibers will be exited over time.
With the restructure under way and the business looking to reduce working capital and capex to cut debt further, with investment only in the offshore mining segment, AECI indeed has promise.
However, the underlying domestic macroeconomic picture has not improved. Despite rand weakness aiding AECI’s offshore interests, much of the “boom” that investors are waiting for the company to announce on improved performance will only likely transpire in financial 2025 and 2026.
Management is making all the right noises to the market, and its restructuring narrative is clear. But IM sees no immediate need to rush headlong into the stock at R91.11, as it is now in a weakening downtrend.
IM participated in the capital markets day and the recent year-end results announcement. There is clearly value in AECI as it degears and pares back its sprawling empire to its highly profitable and growing mining-related core.
IM would gladly start to accumulate the stock on further weakness in the R80s, and patiently await the outcome, knowing it’s at least 18 months away.
Macroeconomic conditions in the South African business were challenging and held back overall performance