Afrimat’s Matie von Wielligh on surviving the construction bloodbath
Afrimat is thriving, despite woes of the construction sector
● Afrimat’s recent announcement of an expected doubling of earnings in the six months to end-August is the result of good governance and an effective diversification strategy, says its founding chair, Matie von Wielligh.
The stellar figures come in the midst of a bloodbath in the construction sector on which the building materials and industrial minerals group has depended since its listing in 2006.
In spite of horrendous conditions, Afrimat, which employs 2,400 people, has consistently been one of the JSE’s best performers.
“The governance system we designed right from the start 12 years ago was set up to create an enabling environment with solid control and a solid value system, but flexible enough to allow entrepreneurial actions by management,” Von Wielligh says.
It took a while for the investment community to notice.
“We didn’t have a track record of credibility and the investment community penalised us. Although we were performing reasonably well our share price didn’t reflect that.”
But if you bought the share five years ago, your return would have averaged 20% a year. And the investment community now regards it as one of the best-managed companies on the JSE, a view fully supported by its recent set of results.
Afrimat listed at R5 and for several years the price didn’t do much, which was unfair but hardly surprising given there was nothing remotely sexy or eye-catching about it.
“We were a quarrying company,” Von Wielligh says. “We only had quarries.”
The stuff it mined from these quarries supplied the construction industry. That was it. “We were 100% supplying the construction industry.”
Over the period of the 2010 Fifa World Cup bonanza, this paid off handsomely with margins of 20%-plus.
Then came the Competition Commission, charges of collusion against the big construction companies that were Afrimat’s clients, the devastation of the Jacob Zuma years, economic stagnation and the collapse of the construction sector.
Afrimat was saved by a strategy of instantly adjusting to market signals picked up by a sophisticated information system.
“We react fast and adjust quickly to conditions,” Von Wielligh says.
Its businesses were “speedily” repositioned and downsized, assets were transferred into other parts of the group and its quarries were operated with fewer people.
Afrimat diversified into industrial minerals, acquiring assets such as metallurgical dolomites, clinker and agricultural lime that were similar to its other assets from a technical and process point of view but sold in different sectors of the market, and into bulk commodities.
“We viewed a future built on more widely spread products in different sectors such as bulk commodities.”
Contributing most strongly to its recent performance was the acquisition of iron ore mine Demaneng in the Northern Cape, which was a departure from quarrying and industrial minerals.
It paid off handsomely when the iron ore price soared from $50 per tonne to $120. It is currently trading at $90-$95 (about R1,365R1,440).
“We were lucky about how the iron ore price assisted us,” Von Wielligh says. But because of the efficiencies Afrimat brought to the mine, “it would not have been a train smash if [the price] stayed where it was”.
By professionalising operations, Afrimat reduced production costs to $30 a tonne and increased volumes. It’s the only small miner in the Northern Cape with the ability to load its own trains.
A mechanical engineer by training, Von Wielligh, 67, was a project engineer on the Sishen-Saldanha line in 1975. As general manager of Kumba Iron Ore when it was owned by Anglo American, he worked closely with Transnet. Afrimat has “a very solid relationship with Transnet based on mutual trust”, which has been good for its exports.
The purchase of Demaneng exemplifies its policy on acquisitions.
“We identify assets that are not valued highly, but where we see an opportunity to turn it around and reposition it and make it profitable. That has been the golden thread throughout our performance over the last 12 years.”
That, and being “careful not to overpay because you have a desire to acquire an asset”.
Afrimat, which has a market capitalisation of R4.5bn, recently walked away from a R2.1bn acquisition of Australia-listed Universal Coal, which had appeared to make sense in view of Eskom’s reliance on coalfired power stations.
But the outright management control it likes to have over its businesses would have come at too high a price, Von Wielligh says.
“It was turning out to be a bigger asset to acquire than we initially thought.”
It would have been only the second time in its history it did a rights issue.
“We have not used our share base to grow the company for a long time. We had one rights issue early in the life cycle of Afrimat and since then never,” he says.
“We’ve been very focused on how to ensure growth in earnings for all our shareholders. We believe that just adding shares to our share register and diluting the value of their shares is not always a good thing. We operate within a framework of scarcity of capital.”
The latest Afrimat construction index points to a recovery of the sector but Von Wielligh is sceptical. “It’s still a difficult playing ground, it’s not easy.”
Too few big contracts or projects are coming from state-owned enterprises, and without those “the likelihood of the economy steaming forward is not going to be great”.
Although he sees more investment opportunities for Afrimat in SA “than we can afford”, he doesn’t see the government making the necessary structural reforms to grow the economy.
“We foresee SA will carry on more or less the same as it is economically. We’re certainly taking that into account in how we manage Afrimat.”
Much of its earnings are foreign exchange-based as it diversifies into different geographies. But it’s treading carefully.
“We’ve been very temped to move strongly into other countries and continents but we’re very rigid in assessing the risks we expose ourselves to.
“There hasn’t been much of a success story for companies that move out of SA. We ask ourselves, what would make Afrimat any different?”
We identify assets that are not valued highly, but where we see an opportunity to turn it around
Matie von Wielligh
Afrimat chair