A year ago IM wrote that though economic growth was an investment risk factor, the 22% fall in the share price at the time justified putting AECI on the investment radar due to its cheap fundamentals on most valuation metrics.
IM also alluded to the fact that AECI is a good rand hedge. Though the rand has been relatively strong during the current reporting period (averaging R14,54/$ for the first half of 2021 relative to R16,65/$ for the first half of 2020), the company has returned over 15% on its share price over the past year and 570c a share in the form of dividends (100c a share interim payout and a 470c a share final). Not a spectacular performance — but still a solid return for any investor.
Though Covid had a large impact on the business last year, the pandemic continues to affect AECI in the form of supply chain disruptions and the nonavailability of shipping containers. This has affected the sourcing and supply of raw materials.
The group recently released its interim results for the period ended June 2021. On the face of it, the 69.9% reported increase in profit from operations shows a strong performance on the comparable prior period (June 2020), but one needs to take into consideration that the prior period had a number of one-off costs — such as restructuring, impairments and a hefty R454m Covid impact cost. After adjusting for these costs, profit from operations has not yet recovered to pre-Covid levels and is actually down on the comparable June 2020 half-year period by 11%.
Having said that, a six monthly R948m profit and headline earnings a share (HEPS) of 529c is an outstanding achievement considering the current economic backdrop. In an environment where a host of companies have been unable to pay dividends, AECI declared a credible 180c a share cash interim dividend, which is a dividend cover of around 2.9 times.
The dividend cover is higher than the full year as the company tends to cover its dividend according to its earning profile, which has historically been split 43% in the first half and 57% in the second half (which explains a higher divided in the second half of the year).
On the balance sheet, net debt increased to R2.9bn compared with R2.4bn at the end of last year. This resulted in gearing of 27% which, though lower than June 2020, is higher than the 22% achieved for the full year of 2020. Traditionally, there is a claw-back on debt in the second half and the same is expected for this year. Gross debt is a large number but the group is, for now, comfortably within its loan covenants.
AECI Mining (the group’s biggest profit contributor, generating about R649m of the total R948m operating profit in the latest interims) benefited from the recovery in commodity prices — including the ammonia price (used in mining explosives and fertilisers which are sold into the currently buoyant commodity and agriculture markets). Margins also improved on the back of good cost control.
Due to strong geographical diversification, the mining section of the group has strong rand hedge characteristics. About 62% of the total revenue from AECI Mining is foreign revenue, therefore the division would have been slightly negatively affected by the relatively strong rand compared to Q1 2020, where foreign revenue was 64% of total revenue.
The other business segments of AECI reported mixed results. AECI Chemicals (the second-largest contributor to the group’s profit from operations) and AECI Water performed relatively well, showing good growth on the comparable period. Despite reporting positive profit from operations (R29m), AECI Agri Health was down strongly from the comparable June 2020 results period.
This was due mainly to inflated margins for the comparable period in their German operation, Schirm, on the back of an opportunistic sanitiser order received from the German federal ministry of the interior, which was not repeated in this period.
The group’s optimism is evident in the future capital commitments of R1.1bn to be spent over the next 24 months.
The second half is expected to be better than the reported first half as strong commodity prices are expected to lead to more mines coming on stream domestically as well as in other geographical areas where the group operates.
This, together with the manufacturing sector starting to improve and approach pre-Covid levels, should be beneficial for growth.
Judging by the cheap valuation metrics, the share price may not yet be reflecting this potential upside.
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