Afrimat has been the mid-cap market darling for years. It is widely acknowledged that its executives are excellent capital allocators and consummate dealmakers.
Since its listing on the JSE in 2006, a series of well-timed and judicious acquisitions to diversify the aggregate and quarrying business into areas such as iron ore, anthracite, phosphates and cement have powered growth in earnings and the share price.
However, as a diversified general mining company involved in the commodity sector, the cyclicality of the underlying products, combined with external forces beyond the company’s control, can derail even the best management team.
This has been the case recently at Afrimat.
Year-end results to February pleased after what was a softer first six months. Headline earnings per share for the year rose 24% to 567.3c with a total dividend paid of 194c per share. Operating profit rose 19.8% to R1.15m with strong gains from the two key divisions. Bulk commodities profits rose 22% to R958m with a 110% increase in construction materials to R273m. Smaller units, modest in the mix, saw industrial minerals slide 72% to R14m with future minerals maintaining a loss of R13m.
The dominant profit contributor for Afrimat is iron ore. This cyclical commodity, whose underlying price is mostly determined by demand from China, accounted for about 68% of profits in financial 2023. Year to date iron ore, which peaked at $144/t in early January, has slid 29% to $102/t. This data point is significant as it will affect H1 2024 results to August and likely temper earnings growth to February 2025.
By the time IM hits the newsstands, Afrimat will have filed a pre-closed investor update. IM expects it to be sour.
By the time IM hits the newsstands, Afrimat will have filed a pre-closed investor update. IM expects it to be sour
IM’s view stems from the Afrimat AGM on August 6, where it issued a business update that detailed the challenges it faces in the six months. CEO Andries van Heerden stated “external economic blows” in the period would affect interim results.
For H1 2023, Afrimat reported headline EPS of 263.4c (up 4.4%). Based on our historic coverage of the stock and information from the AGM, IM believes Afrimat will have to issue a classic JSE trading update — aka a profit warning.
Transnet’s woes caused continued problems on the iron ore export line from Sishen to Saldanha. Derailments in the period hit Afrimat’s 870,000t annual export allocation. Afrimat’s highly profitable domestic Jenkins iron ore mine, which supplies ArcelorMittal South Africa (ACML), was also hit when ACML suffered two furnace incidents and issued a force majeure curtailing iron ore procurement for some months. And the slump in the iron ore price has hit revenue and thus profit.
Other interim results issues relate to the acquisition of aggregates and cement business Lafarge — an extended Competition Tribunal investigation delayed this six months. On the deal’s completion, Lafarge was loss-making and while Afrimat is swiftly rationalising the asset, losses will be in the system until the end of the year.
Not all is gloomy at Afrimat. The construction materials segment continues to perform strongly and relief from load-shedding has prompted a recovery at industrial materials.
In the six months, factors beyond Afrimat’s control will lead to a period of softer earnings. IM forecasts this will be a mere speed bump in Afrimat’s exemplary track record rather than a cyclical turn.
Afrimat peaked at R75.03 in early July, but at the time of writing the share price had slipped 14% and year to date is ahead only 3.5%, with much of the gains evaporating in the past weeks as the market got wind of weaker interim earnings ahead.
As an analyst who has covered Afrimat since its 2006 listing, the zeitgeist on the counter’s operational performance to August has been evident for months and that narrative has now become transparent via recent corporate updates.
Afrimat has many areas of growth over next two years — Nkomati, Lafarge and Glenover phosphate — but the heft of iron ore weighs. This is the pinch point and will remain so as the commodity remains beholden to Chinese demand.
With the stock having priced in much of the anticipated softness, at R64.40 IM continues to favour the long-term potential of Afrimat and would await the guidance from the company and the trading update expected in late-September to re-establish a position.
If IM’s crystal ball is correct, by the time IM publishes Afrimat will be a far more compellingly priced accumulate. IM maintains its standing buy on Afrimat with a target price of R80. For those who missed the government of national unity rally in the stock, a second-bite-at-the-cherry opportunity is ahead.
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