Towards the end of 2023, diversified group AECI announced a new strategy to achieve some aggressive ambitions to drive it into the future.
These goals included doubling the profitability of its core business by 2026 (using the 2022 year-end as a base) and attaining a No 3 global market position for its mining business by 2030.
The group recently released its half-yearly results, which indicate that management has not wasted any time in its attempt to reach the goals. To achieve this, it has implemented a new capital allocation framework and operating model.
The results were lower than those recorded in the first half of 2023. But the performance is actually not as bad as it looks, if the high base set in the 2023 comparable financials is considered; they were at record levels. The 2024 interim results indicate that the group has made a start at achieving its goal for 2026.
It should be easier for the group to reach its earnings before interest, tax, depreciation and amortisation (ebitda) target in the second half of the year. This is mainly because most of the expenses related to the transformation of AECI for this financial year were accrued in the first half. In addition, the second half of the year is traditionally stronger than the first half.
Also on the positive side, the group expects that the return on investment of the costs needed to implement the transformation will take less than two years. It has already identified R800m in potential growth projects over and above existing projects.
Management has started rolling out its SAP information technology system and its mining digitalisation platform, which will enable the group to compete more efficiently globally, assisting its 2030 global goal ambition.
To enhance its ability in servicing and supplying the mining sector, the group will be disinvesting from six businesses. It has signed agreements to sell its animal health business and is committed to selling the remaining identified businesses within the next 12 to 18 months. This is expected to deliver R3bn-R4bn in proceeds.
These disinvestments will leave the group leaner and with a stronger focus on supplying the mining sector. Any businesses remaining in the group must therefore have synergies with its businesses in that sector.
Disinvestments will leave the group leaner and with a stronger focus on supplying the mining sector
To counter the poor growth in the sector in South Africa, the group will focus on globalising its business. AECI is now ramping up in Latin America, entering Europe and preparing to expand into North America. This does not mean it is shying away from Africa, as it will continue to defend its No 1 position in this market and will keep growing in the Asia-Pacific regions it now trades in.
Some key appointments have been made to achieve the stated goals; for example, Stuart Miller, a globally experienced mining engineer from Orica, was selected to head the mining division.
Group gearing stands at 41%, and though within its net debt to ebitda covenant levels, it is slightly out of the group’s targeted range of 20%-40%. Gearing should, however, improve as management will be able to lower debt levels as it receives proceeds from the sale of the businesses it will be disinvesting from.
Shareholders would not have been happy that the group did not pay any dividends at the first half, compared with the 100c a share paid at the 2023 half year. Over the medium term, shareholders should in all likelihood lower their dividend expectations. This is because, as the group moves through its transformation process, it will need to use a good portion of its cash flow.
The AECI share price has not performed favourably relative to the FTSE/JSE all share index over the past few years. AECI can be considered an indirect rand hedge investment for shareholders due to its global geographical exposure, which generates a good portion of its income offshore. This offshore exposure should increase over the next few years as the group achieves its ambitions on further globalising the business.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.