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Afrimat shines in a broken sector

By sticking to SA and diversifying into mining.

Mining and building materials group Afrimat continues to shine in a sector that has turned into a bloodbath for others.

Basil Read and Group Five – once titans of the construction sector – are now in business rescue. Obituaries of SA’s construction sector tell us that government failed to pull the trigger on its long-promised infrastructure programme, leaving companies to tender for work at virtually no profit in the hope that government would come to the rescue. When that didn’t happen, companies took on low-margin projects to keep their work teams occupied and cover head office expenses, until it all came to a messy end.

The notion that the SA construction sector is dead is not supported by the evidence.

Afrimat, quite apart from being the exception to the rule, also publishes the Afrimat Construction Index (ACI), and it shows activity levels slightly lower than 2015-2017, but on a par with levels achieved in 2011 and 2012. What is striking about the latest ACI is building plans passed are little changed over the last three years, while the value of buildings completed (at current prices) is steadily uptrending.

Afrimat versus JSE construction and materials index

Source: Share Magic

Building materials at current prices are the highest they have been since 2018, and this plays directly to Afrimat’s strengths.

Afrimat chief financial officer Pieter de Wit told CFO Talks that the ACI is now higher than it was in 2010, at the tail end of the last great infrastructure boom in SA. “If you look at the current year’s levels it is a bit down on last year but the construction sector is not dead.

“If you look at the companies that are falling over or are in business rescue, they made a lot of their strategic decisions outside of SA.”

While the number of bigger construction projects has fallen, a steady stream of smaller and mid-sized projects has kept the company in rude health.

At the tail end of the last construction boom, Afrimat decided to diversify into mining to smooth the earnings flow from a traditionally cyclical construction sector. In 2016 it acquired Northern Cape iron ore producer Diro Resources out of business rescue, adding to its steadily expanding portfolio of businesses involved in producing lime, dolomite and silica.

The company is predominantly SA-based, with the sole exception being two quarries in Mozambique.

The diversification into mining and bulk commodities has more than doubled the expected profits had Afrimat remained focused solely on construction materials.

The iron ore business turned out to be a gem, contributing nearly a quarter of profits in the first half of the 2019 financial year.

It also reduced construction materials’ contribution from 76% to 56% over the previous financial year. Afrimat acquired the iron ore business at a cyclical low in 2016. Since then it has made a positive contribution to earnings. It is currently selling nearly 900 000 tons a year, of which the majority is exported by rail through Saldanha Bay, and is focusing on higher quality product to maximise returns.

The construction materials business was hit by the economic slowdown, but showed signs of recovery in 2018, particularly in its home province of the Western Cape.

Once the election is over, the hope is that economic confidence will step up and government will make good on its promise of infrastructure spending. Billions of rands of construction projects await a more conducive environment. Without a turnaround in construction, the building materials business is unlikely to show much improvement.

Afrimat’s industrial minerals business, supplying the glass, chemical, metallurgical and other industrial sectors, is underpinned by long-term offtake agreements and generous margins.

Because Afrimat is currently in a closed period, with year-end results expected later this month, executives were unable to comment for this article.

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The article just confirms how well Afrimat is managed.
Well done to the Afrimat team. I continue to be a well rewadred shareholder!

Indeed interesting contrarian position to the rest of the construction industry. And the Afrimat (sponsored) index rings against numerous other observations.

It is notable that Afrimat is a raw and basic materials supplier, and thus takes significantly less risk with actual construction, and thus comparisons with actual major (well, used to be major) constructors is not valid. For one thing, operating quarries and small mines is closer to production lines compared to unique construction sites in differing locations. Well done Afrimat, but let’s not over-simplify the comparison.

Furthermore there is a scale issue which calls for more diligence than just to compare the constructors with Afrimat, the latter being well-placed for much more agility being a well-run but still relatively small operation where one cook can still see much of the kitchen at a single glance.

The interesting thing to watch is Afrimat moving from quarries into real mining, for the moment looking good, but there are thresholds and tests ahead as risk-taking increases with scale increase.

Re Afrimat index: there is the question whether small to medium (construction industry players) can sustain and grow a total economy where the pressure for major infrastructure replacement and expansion is mounting and the large ones are needed.

End of comments.

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