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AECI posts best profit yet

Acquisitions set to further boost company’s standing in the year ahead.

NOMPU SIZIBA: AECI, which operates in a number of sectors, including explosives, mining chemicals and other areas, reported its annual results today. For the 12 months ended 31 December 2018 the company reported group revenue growth of 26% to R23.3 billion, while its profit from operations rose 27% to R2 billion, which it says is the company’s highest profit level in its history. The company is giving shareholders a final gross dividend of 366 cents/share, which is 7.6% above what they received in the prior period.

In the period under review the company pursued a number of acquisitions and operated in a number of regions globally, including Europe, the rest of the continent and Asia.

To tell us the story behind the numbers I’m joined on the line by Mark Dytor, the CEO at AECI. Mark, on the face of it an impressive performance, and you indicate that it’s your best profit yet. To what do you attribute this performance?

MARK DYTOR: There are a couple of things. First is obviously a strong performance from our Mining Solutions pillar, and also our underlying business which is our chemicals pillar. Despite what was going on in the industry and the market conditions, I think these had a great year, and we are quite pleased with their results.

NOMPU SIZIBA: You have the explosives business, where you do a lot of blasting and the like in the mining sector. I see that in your other jurisdictions, particularly in the rest of Africa, your business in this segment was up, but not in South Africa. Tell us about that.

MARK DYTOR: If you look at the prices of the commodities, copper, nickel, cobalt – those were very much up. And therefore [that took] a lot of the investment, especially around Central Africa. So volumes increased there. And gold on the rest of our continent looks pretty robust – it’s not deep-level mining. Now, if I bring it back to South Africa, I think we are not seeing many new mines come on line, and I guess that’s because there’s a lot of uncertainty around the Mining Charter. There is some certainty now, and it’s up to international players to start investing again.

The other big challenge is deep-level, narrow-reef mining, gold mining. We are still hearing and seeing a lot of shuts and closure of shafts, albeit the platinum industry looking a little more solid. But they are looking at that basket of PGMs, which is bringing them up.

NOMPU SIZIBA: You did touch on the fact that your chemicals division did quite well, but what about in the South African context? How did you fare there?

MARK DYTOR: Our chemicals division in South Africa was very good. We still had underlying increases in profits and turnover, and in this industry these are businesses that know the market, they generate cash. They look at innovation; they are looking at new opportunities all the time. They’ve been able, despite the market not growing, to increase market share. We saw the poultry industry coming back in terms of animal feeds, we saw demand in sulphur, sulphuric acid, and also we saw that in consumer care and industrial products. So, although the manufacturing sector is not helping us, we got a good result out of that area.

NOMPU SIZIBA: In your report you touch on the agricultural sector and talk about how drought conditions haven’t helped your business. Which element of your business applies to the agricultural sector?

MARK DYTOR: It’s really our crop-protection business that applies to that. We had the Western Cape the year before last suffering a very big drought, although in 2018 they did have rainfall. But the area still is on irrigation restrictions. So we are not seeing that agriculture market – your sort of high-end-value fruits – coming back yet. And of course, up in the northern provinces of our country, we did see the drought and hot conditions in December. However, we have had rain in January and February. So it looks to me like this season things are running a bit later; but farmers are choosing to move from maize to sunflowers and so on.

The market is changing and I feel that in Africa drought and climate change are the new normal. It’s how we adapt around that. We have to bring technologies in, in terms of digital processing and artificial intelligence, or AI, so that we can monitor farming and monitor crops a lot more easily relative to moisture, crop size, the integrity of the fruit, and so on. We are going to have to use technology because to rely on rain in the future – in these conditions I think you are going to be challenged.

NOMPU SIZIBA: Absolutely. I hope you have a good research and development department for that.

In your plant and animal health business, your revenues rose a whopping 74%, but your profit from operations declined by 11%. Why is that?

MARK DYTOR: There are some “accountancies”. In that pillar there is our Shirm acquisition, and in the acquisition we look at purchase price, and we look at the amortisation of goodwill. What happens is that you take in and depreciate those assets, and of course that had an impact of R75 million. That does affect profit, but it’s not a cash item. So underlying that you look at R75 million back, and then we took an impairment of Farmers Organisation in Malawi of R50 million. So, relatively, the underlying performance is not as bad as it seems.

NOMPU SIZIBA: You went on a bit of an acquisition spree. You mentioned the Shirm business in Germany. And there is the Much Asphalt business.

MARK DYTOR: We had two great opportunities that we saw coming our way. You don’t get those opportunities all the time.

Shirm got us into another geographic footprint, in line with our plant and animal health pillar. Usually in the first year of acquisitions you hope that if you can get a return you are doing well. But these were pretty neutral on the year for us. Shirm has lots of opportunities, lots of new capital that we are now seeing starting to ramp up, so we are quite happy with what we are seeing so far this year. 

Much Asphalt is relying very much on infrastructure spend. Of course there was a lot of euphoria around the change in presidency, and everybody thought the economy was going to kick. But we saw the economy contract and cash wasn’t available last year. Parliament is making the right noises in terms of what’s going to be available in the latest budget speeches.

I think Sanral is looking a little more upbeat. The infrastructure relies on good roads, and we can’t compromise on that in terms of growing our GDP. It is also a very important sector for job creation. So I think that after the election we should see some uptick in infrastructure spend, and I would foresee the construction industry is going to come back early next year.

So we are quite upbeat on those acquisitions, although a little disappointed that in the first year they didn’t give us all the returns we would have liked. But we are in it for the long haul and strategically we are in the right space.

NOMPU SIZIBA: Just speaking to another acquisition of yours – I see you are in the process of finalising one through one of your subsidiaries in the area of explosives in Brazil. That’s a big mining country. Where are you in that process, and do you see a lot of opportunity for growth there?

MARK DYTOR: Actually we are almost ready to close. Hopefully we are going to see that coming through in March. What we’ve bought there is a small business which gives us an entry level. However, with our technology we are able to supply some of the big mining groups, and some of our customers that we service in Africa we’ll be servicing in Brazil. What are we buying there? We are buying explosive licences, and that’s quite key when you enter into a foreign country. And if you look at their exploration that’s going on, the new mines coming on line in Brazil, it’s a great market for us.

NOMPU SIZIBA: Mark, what’s your outlook for your business globally – since you are in many jurisdictions – and specifically for South Africa?

MARK DYTOR: If I look internationally and into our Mining Solutions business, I think we are seeing some tailwinds, we are seeing commodity prices holding. Africa outside of South Africa is still bullish for us. I think central Africa around copper and zinc or cobalt mines are opening up. We are getting new tenders. And with gold in Africa we are seeing some new developments. Also Australia, Indonesia – we are seeing them come back nicely.

So internationally in terms of mining solutions we are very upbeat at the moment. The challenge for us is the South African market around GDP and manufacturing. If we can’t get that fixed it’s always going to be a challenge to drive that. We are a South African business and the majority of our sales are in South Africa, so it’s key that we start getting the economy back on track here.

NOMPU SIZIBA: Our thanks to Mark Dytor.

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