As South Africa enters a recession and the rand continues its slide downhill, JSE-listed Insimbi Industrial Holdings has had its best financial quarter in its 50-year history.
The company has just entered a closed period and is expected to release its results for the six months to August 31 before the end of November.
It’s not that it’s a start-up company, as one might imagine, nor is it a fast-growing 4th Industrial Revolution opportunist. Instead, Insimbi operates in South Africa’s stressed industrial environment, providing resource-based commodities such as ferrous and non-ferrous alloys and metals, as well as refractory materials, to a wide range of industries. It has also recently diversified into the plastic manufacturing market and metals recycling business.
“It is an interesting place to be,” says CEO Fred Botha. “There is a disconnect between what we are seeing on the ground and what I am reading in the newspapers. We are achieving our good results despite the recessionary climate and from what we can see, the steel industry generally appears to be on an upward trajectory after almost a decade of trials and tribulations.”
Insimbi’s current form has less to do with green shoots in the economy and more to do with rightsizing of the industry and clever acquisitions on the part of management.
It has just announced the acquisition of Group Wreck, one of the largest metal recycling operations in Durban. The R150-million deal will be financed via a combination of cash, shares and vendor loans, which is a similar financial model to the one used to finance the acquisition of Amalgamated Metal Recycling Group (AMR) in late 2016.
The model came about as a result of necessity. “We are a listed firm, but capital raising has been difficult,” says Botha. “Our share price was already discounted and we don’t want to discount it further to raise capital for acquisitions. We planned to use senior debt to finance the acquisition, but at the time of the AMR deal the banks were skittish and cut back on their funding. We plugged the gap with Insimbi shares and vendor funding, which locks the buyer and seller in together. The structure was so successful that we used it to finance the latest acquisition as well.”
AMR operates in Gauteng, Limpopo and Mpumalanga and was acquired as part of an effort to diversify the group’s activities and provide it with scale. Recycling, aside from being the major informal employer in the country, has proven to be a major profit boost for Insimbi. In the year to February 2018, turnover increased 160% to R3.5 billion with net profit increasing by 142% to reach R71.1 million. AMR delivered significantly more revenue than forecast, contributing 73% of the overall turnover of the group, 56% of the gross profit and 72% of the operating profit.
Excluding Group Wreck, Insimbi processes 15 000 tons of recycled metal a month, half of it ferrous (such as steel and wrought iron) and the other half non-ferrous (copper, aluminium, lead and tin).
The recycling business has also opened an export door. “Globally there is more demand for recycled metal than there is supply,” says Botha. “Markets like China and India have a limitless appetite, so if demand slides locally we increase our exports.”
However, local appetite for metal alloys seems to be improving.
Foundries, which produce metal products for industry, have gone through years of decline, with more than 30 family-owned foundries closing their doors over the past eight years. Botha says the industry has reached a base that is now sustainable. “The matriarch in our business, Insimbi Alloy Supplies, lumbered along for years as we all waited for the transformation of SA’s rail industry and government spending on other infrastructure upgrades. That hasn’t happened, but we are starting to see numbers in our ‘matriarch’ that are similar to our pre-2010 World Cup figures. The industry has become more resilient and efficient.”
While demand is more stable than it has been in a while, Botha notes that global trade wars remain a threat. “The war between Trump and China has already forced down the prices of automotive aluminium [which is used in the production of engine blocks] because the US is flooding India with semi-finished product that it can’t sell into China.”
Increasing the size of Insimbi and adding further diversity is the strategy going forward, says Botha. “We have a core business that is mature and will not grow unless infrastructure spending picks up. It is useful as it brings in R800 million to R900 million of turnover annually, which pays the bills. However, growth will come from acquisitions – which are essential as we don’t want to stay a small-cap company for another 10 years.”