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We take a look at the full year results of chemicals group AECI for the year ending December 2018. So how has 2018 treated the group and how well are they positioned to take advantage from any recovery in the mining and manufacturing industry?
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About AECI
AECI is a South African-based company focused on providing products and services to a broad spectrum of customers in the mining, water treatment, plant and animal health, food and beverage, infrastructure and general industrial sectors. It has regional and international businesses in Africa, Europe, South East Asia, North America and Australia.
The Group now comprises 17 businesses and, at 31 December 2017, it has 7 908 employees. The Group’s strategy is to be the supplier of choice in the markets in which it operates and to continue to grow domestically as well as through ongoing expansion of its footprint in terms of the geographies and markets served.
In line with this strategy the five growth pillars are Mining Solutions (AEL Mining Services, Experse and Senmin), Water & Process (ImproChem), Plant & Animal Health (Nulandis and newly acquired Schirm), Food & Beverage (Lake Foods and Southern Canned Products), and Chemicals (Chemfit, Chemical Initiatives, ChemSystems, Industrial Oleochemical Products, SANS Technical Fibers and newly acquired Much Asphalt). Also in this pillar are two joint ventures - Crest Chemicals and Specialty Minerals South Africa.
AECI was registered as a company in South Africa in 1924 and has been listed on the JSE since 1966. At the end of 2017 its market capitalisation was R12,2 billion.
The Group now comprises 17 businesses and, at 31 December 2017, it has 7 908 employees. The Group’s strategy is to be the supplier of choice in the markets in which it operates and to continue to grow domestically as well as through ongoing expansion of its footprint in terms of the geographies and markets served.
In line with this strategy the five growth pillars are Mining Solutions (AEL Mining Services, Experse and Senmin), Water & Process (ImproChem), Plant & Animal Health (Nulandis and newly acquired Schirm), Food & Beverage (Lake Foods and Southern Canned Products), and Chemicals (Chemfit, Chemical Initiatives, ChemSystems, Industrial Oleochemical Products, SANS Technical Fibers and newly acquired Much Asphalt). Also in this pillar are two joint ventures - Crest Chemicals and Specialty Minerals South Africa.
AECI was registered as a company in South Africa in 1924 and has been listed on the JSE since 1966. At the end of 2017 its market capitalisation was R12,2 billion.
The image above shows the 5 main pillars of AECI group:
- Mining solutions
- Water and Process
- Plant & Animal Health
- Food and Beverage
- Chemicals
Financial overview
Key information regarding AECI's latest financial results according to the group
Now for the numbers we are interested in:
- Revenue +26% to R23 314m
- Strong performances in Mining Solutions and Chemicals
- Pleasing improvement in Food & Beverage
- Contribution from acquisitions
- Foreign and export revenue increased to 40% of total revenue
- EBITDA +21% to R2 631m
- Highest ever profit from operations: +27% to R1 999m
- Solid HEPS growth: +9% to 1 045c
- Good cash generation from operations continued: R2 029m
- Acquisitions fully integrated into the Group
- Final ordinary cash dividend of 366cps declared (515cps for FY18): +8% on FY17
- Safety performance (excl. acquisitions) improved further
- Achieved Level 3 B-BBEE Contributor status in the year
Now for the numbers we are interested in:
- Revenue: R23.3 billion (up 26% from 18.48 billion in the prior)
- Operating costs: R21.315 billion (up 26.1% from R16.9 billion in the prior year)
- Profit for the period: R1.027 billion (up 4.5% from R983 million in the prior year)
- Net profit margin: 4.4%
- Diluted Headline Earnings per share: R10.45 (up 10.6% from R9.15 in the prior year)
- PE ratio: 9.1
- Dividend declared for full year: R5.15 per share (down 7.74% from R4.78 in the prior year)
- Dividend yield: 5.4%
- Cash generated from operations: R2.95 billion (up 25.5% from R2.35 billion in the prior year)
- Cash generated from operations per share: R27.31 per share
- Net asset value per share: R91.35 (down -0.96% from R47.47 in the prior year)
- So trading at just above its stated net asset value
- Cash on balance sheet: R1.58 billion (up 31% from R1.206 billion in the prior year)
- Cash on balance sheet per share: R14.62 or 15.4% of the current share price
Management commentary on the results
The segment below contains some of the commentary made on the results by AECI management:
FINANCIAL PERFORMANCE
Higher prices and demand for most commodities drove output in the global mining sector. This benefited AECI’s businesses servicing this industry across an extensive geographic footprint. The weaker ZAR/US$ exchange rate in the second six months and a recovery in chemical input prices also had an impact. These price increases were supported by the oil price which, on average, was higher year-on-year. Extreme weather conditions had an adverse effect on performance. Other challenges were South Africa’s subdued economic environment, delays in road infrastructure expenditure and the continued contraction of South Africa’s deep level mining industry. The Board has declared a final gross cash dividend of 366 cents per ordinary share, an increase of 7,6% from 2017’s 340 cents per share, bringing the total dividend for the 2018 financial year to 515 cents, 7,74% higher than the prior year’s 478 cents. A South African dividend withholding tax of 20% will be applicable to the final dividend, resulting in a net dividend of 292,8 cents per share payable to those shareholders who are not eligible for tax exemption or reduction
FOCUS
AECI delivered pleasing results in 2018, notwithstanding some challenges. The priority in the coming year will be ensuring that the Group’s recent acquisitions deliver financial performances in line with expectations and that the newly-acquired asset in Brazil is integrated into Mining Solutions as quickly as possible once the transaction has been finalised. Successful execution of realignment projects in AEL and ImproChem will also be key. Cash management remains important.
OUTLOOK
From an international perspective, the uncertainty created by shifts in world trade relations persists as does that relating to final Brexit agreements. Rainfall patterns and the effects of climate change impacts will continue to have a strong influence on the agricultural sector globally. AECI continues to expand its product and services offering in the rest of Africa, in line with strategy. Conditions in several countries where the Group operates were conducive to maximising the opportunities for growth that demand for commodities presented in 2018, notwithstanding challenges such as socio-political unrest and a shortage of access to hard currencies in others. Demand levels have been sustained into 2019 and this bodes well for the Group, its customers and in the countries of operation. In South Africa policy certainty and the future stability of state-owned enterprises, including electricity supply, has improved. This, together with the positive changes in the political environment at the end of 2017, should favour an acceleration in economic growth and investment in the coming year. The expansion and maintenance of infrastructure is fundamental to South Africa’s long-term economic growth and it is of concern that the timing of contract awards in this sector remains unclear. There are some indications that activity could accelerate in the second half of the year. It is pleasing that the terms of the Mining Charter were finalised in 2018. The Group is well placed to continue adding value to its customers as they enhance their compliance in this important area. The Board and management have reconfirmed AECI’s strategy and value proposition going forward
FINANCIAL PERFORMANCE
Higher prices and demand for most commodities drove output in the global mining sector. This benefited AECI’s businesses servicing this industry across an extensive geographic footprint. The weaker ZAR/US$ exchange rate in the second six months and a recovery in chemical input prices also had an impact. These price increases were supported by the oil price which, on average, was higher year-on-year. Extreme weather conditions had an adverse effect on performance. Other challenges were South Africa’s subdued economic environment, delays in road infrastructure expenditure and the continued contraction of South Africa’s deep level mining industry. The Board has declared a final gross cash dividend of 366 cents per ordinary share, an increase of 7,6% from 2017’s 340 cents per share, bringing the total dividend for the 2018 financial year to 515 cents, 7,74% higher than the prior year’s 478 cents. A South African dividend withholding tax of 20% will be applicable to the final dividend, resulting in a net dividend of 292,8 cents per share payable to those shareholders who are not eligible for tax exemption or reduction
FOCUS
AECI delivered pleasing results in 2018, notwithstanding some challenges. The priority in the coming year will be ensuring that the Group’s recent acquisitions deliver financial performances in line with expectations and that the newly-acquired asset in Brazil is integrated into Mining Solutions as quickly as possible once the transaction has been finalised. Successful execution of realignment projects in AEL and ImproChem will also be key. Cash management remains important.
OUTLOOK
From an international perspective, the uncertainty created by shifts in world trade relations persists as does that relating to final Brexit agreements. Rainfall patterns and the effects of climate change impacts will continue to have a strong influence on the agricultural sector globally. AECI continues to expand its product and services offering in the rest of Africa, in line with strategy. Conditions in several countries where the Group operates were conducive to maximising the opportunities for growth that demand for commodities presented in 2018, notwithstanding challenges such as socio-political unrest and a shortage of access to hard currencies in others. Demand levels have been sustained into 2019 and this bodes well for the Group, its customers and in the countries of operation. In South Africa policy certainty and the future stability of state-owned enterprises, including electricity supply, has improved. This, together with the positive changes in the political environment at the end of 2017, should favour an acceleration in economic growth and investment in the coming year. The expansion and maintenance of infrastructure is fundamental to South Africa’s long-term economic growth and it is of concern that the timing of contract awards in this sector remains unclear. There are some indications that activity could accelerate in the second half of the year. It is pleasing that the terms of the Mining Charter were finalised in 2018. The Group is well placed to continue adding value to its customers as they enhance their compliance in this important area. The Board and management have reconfirmed AECI’s strategy and value proposition going forward
Share price performance
The screenshot below taken from Sharenet shows the share price performance of AECI (AFE) over the last 3 years. Below a summary of the performance of AECI shares over various time periods:
- 1 week: 1.95%
- 1 month: -2.15%
- Year to date (YTD): 7.07%
- 1 Year: -20.17%
- 3 Years: 2.59%
- 5 Years: -30.72%
Shoprite (SHP) share price history
Valuation of AECI (AFE)
So what are AECI shares worth? They have a strong balance sheet, on a relatively cheap PE ratio, generate strong cash per share, have a significant amount of cash on the balance sheet, and the dividend yield is definitely not something to snuff at. And their net profit margin is pretty strong. All things considered our valuation model values AECI shares at R113 a share (at the bare minimum). We therefore feel the group offers significant value at its current price.
At R113 a share the group will trade a PE ratio of 10.8 and a dividend yield of 4.5%. Which even at our lowest valuation of R113 a share is not a demanding PE ratio or dividend yield to frown upon.
At R113 a share the group will trade a PE ratio of 10.8 and a dividend yield of 4.5%. Which even at our lowest valuation of R113 a share is not a demanding PE ratio or dividend yield to frown upon.