Afrimat, a South Africa based construction materials supply company is at its peak and has become a leading African open pit mining company. Construction in South Africa is tough and infrastructure spend from government is low. Private fixed investment has been in a downward cycle for many years and business confidence is at an all-time low.
Spending is mostly focused on smaller projects and these are awarded to unlisted, mostly unknown, black-empowered companies.
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Road projects are presently consuming a lot of government capital, through the state owned SANRAL. The order book for road construction and rehabilitation is relatively healthy with an even spread between micro to medium enterprises and the larger traditional construction companies.
According to the SAFCEC’s State of the Industry report, road construction contributed almost 48% of industry revenue in the first quarter of 2017. The Safcec numbers also show a marked increase in earthwork activity from less than 1% of industry turnover to 5.5%.
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Benefited
The strong road construction market has benefited construction material suppliers and companies such as Afrimat, which has contributed to Afrimat’s increased market penetration. The company is a black-empowered, diverse company with a range of products not only for construction; other sectors include Industrial Minerals, Iron Ore and Concrete Based Products. In addition the company supplies contracting services to industries such as mining.
Company’s history
The company’s history stems back to the mid-1960s, through its key source business Prima Quarries in the Western Cape and Lancaster Group in KwaZulu-Natal, following a merger in 2006 between the two mentioned businesses, Afrimat was born through a listing on the JSE in 2006.
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The group has managed to buy great businesses such as Exarro’s Glen Douglas dolomite mine, SA Block and Clinker, Cape Lime and the more recent acquisition of Diro Iron Ore. In addition to supplying materials, Afrimat has a strong presence in contracting services such as drilling, blasting, mobile crushing and screening.
Afrimat is establishing quarries in Mozambique and is currently looking further afield for other opportunities. Its low staff turnover, has resulted in a deep skills pool. However, staff transformation and community upliftment are integral to the company’s success.
Since September 2016, Patrice Motsepe’s African Rainbow Capital, through a buyout of the Afrimat Employee Trust, purchased 18.4% stake with a lock in clause of four years. The company is a strategic long-term investor with no predefined exit strategy.
“Afrimat is of the view that this will create a long-term and sustainable BEE partner with certainty around shareholding, which will build further value for Afrimat. ARC has also shown a willingness in wanting to work with Afrimat on our proposed growth strategy,” said Afrimat’s Chief Executive Andries van Heerden.
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Prospects
In May, Afrimat published full year results to February 2017. Headline earnings per share increased by 25.4% to 196.4%. The undemanding price/earnings ratio of 12.7 make this company an attractive proposition.
Although management indicated at the recent AGM that the start to their new financial year was challenging and that they will not be able to sustain previous growth. Though the current valuation seems to be good value for money. Though, the share price has dropped from US$2.24 less than two months ago.
They expect earnings to be positive and ahead of their peers, but not as high as the market came to expect of them.
For many years they have maintained earnings growth of more than 20% a year. Even if this comes down to 10% or to 15%, the share is still attractive below US$1.87. The company has built up a diversified portfolio, which acts as a risk hedge for shareholders.
Amelia Morgenrood CFP is BCom (Hons) Financial Planning, and a member of the South African Institute of Stockbrokers. She is portfolio Manager and regional director.
