Does anyone remember the AECI of the old days? It was predominantly an explosives and fertiliser company and its nickname on the trading floor of the JSE was “Bang Bangs” in reference to its involvement in mining industry blasting. The principal shareholder was the now-defunct Imperial Chemical Industries. In recent times it has undergone a profound metamorphosis and today it enjoys a wide institutional shareholding.
The first signs of a change in direction for the group came some years ago with the large-scale sale of surplus land at Modderfontein and Somerset West. With advancements in explosives technology it was no longer necessary to have vast swathes of unproductive land near its production facilities to cater for unforeseen explosions.Additionally, the background environment for most of AECI’s businesses has been on the up and up, especially in mining solutions. The improvement in gold and copper prices has helped its explosives volumes in South Africa and the rest of Africa, as have increases in prices of base metals and minerals such as coal and iron ore.It has also tapped into the national disaster of cumulative rainfall in the Western Cape being well below historical averages. AECI has been able to supply small-scale desalination infrastructure to Cape Town-based companies such as Sea Harvest, Lucky Star and Oceana.
And in the rest of Africa, satisfactory progress has been made, especially in public water treatment. Volumes into the rest of Africa now account for 30% of revenue in the water and process division, up from 20% in 2016.
On the down side the price of platinum, which accounts for over 20% of revenue in the mining solutions segment, has languished for several years. Also, the relative strength of the rand has worked against the group, as 60% of explosives are sold outside of South Africa and are priced in US dollars, and a strong rand is not good for profits from its mining segment.Continuing with the list of detractors, the world price of ammonia has been in secular decline for a while now, which is not good for AECI either, as this is a feedstock for explosives. A low ammonia price negatively affects the top line in terms of the group’s ability to charge higher prices for its final products.
The latest set of results marks a change in reporting, from a four-segment operation (being explosives, chemicals, property and corporate) to a six-pillar analysis, comprising mining solutions, chemicals, plant and animal health, water and process, food and beverage, and group, reflecting the evolutionary change in operations.Mining solutions is by far the largest contributor to both revenue (52%) and operating profit before group adjustments (69%) , followed by chemicals (19% and 24% respectively), plant and animal health (13% and 8%), water and process (8% and 12%), and food and beverage (6% and 4%).
AECI has been active on the acquisition trail recently, buying Schirm, a German contract manufacturer of agrochemicals and fine chemicals, as well as hot and cold mix asphalt operation, Much Asphalt.
In financial 2017, headline earnings per share hit 959c and the dividend was increased to 478c for the year. The outlook for AECI in 2018 and beyond looks reasonably promising, according to management. Execs believe an improved domestic, political and economic sentiment should provide a stable backdrop for continued growth, while a commitment by stakeholders to negotiation of a workable Mining Charter should add extra stimulus to the mining industry.
Commodity prices will probably trend higher into 2018 and beyond. However, deep level mining in the gold and platinum sectors remains a concern due to the strong rand/US$ exchange rate. Outside of South Africa, there are many mining opportunities in countries such as Angola and Zimbabwe, though the DRC remains somewhat problematic.
At a share price of about R115, the PE ratio is 12 times, which is in line with the JSE All Share index, excluding Naspers. The dividend yield is an attractive 4.2%. This could be a solid operator that won’t shoot the lights out nor explode in your face.
Chris Gilmour is an investment analyst.