Last checked at 26 Jul 2011 07:03
AECI LIMITED
(Incorporated in the Republic of South Africa)
(Registration No. 1924/002590/06)
Share code: AFE ISIN No.: ZAE000000220
("AECI" or "the Company")
CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL RESULTS
FOR THE HALF-YEAR ENDED 30 JUNE 2011
* Good safety performance maintained * Revenue from continuing operations up 10% to R5 969 million * HEPS up 11% to 265c * Dividend of 78c declared * All strategic growth projects in ramp-up phase COMMENTARYPerformance
The Group delivered an improvement in performance for the first six months of 2011 compared to that for the corresponding period last year, despite volatile trading conditions in both the mining and manufacturing sectors.
Revenue from continuing operations increased by 10% to R5 969 million (2010: R5 425 million), assisted by global increases in commodity prices but tempered by the continued strength of the rand, which averaged R6,88/1US$ in the half-year (2010: R7,50/1US$). Volumes were 2,3% higher. Headline earnings of R284 million improved by 11% (2010: R255 million) and profit from operations was 13% higher at R546 million (2010: R484 million).
Headline earnings were negatively impacted by a higher tax charge due to the higher dividend paid in May as well as additional tax provisioning resulting from the Founders Hill judgement.
The Board has declared an interim cash dividend of 78 cents per ordinary share (2010: 70 cents cash dividend). The dividend declaration is published in full elsewhere.
In 2010, the Group achieved its best ever safety performance. A high degree of focus in this area was maintained and additional initiatives are being implemented to achieve further improvements.
Mining services
Revenue from AEL Mining Services ("AEL") was 11% higher at R2 542 million (2010: R2 286 million), driven by a 16% escalation in ammonia prices. This also resulted in higher working capital levels. Overall volumes grew by 2,5%. Profit from operations improved by 8% to R200 million (2010: R185 million) and the operating margin was 7,9% (2010: 8,1%). The mining services environment has become more competitive and a substantial portion of AEL's business was subjected to tender processes in the half-year. Following these processes, AEL was able to retain more than 90% of its business and the market share changes did not impact performance for the period. A mechanical failure on one of AEL's nitric acid plants, at Modderfontein, negatively impacted results for the period.
In South Africa, strong growth was recorded in AEL's Surface and Massive businesses servicing the platinum, diamonds and chrome mining sectors. Volumes in deep level mining continued to decline. Coal mining was adversely affected by exceptionally high rainfall in the early part of the year.
Good growth was delivered by the copper mining sector in Central Africa and diamond mining in Botswana continued to perform creditably. The contribution from gold mining in West and East Africa remained flat.
The International business maintained its steady growth trend in South East Asia, notwithstanding the effects of very high rainfall in the period.
Pleasing ramp-up of the Initiating Systems Automation Programme (ISAP) project at Modderfontein continued, with about 40 million detonators manufactured by end-June. The target date for full ramp-up of ISAP remains the first half of 2012. The retrenchment of employees from conventional shock tube manufacturing facilities has commenced although the process has been somewhat delayed to an extent owing to high shocktube demand, the building of inventories and a fire on a conventional plant. As a result, full ISAP-related cost savings are only expected in the second half of the year.
Specialty chemicals
Revenue improved by 8% to R3 280 million (2010: R3 039 million). Volume growth for the period reflected a moderate improvement of 2%, owing to the recovery in mining and in certain manufacturing sectors. The rally in commodity chemical prices drove prices higher although this was offset to some extent by the effects of the strong local currency. Profit from operations improved by 11% to R386 million (2010: R349 million) and the operating margin was 11,8% (2010: 11,5%).
Excellent performances were delivered by ImproChem, Industrial Oleochemical Products, Lake International and Resitec and the results of Crest Chemicals were also pleasing. Senmin had a slow start to the year due to delays in the final certification of its polyacrylamide facility. For the six months overall, however, the business delivered another solid performance. The new xanthates dryer is currently being installed and commissioned and will remove the bottleneck that previously constrained plant output.
As of 1 July 2011, Infigro and SA Paper Chemicals (SAPC) were merged. This new structure provides the business with critical mass to operate in the focused areas of paper chemicals, perlite and leather chemicals.
Two acquisitions were completed in the second quarter. Qwemico has been integrated into Plaaskem and T&C Chemicals into ImproChem and SAPC. The acquisition of the remaining 20% of Cobito was finalised in July 2011 and the acquisition of Croxton Chemicals, to be integrated into Crest Chemicals, will be finalised in the second half-year. The total investment for these transactions is R161 million.
Property
Heartland's operating profit improved by 24% to R36 million (2010: R29 million), primarily based on income from the leasing and services businesses. The property development market remained subdued and no marked changes to this environment are expected in the immediate future.
Two property sales were finalised during the period. This is somewhat encouraging as is the increased rate at which enquiries are being received for industrial, warehousing and office space. Bulk infrastructure development, in line with market demand, is commencing at Longlake in Modderfontein.
In the current rental portfolio, which has performed extremely well in the past, the trend is towards increased vacancy rates and a reduction in tenant retentions. This is attributable predominantly to the weakening of South Africa's manufacturing sector.
Specialty fibres
SANS Technical Fibers, in the USA, achieved a 28% improvement in revenue to R165 million (2010: R129 million), with volume growth of 14% in a global growth environment for the automotive and footwear sectors. Profit from operations more than doubled to R27 million (2010: R10 million). The higher operating margin of 16,4% is largely due to enhanced efficiencies resulting from additional capacity installed in 2010.
Finance and taxation
The Group's strategic capital investment programme is nearing completion. In the first half, R229 million (2010: R305 million) was invested with R109 million of this for expansion projects.
Gearing increased to 49% from 40% in December 2010, mainly owing to an increase in working capital. Higher commodity prices and the building of inventories, to minimise the disruption of products and services to customers during the period of anticipated industrial action, were key in this regard. Net working capital as a percentage of sales was 20,2% (2010: 18,7%) and net interest cover was at 7,3 times (2010: 4,8 times).
Taxation judgement - Founders Hill (Pty) Limited
The Supreme Court of Appeal (SCA) handed down its decision in the Founders Hill (Pty) Limited case in May. The SCA found in favour of the South African Revenue Service (SARS) with regard to the capital versus revenue nature of proceeds of land sales at Founders Hill. The SCA held that that the land was trading stock when Founders Hill (Pty) Limited acquired it from AECI Limited. However, SARS was directed to reverse the interest charged in the assessments owing to the fact that AECI Limited had taken tax advice and that proper disclosure of the transactions had been made in the relevant tax returns. Founders Hill (Pty) Limited has requested leave to appeal the decision of the SCA from the Constitutional Court. SARS and the Minister of Finance have lodged an opposing affidavit.
AECI has provided R40 million for all taxes assessed in respect of three other subsidiaries that have tax issues similar to those of Founders Hill (Pty) Limited.
B-BBEE transactions
As indicated in February 2011, the AECI Board has pursued the B-BBEE transaction that was initially contemplated in 2009. Two B-BBEE transactions are currently being proposed to shareholders:
* the acquisition of the Kagiso Tiso Holdings consortium's shareholding in AEL Mining Services in exchange for ordinary shares in AECI; * the issue of new shares to facilitate the establishment of an Employee Share Trust and a Community Share Trust.
Changes to the Board
At the Annual General Meeting (AGM) of shareholders in May, Fani Titi indicated that he will step down as Chairman of the Company at the next AGM, scheduled for May 2012. The Board is pleased to announce that Schalk Engelbrecht will assume the role of Chairman at that time. In the period under review, the Board welcomed Liziwe Mda as a Non-Executive Director and Nomini Rapoo as Company Secretary.
Outlook and strategic focus
Historically, the AECI Group trades better in the second half-year owing to seasonal effects in agricultural and the consumer sectors. However, the potential impact on Group companies and their customers resulting from the current industrial action is of concern.
AECI management's focus for the rest of 2011 will remain on:
* the successful incorporation of acquisitions into existing businesses in the specialty chemicals cluster; * the continued ramp-up of ISAP and of Senmin's new plants; * the careful management and reduction of working capital levels; and * cost-focused leadership. Fani Titi Graham EdwardsChairman Chief Executive
Woodmead, Sandton 25 July 2011
Income statement 2011 2010 2010 First half First half Year % Unaudited Unaudited Audited change R millions R millions R millions Revenue (2) +10 5 969 5 425 11 569 Net operating costs (5 423) (4 941) (10 507) Profit from operations +13 546 484 1 062 Net income/(loss) from 1 4 (6)Pension Fund employer surplus accounts Net income/(loss) from plan 14 6 (5)assets for post-retirement medical aid liabilities 561 494 1 051 Interest expense (3) (106) (99) (173) Interest received 16 14 21 Share of profit of associate * 1 2companies 471 410 901 Impairment of goodwill - - (28) Impairment of property, plant - (4) (4)and equipment Gain on acquisition of - - 4subsidiary Profit before tax 471 406 873 Income tax expense (152) (117) (233) Profit for the period 319 289 640 Profit for the period attributable to: - ordinary shareholders 295 269 600 - preference shareholders 1 1 2 - non-controlling interest 23 19 38 319 289 640 Headline earnings are derived from: Profit attributable to 295 269 600ordinary shareholders Impairment of goodwill - - 28 Impairment of property, plant and equipment - 4 4 Loss on disposal of - - 16subsidiary Profit on disposal of property, plant and equipment (13) (1) (5) Profit on disposal of associates and investments - (18) (22) Tax effects of the above 2 1 2items Non-controlling interest - - (4)effects of the above items Headline earnings 284 255 619 Per ordinary share (cents): Headline earnings +11 265 238 577 Diluted headline earnings (4) 264 237 575 Basic earnings 275 251 559 Diluted basic earnings (4) 274 250 558 Dividends declared +11 78 70 205 Dividends paid 135 62 132 Ordinary shares (millions)  (5) - in issue 107 107 107 - weighted average number of 107 107 107shares - diluted weighted average number of shares (4) 108 108 108 *Nominal amount Statement of comprehensive income 2011 2010 2010 First half First half Year Unaudited Unaudited Audited R millions R millions R millions Profit for the period 319 289 640 Other comprehensive income net of tax: Revaluation of derivative instruments * * * Foreign currency translation 23 17 (84)differences net of deferred tax Other * * * Total comprehensive income for the 342 306 556period Total comprehensive income attributable to: - ordinary shareholders 320 288 516 - preference shareholders 1 1 2 - non-controlling interest 21 17 38 342 306 556 *Nominal amount Statement of financial position 2011 2010 2010 30 June 30 June 31 Dec Unaudited Unaudited Audited R millions R millions R millions Assets Non-current assets 5 756 5 581 5 667 Property, plant and equipment 3 622 3 451 3 564 Investment property 446 446 440 Goodwill 1 074 1 063 1 035 Pension Fund employer surplus accounts 231 240 230 Investments 26 22 20 Loan receivables 20 12 22 Deferred tax 337 347 356 Current assets 5 461 4 603 4 647 Inventories 2 180 1 828 1 892 Accounts receivable 2 421 2 080 2 023 Cash and cash equivalents 860 695 732 Total assets 11 217 10 184 10 314 Equity and liabilities Ordinary capital and reserves 4 489 4 159 4 314 Non-controlling interest 169 132 148 Preference share capital 6 6 6 Total shareholders' interest 4 664 4 297 4 468 Non-current liabilities 1 817 2 570 2 200 Deferred tax 117 86 121 Non-current borrowings 709 1 697 1 133 Non-current provisions 991 787 946 Current liabilities 4 736 3 317 3 646 Accounts payable 2 158 1 873 2 176 Current borrowings 2 452 1 319 1 368 Tax payable 126 125 102 Total equity and liabilities 11 217 10 184 10 314Statement of cash flows 2011 2010 2010 First half First half Year Unaudited Unaudited Audited R millions R millions R millions Cash generated by operations 807 664 1 654 Dividends received - - 2 Interest paid (119) (143) (268) Interest received 16 14 21 Income tax paid (88) (112) (209) Changes in working capital (731) (265) * Expenditure relating to non-current (25) (1) (37)provisions Expenditure relating to retrenchments - (4) (33)and restructuring Cash (utilised)/available from (140) 153 1 130operating activities Dividends paid (146) (67) (146) Cash flows from operating activities (286) 86 984 Cash flows from investing activities (256) (280) (581) Proceeds from disposal of investments - 32 35and businesses Investments (57) (7) (7) Net capital expenditure (199) (305) (609) (542) (194) 403 Cash flows from financing activities 662 206 (299) Finance lease receivables 2 1 11 Borrowings 660 205 (310) Increase in cash and cash equivalents 120 12 104 Cash and cash equivalents at the beginning of the period 732 668 668 Translation gain/(loss) on cash 8 15 (40) Cash and cash equivalents at the end 860 695 732of the period *Nominal amount Statement of changes in equity 2011 2010 2010 First half First half Year Unaudited Unaudited Audited R millions R millions R millions Total comprehensive income for the 342 306 556period Dividends paid (146) (67) (146)
Equity at the beginning of the period 4 468 4 058 4 058
Equity at the end of the period 4 664 4 297 4 468 Made up as follows: Ordinary share capital 107 107 107 Share premium 108 108 108 Reserves 189 270 164 Property revaluation surplus 237 237 237 Foreign currency translation reserve (56) 22 (81)net of deferred tax Other 8 11 8 Retained earnings 4 085 3 674 3 935 Preference share capital 6 6 6 Non-controlling interest 169 132 148 4 664 4 297 4 468Other salient features 2011 2010 2010 First half First half Year Unaudited Unaudited Audited R millions R millions R millions Capital expenditure - property, plant 229 305 634and equipment (3) - expansion 109 213 385 - replacement 120 92 249 Capital commitments (6) 142 156 88 - contracted for 117 97 49 - not contracted for 25 59 39 Future rentals on property, plant and equipment leased 141 124 196 - payable within one year 30 28 96 - payable thereafter 111 96 100 Contingent liabilities 48 87 97 Net borrowings 2 301 2 321 1 769 Gearing (%) 49 54 40 Current assets to current liabilities 1,2 1,4 1,3 Net book value per ordinary share 4 186 3 878 4 022(cents) Depreciation 191 154 332 ZAR/US$ closing exchange rate (rand) 6,79 7,66 6,65 ZAR/US$ average exchange rate (rand) 6,88 7,50 7,32Industry segment analysis Revenue Profit from Net assets operations 2011 2010 2011 2010 2011 2010 First half First half 30 June Unaudited Unaudited Unaudited R millions R millions R millions Mining 2 542 2 286 200 185 2 685 2 434services Specialty 3 280 3 039 386 349 4 055 3 828chemicals Property 194 168 36 29 751 691 Specialty 165 129 27 10 160 153fibres (USA) Group (212) (197) (103) (89) (66) (111)services and intersegment 5 969 5 425 546 484 7 585 6 995
Net assets consist of property, plant, equipment, investment property, goodwill, inventory and accounts receivable, less accounts payable.
Notes
(1) Basis of preparation
The condensed consolidated unaudited interim financial results are prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards, the presentation and disclosure requirements of IAS 34 - Interim Financial Reporting, the AC500 series issued by the Accounting Practices Board, the Listings Requirements of the JSE Limited, and in the manner required by the South African Companies Act No. 71 of 2008. Accounting policies have been applied consistently by all entities in the Group and are consistent with those applied in the previous reporting period. The preparation of these condensed consolidated unaudited interims financial results for the half-year ended 30 June 2011 was supervised by the Financial Director, Mr KM Kathan CA(SA).
(2) Includes foreign and export revenue of R1 665 million (2010 first half: R1 460 million).
(3) Interest capitalised in the period amounting to R14 million (2010 first half: R46 million).
(4) Calculated in accordance with IAS33. The Company has purchased call options over AECI shares which will obviate the need for the Company to issue new shares in terms of the AECI share option scheme. In practice, therefore, there will be no future dilution.
(5) Net of 11 884 699 (2010: 11 884 699) treasury shares held by a subsidiary company.
(6) Not included in capital commitments for the current year are acquisitions already approved by the Board amounting to R114 million (2010 first half: nil).
(7) The preparation of the interim financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The accounting policies involving particular complex or subjective judgements or assessments are deferred tax assets, environmental remediation, asset lives and residual values and post-retirement benefit obligations.
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)