Last checked at 24 Jul 2007 07:00
AECI Limited
Incorporated in the Republic of South Africa
(Registration No. 1924/002590/06)
Share code AFE ISIN No. ZAE000000220
SPECIALTY PRODUCT AND SERVICE SOLUTIONS
Group interim financial results for the half-year ended 30 June 2007
* Revenue up 23% excluding property activities
* Dividend per ordinary share increased to 72 cents
* Major expansion projects for a total of R1.1 billion on track
Commentary
Performance
Headline earnings for the first half-year were 247 cents per ordinary share, 131 cents lower than in the first half of 2006. Earnings in that period were boosted by the gain on disposal of the Company's Milnerton site which contributed some 200 cents to earnings per share. No comparable transaction took place in the current period. An increased dividend of 72 cents per ordinary share has been declared, compared with 64 cents per share in 2006. The dividend declaration is published in full elsewhere.
Group revenue increased by 16 per cent over the same period last year. Excluding property activities, the increase was 23 per cent. Moderately higher demand from the local mining, manufacturing and consumer sectors was augmented by strong growth in international sales. The operating margin excluding property improved to 7.1 per cent of sales from 6.8 per cent last year, notwithstanding market resistance to the full recovery of increased raw material costs, which kept gross margins under pressure. The 12 month return on average invested capital (ROIC) for the Group, excluding revaluation of land, reduced to 15 per cent compared to 19 per cent at June 2006.
African Explosives (AEL) achieved a reasonable result despite intense competition in the narrow reef business in South Africa which affected detonator margins and volumes. Operations elsewhere in Africa again delivered pleasing growth. The first phase of automated production of initiating systems at Modderfontein is operating at increasing rates and the second phase is on track for completion in the last quarter of 2007. A third and final phase, at an estimated cost of R300 million, has been approved by the Board with completion expected by the end of 2009. This will position AEL as a leading global supplier of initiating systems.
DetNet, the electronic detonator joint venture with Dyno Nobel Limited, incurred a small loss in the period.
Chemical Services (Chemserve) sustained its impressive growth trend with profit from operations 20 per cent higher than in 2006, supported by an excellent performance from the mining chemicals business. Operating margins were largely maintained despite high and volatile prices of oil-based raw materials. The two major projects in the mining chemicals segment of Chemserve's portfolio, approved by the Board at an aggregate cost of R610 million, have progressed as planned with commissioning scheduled in early 2009. Further potential acquisitions to complement the investment in Resitec in Brazil are being evaluated.
SANS Fibres (SANS) achieved a major improvement in performance relative to the first half of 2006 as the power outages and other disruptions of that period did not recur. The quality and productivity improvement programmes established last year delivered significant benefits but these were not sufficient to offset fully the escalation in rand-based costs which resulted in an unsatisfactory operating margin. Progress has been made in identifying potential strategic partners or owners that could add value to all or part of SANS's business, and discussions are underway with a number of interested parties.
Dulux recorded a 30 per cent increase in operating profit with higher sales volumes of its premium branded products in South Africa, a favourable product mix and stable margins. Profits from its other African operations were higher than in 2006.
The property activities, managed by Heartland, recorded profit from operations of R41 million net of R23 million of remediation costs. Excluding the gain on disposal of the Milnerton site, profit from operations was R38 million in the first half of 2006. The availability of land ready for release and sale is likely to remain limited in the second half-year.
Financial
Good investment returns on the employer accounts established last year in the AECI Pension Fund boosted profit before tax by R60 million and headline earnings by 39 cents per share. Higher interest rates, together with an increased level of average borrowings, led to a significant increase in net financing costs. The absence in the current period of a transaction comparable to the Milnerton property sale raised the effective tax rate from 21 per cent in the first half of 2006 to 32 per cent.
Expansion projects in AEL and Chemserve continued to be the main components of net capital expenditure which, at R275 million, was more than double the depreciation charge for the period. Group working capital at R1 881 million represented 17 per cent of revenue over the previous 12 months. At June 2006, excluding the receivable in respect of the Milnerton sale, working capital was R1 624 million, equivalent to 18 per cent of revenue.
The Group's net borrowings of R1 192 million were R58 million lower than at June 2006. Cash interest cover was robust at 8 times. Gearing reduced to 31 per cent of shareholders' funds from 38 per cent at June 2006.
At the Annual General Meeting of the Company held on 21 May, shareholders authorised a general repurchase of up to 5 per cent of the ordinary shares in the Company. No repurchases were undertaken in the period.
Portfolio
As announced on 17 July, AECI has agreed to sell Dulux, the decorative coatings business, to ICI plc for a cash consideration of R745 million. Subject to regulatory approvals, the transaction is expected to become effective from 1 October 2007 when a gain on disposal of some R500 million will be recognised in the Group accounts. At that time, and depending on progress with potential acquisitions, the Board will consider returning all or part of the sale proceeds to shareholders.
Outlook
Favourable international conditions with firm commodity prices should continue to support the mining and manufacturing sectors in the second half with concomitant benefit to the Group's major operating businesses. As stated previously, however, profit after tax from property activities is likely to be substantially below the record level of 2006.
Hence management expects that headline earnings per share in 2007 are likely to be lower than those achieved last year excluding the non-recurring effect of the agreement entered into with the Pension Fund in that period.
Fani Titi Schalk Engelbrecht Chairman Chief executive Sandton23 July 2007Income statement 2007 2006 2006 First half First half Year Unaudited Unaudited Audited % change R millions R millions R millions Revenue (2) +16 5 410 4 666 10 212 Profit from -29 409 580 1 102operations Pension fund employer 24 - 196surplus account Release of provision for post-employment medical aid benefits 36 - 131 469 580 1 429 Net financing costs (65) (43) (103) Income from 5 4 7associates and investments 409 541 1 333 Impairment of (2) - (6)goodwill Exceptional items (17) (2) (21) Profit before tax 390 539 1 306 Tax (126) (111) (353) Profit for the period 264 428 953 Attributable to (3) (13) (37)preference shareholders and minority interest Net profit 261 415 916attributable to ordinary shareholders Headline earnings are derived from: Net profit 261 415 916attributable to ordinary shareholders Impairment of 2 - 6goodwill Exceptional items 17 2 21before tax Minority (2) - -shareholders' share of the above items Tax effects of the (5) - (1)above items Headline earnings 273 417 942 Per ordinary share (cents): Headline earnings -35 247 378 853 Diluted headline 245 372 842earnings (3) Attributable earnings 236 376 829 Diluted attributable 234 370 819earnings (3) Dividends declared +13 72 64 205 Dividends paid 141 121 185 Ordinary shares (millions) (4) - in issue 110 110 110 - weighted average 110 110 110number of shares - diluted weighted 112 112 112average number of shares (3) Notes
(1) The interim financial results have been prepared in compliance with International Financial Reporting Standards. Accounting policies are consistent with those applied in the previous financial year.
(2) Includes foreign sales of R1 282 million (2006 - R990 million).
(3) Calculated in accordance with IAS33. In 2005, the Company purchased call options over AECI ordinary shares which will obviate the need for the Company to issue new shares in terms of the AECI share option scheme. Therefore, there will be no future dilution of earnings from this source.
(4) Net of 10 311 120 (2006 - 10 311 120) treasury shares held by a subsidiarycompany.Balance sheetat 30 June 2007 2006 2006 30 June 30 June 31 Dec Unaudited Unaudited Audited R millions R millions R millions Assets Non-current assets 3 619 3 210 3 445
Property, plant and equipment 2 133 1 849 1 965
Goodwill 1 015 1 001 1 019 Pension fund surplus 220 - 196 Investments 132 101 119 Deferred tax 119 259 146 Current assets 4 471 4 024 4 350 Inventory 1 938 1 497 1 733 Accounts receivable 2 139 2 182 2 242 Cash and cash equivalents 394 345 375 Total assets 8 090 7 234 7 795 Equity and liabilities
Ordinary capital and reserves 3 698 3 186 3 595 Preference capital and minority 134 109 132
interest in subsidiaries Total shareholders' interest 3 832 3 295 3 727 Non-current liabilities 905 1 064 942 Deferred tax 32 26 35 Borrowings 526 549 518 Provisions 347 489 389 Current liabilities 3 353 2 875 3 126 Accounts payable 2 196 1 795 2 230 Borrowings 1 060 1 046 797 Tax payable 97 34 99 Total equity and liabilities 8 090 7 234 7 795Industry segment analysis
for the half-year ended 30 June
Profit Revenue from operations Net assets 2007 2006 2007 2006 2007 2006 Unaudited Unaudited Unaudited R millions R millions R millions Mining solutions 1 294 1 152 97 105 1 223 1 037 Specialty chemicals 2 596 2 082 253 210 2 567 2 219 Specialty fibres 1 062 786 15 (28) 727 691 Decorative coatings 369 297 17 13 219 168 Property 212 458 41 292 409 786 Group services, intergroup and (123) (109) (14) (12) (116) (167)other 5 410 4 666 409 580 5 029 4 734
Net assets consist of property, plant, equipment and goodwill, inventory, accounts receivable less accounts payable.
Cash flow statement 2007 2006 2006 First half First half Year Unaudited Unaudited Audited R millions R millions R millions Cash generated by operations 536 689 1 385 Dividends received 4 3 7 Net financing costs paid (69) (51) (114) Taxes paid (107) (142) (202) Changes in working capital (147) (422) (265)
Expenditure relating to non-current (31) (59) (130)
provisions Expenditure relating to (12) - (13)restructuring Cash available from operating 174 18 668activities Dividends paid (156) (135) (206) Cash flows from operating 18 (117) 462activities Cash flows from investment (274) (354) (612)activities Proceeds from disposal of 8 2 3investments and businesses Investments (7) (154) (199) Net capital expenditure (275) (202) (416) Net cash utilised (256) (471) (150) Cash flows from financing 271 388 99activities
Increase/(decrease) in cash and 15 (83) (51)cash equivalents Cash and cash equivalents at the 375 409 409beginning of the period Translation gain on cash and cash 4 19 17equivalents Cash and cash equivalents at the 394 345 375end of the period
Statement of changes in equity
2007 2006 2006 First half First half Year Unaudited Unaudited Audited R millions R millions R millions Profit for the period 264 428 953 Dividends paid (156) (135) (206) Revaluation of derivative (3) - 6instruments Foreign currency translation differences net of deferred tax 4 46 17 Changes in the Group - 13 14 Other (4) 3 3
Net increase in equity for the 105 355 787period Equity at the beginning of the 3 727 2 940 2 940period Equity at the end of the period 3 832 3 295 3 727
Made up as follows: Issued ordinary capital 453 453 453 Non-distributable reserves 289 319 294
Surplus arising on revaluation of property, plant and equipment 257 263 261 Foreign currency translation reserve 24 49 20
net of deferred tax Other 8 7 13 Retained income 2 956 2 414 2 848 Preference capital 6 6 6 Minority interest 128 103 126 3 832 3 295 3 727Other salient features 2007 2006 2006 First First Year half half Unaudited Unaudited Audited R millions R millions R millions
Capital expenditure - property, 282 210 433
plant and equipment - expansion 170 142 239 - replacement 112 68 194 Capital commitments 1 264 226 650 - contracted for 17 50 91 - not contracted for 1 247 176 559
Future rentals on property, plant
and equipment leased 298 236 290 - payable within one year 64 46 65 - payable thereafter 234 190 225
Net contingent liabilities and 117 238 121
guarantees Net borrowings 1 192 1 250 940 Gearing (%) 31 38 25
Current assets to current 1.3 1.4 1.4liabilities Net asset value per ordinary share 3 349 2 885 3 255
(cents) Depreciation 114 106 223Directorate
F Titi (Chairman), S Engelbrecht (Chief executive), NC Axelson ¢â‚¬ , FPP Baker¢â‚¬ , RMW Dunne*, GN Edwards¢â‚¬ , MJ Leeming, LM Nyhonyha, AC Parker, LC van Vught.
Company secretary: A Kennedy¢â‚¬ Executive *Britishwww.aeci.co.zaMining solutions
Development, manufacture and supply of value-adding services, initiating systems and explosives to the mining, quarrying, and allied industries.
Specialty chemicals
Largest specialty chemical operation in southern Africa, supplying a diverse range of specialties, raw materials and related services to a broad spectrum of industries.
Specialty fibres
Production, marketing and distribution of specialty nylon and polyester yarn for local and export markets; production of PET bottle polymer.
Decorative coatings
A leading decorative coatings supplier in Southern Africa. Dulux enjoys a strong market position as an innovator and supplier of high performance products to a wide variety of customers.
Property
Heartland manages the realisation of land and related assets that have become surplus to the Group's requirements.
24 June 2007
Sponsor: J.P.Morgan Equities Limited
AECI LTD