Last checked at 20 Feb 2007 09:05
AECI
SPECIALTY PRODUCT AND SERVICE SOLUTIONS
group audited financial results
for the year ended 31 December 2006
* Revenue exceeds R10 billion
* Profit from operations over R1 billion
* Headline earnings per share up 77%
* Return on invested capital (ROIC) higher at 19%
Commentary
Performance
Headline earnings of 853 cents per ordinary share were 77 per cent higher than in 2005. This included a non-recurring boost of 210 cents per share as a consequence of the previously announced agreement with the AECI Pension Fund which became effective in October. Without this once-off effect, headline earnings were 643 cents per share, an increase of 33 per cent on last year. An increased final dividend of 141 cents per ordinary share has been declared compared to 121 cents in 2005 to bring the total dividends for the year to 205 cents from 175 cents. The dividend declaration is published in full elsewhere.
Group revenue increased by 16 per cent in 2006, of which some 5 per cent was attributable to acquisitions by Chemical Services (Chemserve). Demand from the local mining and manufacturing sectors continued to improve in the second half in response to strong export markets and a somewhat weaker rand exchange rate. Gross margins were under pressure for much of the year because of increased oil-based and other raw material costs with some relief evident only in the last quarter. The operating margin improved to 10.8 per cent of sales from 10.1 per cent in 2005 and the return on invested capital (ROIC) for the Group, excluding revaluation of land, was 19 per cent compared to 18 per cent in 2005.
African Explosives (AEL) recorded a steady performance despite intense competition from local and Chinese-sourced shocktube initiators in the South African narrow reef market. All other sectors delivered improved results with significant volume increases in open cast mines in South Africa and in other African markets. The first phase of automated production of initiating systems at Modderfontein was commissioned successfully in the last quarter of 2006.
DetNet, the electronic initiating systems 50:50 joint venture with Dyno Nobel Limited, made disappointing progress. Management and marketing arrangements have been restructured to enhance the pace of customer conversion to electronic detonation, and an improved performance is expected in 2007.
Chemserve posted an excellent result with operating profit 22 per cent up on 2005, supported by a strong recovery in the local mining and manufacturing industries and continued growth in consumer-driven sectors. Substantial investments are being made to expand capacity in the high growth areas. Operating margins were largely maintained despite high and volatile prices of oil-based raw materials. Businesses acquired over the past two years have been integrated successfully into the Chemserve service model and accounted for around half of the growth in sales and profit for the year.
SANS Fibres (SANS) incurred a small loss in the year, a consequence of several adverse factors in the first eight months. Production and quality performance were severely disrupted by the impact of power outages in the Western Cape, two incidents of force majeure by the major supplier of nylon polymer and a carbon dioxide shortage which reduced local peak season PET demand. A substantial improvement in operations was sustained from August and the quality and productivity improvement programmes appear to be back on track. International demand for SANS's key light industrial yarns remained strong. Early in 2007, Unifi Inc, the partner in the US-based joint venture gave notice of its intention to exercise its put option against SANS as provided for in the initial shareholders' agreement, and to exit the business in the first quarter of 2008. The opportunity will be taken to seek a strategic alliance with a partner which could add value to SANS's business as a whole.
Dulux extended its impressive performance trend with volume growth of 10 per cent and a 19 per cent increase in operating profit. Demand from the DIY market and the professional painting sector was particularly strong in the last quarter. The operating margin was maintained despite a marked escalation in raw material costs. Profits from African operations were lower due to currency effects and unfavourable market conditions.
The property activities managed by Heartland delivered outstanding results with operating profit at a record R314 million net of R66 million of remediation costs. Net cash flow totalled R296 million after expenditure of R134 million on remediation. Sales of 160 hectares of land for residential, commercial and light industrial use were recorded at Modderfontein, Milnerton and Somerset West. In December an agreement regarding Gautrain was concluded with the Province of Gauteng. This provides for appropriate connectivity between the various parts of Modderfontein and recognises the desirability of a station on the property at some future date.
Financial
The agreement with the AECI Pension Fund released R131 million from the existing post-employment medical aid provision and required the R196 million balance in the Employer Surplus Account in the Pension Fund at year-end to be recognised as an asset by AECI. Collectively this boosted operating profit by R327 million. Restructuring costs charged against profits totalled R5 million in 2006 compared to R23 million in 2005.
Expansion projects in AEL and Chemserve were the main components of net capital expenditure of R416 million which was R193 million higher than the Group depreciation charge. In addition, Chemserve invested R155 million and Dulux R20 million in the acquisition of new businesses. Group working capital increased to R1 745 million at year-end, which represents 17.1 per cent of annual sales from 15.7 per cent last year, and is a target for improvement in 2007.
The Group's net borrowings of R940 million were R142 million higher than at December 2005. Cash interest cover improved to 13 times and gearing reduced to 25 per cent of shareholder funds from 27 per cent at December 2005. No repurchases of ordinary shares were undertaken during the year.
Portfolio
In addition to the previously announced acquisitions of Leochem, a producer of personal care intermediates, and Resitec, a producer of oleo-chemicals in Brazil, Chemserve also acquired four small local businesses during the year. Dulux acquired Sent Packing, a supplier of specialist exterior coatings, with effect from July 2006. All these businesses have met or exceeded expectation since acquisition.
In line with the Group's strategy of growing its presence in the provision of specialist services to the global mining industry, the Board in November approved a R230 million project with potentially attractive returns in the mining chemicals segment of the Chemserve portfolio, and has this month approved in principle a second such project at a cost of R380 million. Already approved expenditure of R180 million on AEL's detonator automation programme is likely to be followed soon by a third and concluding phase at a cost of some R250 million. This R1 billion investment programme would clearly increase the prominence of specialist mining-related services as a major core business of the Group over the next few years.
Outlook
The favourable international environment of increasing industrial production and firm commodity prices should support the local mining and manufacturing sectors and underpin steady and more balanced growth in South African GDP. Provided the rand exchange rate does not strengthen materially from recent levels, the Group's operating businesses are well positioned to post further aggregate gains under these conditions.
In the property segment, however, limited availability of land ready for release and sale during 2007 is likely to result in profit after tax from property activities being substantially below the record level of 2006.
Hence management does not expect headline earnings per share in 2007 to exceed the 643 cents per ordinary share which were achieved in 2006 excluding the non-recurring effect of the agreement entered into with the Pension Fund.
Alan Pedder CBE Schalk Engelbrecht Chairman Chief executive Sandton19 February 2007Income statement % 2006 2005 change R millions R millions Revenue(2) +16 10 212 8 768 Profit from operations +24 1 102 887
Creation of pension fund employer surplus 196 -account Release of provision for post- employment medical aid benefits 131 -
1 429 887 Net financing costs (103) (90)
Income from associates and investments 7 5 1 333 802 Transitional provision for post- employment medical aid benefits - (20)
Impairment of goodwill (6) (10) Exceptional items (21) (27) Profit before tax 1 306 745 Tax (353) (225) Net profit 953 520
Attributable to preference and minority (37) (34)shareholders Profit attributable to ordinary 916 486shareholders Headline earnings are derived from: Profit attributable to ordinary 916 486shareholders Transitional provision for post- employment medical aid benefits - 20
Impairment of goodwill 6 10 Exceptional items before tax 21 27
Tax effects of the above items (1) (13)
Headline earnings 942 530 Per ordinary share (cents): Headline earnings +77 853 482 Diluted headline earnings(3) 842 473 Attributable earnings 829 442
Diluted attributable earnings(3) 819 434
Dividends declared +17 205 175 Dividends paid 185 148 Ordinary shares (millions)(4) - in issue 110 110
- weighted average number of shares 110 110 - diluted weighted average number of 112 112shares(3)
Notes
(1) Accounting policies are in accordance with International Financial Reporting Standards and are consistent with those applied in the previous financial year.
(2) Includes foreign sales of R2 302 million (2005 - R1 817 million).
(3) 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 of earnings from this source.
(4) Net of 10 311 120 (2005 - 10 311 120) treasury shares held by a subsidiary company.
(5) The auditors KPMG Inc, have issued their opinion on the Group annualfinancial statements for the year ended 31 December 2006. A copy of theauditors' unqualified report is available for inspection at the Company'sregistered office.Balance sheet at 31 December 2006 2005 R millions R millions Assets 3 445 3 056 Non-current assets Property, plant and equipment 1 965 1 723 Goodwill 1 019 920 Pension fund surplus 196 - Investments 119 91 Deferred tax assets 146 322 Current assets 4 350 3 559 Inventory 1 733 1 372 Accounts receivable 2 242 1 778 Cash and cash equivalents 375 409 Total assets 7 795 6 615 Equity and liabilities Ordinary capital and reserves 3 595 2 857
Preference capital and minority shareholders'
interest in subsidiaries 132 83 Total shareholders' interest 3 727 2 940 Non-current liabilities 942 1 132 Deferred tax liabilities 35 31 Non-current borrowings 518 559 Non-current provisions 389 542 Current liabilities 3 126 2 543 Accounts payable 2 230 1 777 Current borrowings 797 648 Tax payable 99 118 Total equity and liabilities 7 795 6 615Industry segment analysis Revenue Profit from Assets operations 2006 2005 2006 2005 2006 2005 R millions R millions R millions Mining solutions 2 492 2 314 261 257 1 019 963 Specialty 4 729 3 826 501 412 2 392 1 931chemicals Specialty fibres 1 780 1 619 (6) 32 835 713 Decorative 774 648 70 59 200 126coatings Property 644 607 314 185 449 500 Group services, intergroup and (207) (246) (38) (58) (166) (217)other 10 212 8 768 1 102 887 4 729 4 016
Net assets consist of property, plant, equipment and goodwill, inventory, accounts receivable less accounts payable. Assets in the property segment include land revaluation of R405 million (2005 - R412 million).
Cash flow statement 2006 2005 R millions R millions Cash generated by operations 1 385 1 165 Dividends received 7 4 Net financing costs (114) (90) Taxes paid (202) (129) Changes in working capital (265) (295)
Expenditure relating to non-current provisions (130) (33) Expenditure relating to restructuring (13) (9) Cash available from operating activities 668 613 Dividends paid (206) (167) Cash retained from operating activities 462 446 Cash utilised in investment activities (612) (530) Proceeds from disposal of investments and 3 27
businesses Investments (199) (218) Net capital expenditure (416) (339) Net cash utilised (150) (84)
Cash effects of financing activities 99 212 Share options hedge premium paid - (120) Proceeds from issue of new shares - 8 (Decrease)/increase in cash and cash equivalents (51) 16 Cash and cash equivalents at the beginning of the 409 380year Translation gain on cash and cash equivalents 17 13 Cash and cash equivalents at the end of the year 375 409
Statement of changes in equity
2006 2005 R millions R millions Profit for the year 953 520 Dividends paid (206) (167)
Revaluation of derivative instruments 6 - Foreign currency translation differences net of 17 6
deferred tax Ordinary shares issued - 8 Changes in the Group 14 12
Share options hedge premium net of deferred tax - (85) Other 3 - Net increase in equity for the year 787 294 Equity at the beginning of the year 2 940 2 646 Equity at the end of the year 3 727 2 940
Made up as follows: Issued ordinary capital 453 453 Non-distributable reserves 295 276
Surplus arising on revaluation of property, plant and equipment 261 268 Foreign currency translation reserve net of 20 3deferred tax Retained earnings of associates 1 1
Other 13 4 Retained income 2 847 2 128 Preference capital 6 6 Minority interest 126 77 3 727 2 940Other salient features 2006 2005 R millions R millions
Capital expenditure - property, plant and 433 351
equipment - expansion 239 235 - replacement 194 116 Capital commitments 650 97 - contracted for 91 23 - not contracted for 559 74
Future rentals on property, plant and equipment 290 235
leased - payable within one year 65 47 - payable thereafter 225 188
Net contingent liabilities and guarantees 121 281
Net borrowings 940 798 Gearing (%) 25 27
Current assets to current liabilities 1.4 1.4 Net asset value per ordinary share (cents) 3 255 2 587
Depreciation 223 212Directorate
AE Pedder CBE* (Chairman), S Engelbrecht (Chief executive), NC Axelson ¢â‚¬ , FPP Baker ¢â‚¬ , CB Brayshaw, RMW Dunne*, GN Edwards ¢â‚¬ , MJ Leeming, LM Nyhonyha, F Titi, LC van Vught
*British ¢â‚¬ ExecutiveAECI Limited
Incorporated in the Republic of South Africa (Registration No. 1924/002590/06)
Share code AFE ISIN No. ZAE000000220
www.aeci.co.za
Mining solutions
Development, manufacture and supply of value-adding services, initiating systems and explosives to the mining, quarrying, and allied industries.
Chemical Services Limited
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.
AECI LIMITED
("AECI" or "the Company")
(Incorporated in the Republic of South Africa)
(Registration number 1924/002590/06)
Share code: AFE ISIN No: ZAE000000220
Notice to shareholders
Final ordinary dividend No. 146
Notice is hereby given that on Monday, 19 February 2007 the directors of AECI Limited declared a final dividend of 141 cents per share, in respect of the financial year ended 31 December 2006, payable on Monday, 23 April 2007 to ordinary shareholders recorded in the books of the Company at the close of business on Friday, 20 April 2007.
The last day to trade cum dividend will be Friday, 13 April 2007 and shares will commence trading ex dividend as from Monday, 16 April 2007.
Any change of address or dividend instruction must be received on or before Friday, 13 April 2007.
Share certificates may not be dematerialised or rematerialised from Monday, 16 April 2007 to Friday,
20 April 2007, both days inclusive.
This announcement will be mailed to all recorded shareholders on or aboutTuesday, 20 February 2007.By order of the BoardE A ReaActing Company SecretaryWoodmead, Sandton19 February 2007Transfer secretaries
Computershare Investor Services 2004 (Pty) Limited
70 Marshall Street, Johannesburg, 2001
and
Computershare Investor Services plc
PO Box 82, The Pavilions, Bridgwater Road
Bristol BS 99 7NH, EnglandSponsorJPMorganRegistered officeFirst Floor, AECI Place24 The WoodlandsWoodlands DriveWoodmeadSandton
AECI LTD