Two aspects should be considered when analysing Afrimat:
- Its classification as a construction company is misleading as it is more a mid-tier mining company with some construction-orientated adjuncts.
- Most of its growth has come through acquisitions, not organic growth. Analysts usually view this type of growth with suspicion as it is often unsustainable.
The latter issue has not been the case with Afrimat. Every acquisition has been thought through carefully, with a healthy scepticism for spreadsheet-only analysis. The Afrimat management is steeped in hands-on expertise in the fields in which they operate, leaving shareholders in no doubt that all acquisitions have been carefully analysed in the minutest detail.
That approach has been vindicated by the long-term comparison of Afrimat’s headline earnings per share (Heps) against construction industry peers such as PPC, Sephaku, Raubex and Consolidated Infrastructure Group over the past decade. While Afrimat’s Heps have risen by eight times since 2010, its competitors have all gone backwards. Afrimat is in a class of its own. Without its strategic acquisitions, Afrimat’s earnings would also have gone sideways to down during the past decade.
Afrimat’s most recent acquisitions have been in the commodity space — iron ore, anthracite and manganese. The timing of the first iron ore acquisition at Demaneng in the Northern Cape was exquisite, as production commencement coincided with a huge rise in the international iron ore price. Now, the international price iron ore is hovering around $190/tonne, having been at almost $230/tonne earlier.
Afrimat’s all-in cost of production, transport and shipping at Demaneng is about $55/tonne, resulting in extremely healthy profit margins. More recently, Afrimat acquired CozaMining near Demaneng for R300m, which includes the mines of Jenkins, Driehoekspan and Doornpan. The Jenkins mine is nearing completion and will supply ArcelorMittal’s local steel operation with iron ore, receiving similar prices to Demaneng but calculated on a different formula.
In 2020, Afrimat secured full ownership of the high-quality Nkomati anthracite mine in Mpumalanga, which had been in business rescue. In May 2021, it bought the Gravenhage manganese mining right and associated assets in the Northern Cape, about 120km from Demaneng, for R650m. Gravenhage, with an estimated life of mine of 20 years, takes Afrimat properly into the mid-tier mining space. Possible extraction synergies with Demaneng exist and the mine will be developed to be profitable at the bottom of the commodity cycle.
For the year to end-February, group revenue rose 11.8% to R3.7bn, operating profit increased by 47.5% to R886.3m and Heps rose 27% to 441.7c. A final dividend of 112c was declared, making a total dividend for the year of 148c. The balance sheet was extremely strong, with a net debt-equity of 3.8%. The compound annual growth rate (CAGR) in Heps between 2017 and 2021 is 22.5% and the CAGR in net cash flow from operations during that same time frame is 17.6%.
Segmentally, bulk commodities were dominant in operating profit, contributing 82% compared with 12% for construction materials and 6% for industrial minerals. Construction materials and industrial minerals were severely affected by the lockdown levels in April-June 2020, but they recovered significantly during the second half.
Provided there is no repeat of the Covid-19 strict lockdown this financial year, Afrimat is set to produce another strong set of results to February 2022. It will get the benefit of a low base of comparison in 2021, and it should continue to benefit from continued higher iron prices. As the Jenkins mine is only scheduled to come into production in late 2022, it will only affect the 2023 financial year.
At a 5,130c share price and with Heps of 441.7c, the historic price-earnings (PE) ratio is a not very demanding 11.6 times. The dividend yield is 2.9%. If Heps increase 20% to 530c next year, the prospective PE becomes a very cheap 9.7 times.
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