PERFORMANCE
Headline earnings of R392
million, equivalent to 355 cents per ordinary share, were 58 per cent lower than
in 2006. The current year’s headline earnings are stated after charging R108
million after tax (R117 million before tax) in respect of closure costs at SANS
Fibres (SANS). In 2006, the
inclusion of R233 million after tax, following an agreement concluded with the
AECI Pension Fund to create an employer surplus account, and a once-off profit
of R223 million after tax on the sale of a surplus property at Milnerton,
boosted results. In the current
year, the Group earned R47 million income after tax on the assets created out of
the pension fund surplus. If the
effect of these transactions is excluded, headline earnings were R453 million,
or 410 cents per share, compared with R487 million, or 441 cents per share, in
2006, a reduction of 7 per cent. Despite
the reduction in profit, the directors are sufficiently confident about the
future to maintain a final dividend of 141 cents per ordinary share.
Group revenue increased by 11 per cent in total in 2007 whilst revenue
from continuing operations increased by 13 per cent, reflecting some pleasing
growth in the mining and specialty chemicals sectors. However,
with high oil prices impacting on oil-based raw material costs, extended
commissioning of new detonator manufacturing equipment and intense competition
in the shocktube market, margins were under pressure. The
operating margin on continuing operations declined to 9 per cent from 14 per
cent in 2006.
African Explosives Limited (AEL) recorded strong growth in volumes and
sales in the surface market sector in
South Africa
and its businesses in
Africa
. In
South Africa, however, the narrow reef market was impacted severely by lower volumes and
intense competition. The slower than
planned ramp-up of the first phase of automated production of initiating systems
at Modderfontein, owing to larger than expected inter-batch variations in the
powder drying section of the plant, also contributed to AEL’s disappointing
decline in trading profit. A
technical solution to the plant problem has been found and production rates for
the first phase of the automation project are expected to increase to full
design capacity during the second and third quarters of 2008.
Final completion and commissioning of the second phase of the project is
underway and production is expected to increase to over 85 per cent of design
capacity of 80 million detonators by the end of 2008.
Chemical Services (Chemserve) recorded a creditable 13 per cent increase
in trading profit in 2007. Organic
growth accounted for virtually all of the improvement, with some contribution
from two small acquisitions. Although
the drop-off in certain manufacturing sectors had an adverse effect, Chemserve
benefited from innovative vendor management in platinum, gold and base metal
mining in Southern Africa; infrastructure
development which created demand for construction chemicals and related
products; and consumer-driven
markets such as food, coatings, household and personal care products and some
white goods. The year was
significant in terms of Chemserve’s capital programme, with major projects
underway for the construction and expansion of manufacturing capacity.
Most of this is in the area of mining chemicals and it is expected that
the investments will deliver significant benefits from 2009.
After a record performance in 2006, the property activities managed by
Heartland had a more subdued year and trading profits were R75 million, net of
R83 million of remediation costs. Net cash outflow totalled R48 million after
expenditure of R66 million on remediation and R70 million expenditure on
infrastructure. Sales of 86 hectares
of land were achieved in the year compared with 160 hectares in 2006.
DISPOSAL GROUPS AND DISCONTINUED OPERATIONS
AECI’s
strategic focus is increasingly on the supply of specialty products and services,
based on chemistry, to customers in the mining and manufacturing sectors in
Africa
and elsewhere. The decorative
coatings business, trading as Dulux, targeting primarily the retail consumer
market, was not well aligned with this strategy.
Effective 1 October 2007, therefore, AECI agreed to sell the Dulux
business to ICI plc for a cash consideration of R745 million which was received
prior to the year end. The sale
realised a profit after tax of R394 million, which is excluded from headline
earnings.
The polyester light decitex industrial (LDI) and heavy decitex industrial (HDI)
businesses of SANS have been under severe pressure for some time owing to
several factors. These include
ongoing over-investment in polyester yarn plants (mainly in the Far East)
resulting in surplus capacity and very low prices, and the lower cost base of
manufacturers in the
Far East
. The highly competitive situation
will not change. Furthermore,
SANS’ principal local customer for nylon HDI decided to exit this business.
In this context, and after failing to find a partner or owner which could
add value to these components, or to SANS’ operation as a whole, the decision
was taken to close these businesses at the end of December 2007. An
impairment charge of R93 million after tax has been incurred in respect of these
assets and is included in net profit from discontinued operations in the income statement.
The nylon LDI and the polyethylene terephthalate (PET) polymer businesses were
profitable in 2007 and their immediate outlook remains positive.
However, AECI is actively engaging with several parties interested in
purchasing the nylon LDI and PET businesses which have, therefore, been
classified as assets held for sale. It
is expected that the sale of these businesses will be completed within the next
financial year. An impairment charge
of R157 million after tax has been taken in 2007 to write down the assets of
these businesses to their expected sale values.
FINANCIAL
Capital expenditure of R688
million included R381 million for expansion projects, mainly in respect of the
major projects currently under construction at AEL and Chemserve. The
capital expenditure was R455 million higher than the depreciation charge. Group
working capital, including the working capital component of assets classified as
held for sale, increased to R1 897 million, representing 17.8 per cent of annual
sales (excluding businesses sold) compared with the corresponding figure of 17.1
per cent in 2006.
Notwithstanding the receipt of the proceeds for the sale of the Dulux business,
Group borrowings increased to R1 001 million from R940 million in 2006
reflecting the increased capital expenditure during the year. Cash
interest cover returned to a more normal level of 7 times from the exceptionally
high level of 13 times in 2006. Gearing
remained at 25 per cent of shareholder funds, the same level as in December
2006. No repurchases of ordinary
shares were undertaken during the year. However,
the Board has taken the decision to buy back up to 5 per cent of the Group’s
issued shares in the market as and when the market is favourable, as authorised
at the 2006 Annual General Meeting (AGM). Authority
is being sought at the AGM in May 2008 to repurchase up to a further 10 per
cent.
The impairments and disposals in the discontinued operations section of the income statement comprise mainly the profit on sale
of Dulux of R394 million less the non-headline SANS impairment of R314 million.
PORTFOLIO
Reference has already been made to the disposal of Dulux and the closure of
part of the SANS operations in December. The remainder of SANS’ businesses are
expected to be sold in 2008. In terms of the agreement between SANS and its partner
in the
North Carolina
,
USA
joint venture, SANS acquired the remaining 50 per cent of the shares it did not
already own at a cost of R60 million during the year. This business is also
expected to be sold during the course of 2008. Chemserve acquired two small
local businesses during the year.
OUTLOOK
The
trading outlook over the next year appears challenging with the prospect of high
oil prices, a higher interest rate environment, a weaker rand and uncertainty
regarding power supply in
South Africa. A weaker rand puts immediate
pressure on the Group’s import costs but assists with exports.
Inflationary pressures are evident in many countries.
Therefore, pressure on margins is expected to continue. The
Group will focus on containing operating costs and will seek to recover
increased input costs in the market where possible.
Apart from at SANS, the recent nationwide disruptions in electricity supply have
had a limited impact on the Group’s manufacturing plants.
However, the delivery of products to certain of the Group’s customers
was adversely affected, particularly the mines. As
part of the solution to assure a steady supply of power, the Group is currently
investigating co-generation alternatives.
AECI
is well-positioned and well-funded to grow both organically and by acquisition.
2008 should see improved results compared to 2007, particularly from
Chemserve and Heartland. Beyond
2008, the benefits of capital investments are expected to start delivering
significantly improved results in 2009 and 2010.
The
condensed consolidated financial results were authorised for issue by the
directors on 25 February 2008.
Fani Titi
Schalk Engelbrecht
Chairman
Chief executive
Woodmead, Sandton
25 February 2008
