Despite low economic growth in the six months to June 30, JSE-listed African Oxygen (Afrox) achieved double-digit growth in its headline earnings per share (HEPS) to 104c, representing an increase of 11.5% from the HEPS of 93.3c recorded for the six months to June 30, 2017.
Referring to the results as “pleasing”, Afrox MD Schalk Venter told Engineering News Online on the sidelines of a presentation of the company’s results on Monday, that while the low economic growth is likely to continue for the rest of the financial year, Afrox will continue to focus on its strategy of driving efficiencies.
As part of this, he explained, Afrox will continue to focus on specific growth opportunities, as well as the continuous driving of cost efficiencies in a high-inflationary environment.
“[As part of Afrox’s strategy], the company also focusses on servicing its customers, as well as we can and recovering our inflation,” Venter said, highlighting the company’s growth opportunities in the following six months, which will also be capitalised on.
In the next six months, the industrial gasses and welding equipment supplier will grow its opportunities, with a particular focus on the State healthcare tender award and continue with cost containment and effective price cost recoveries.
Afrox was in April awarded the South African State Healthcare Contract to supply medical gases to government hospitals. The company will invest more than R130-million into this tender, where Afrox will extend its supply operations to additional government healthcare facilities in the KwaZulu-Natal, Free State, North West and Mpumalanga provinces.
“We need to install delivery infrastructure, which will include tanks, cylinders, reticulation and safety systems,” Venter elaborated, noting that the tender will “generate handsome income and really good returns” for the company, especially considering that access to healthcare is growing across the African continent owing to government policies.
The implementation of further installations has, meanwhile, commenced and is expected to come onstream during 2019. The total revenue of this five-year contract is estimated at about R1-billion.
In total, Afrox will supply more than 400 hospitals and 1 600 clinics across the country.
Meanwhile, in terms of financial results, Afrox managed to increase both revenue and earnings before interest, taxes, depreciation and amortisation (Ebitda) as a result of volume increases in liquefied petroleum gas (LPG), healthcare and bulk industrial gases in combination with a good cost control management and the impact from efficiencies across the organisation.
Emerging Africa, however, Afrox FD Matthias Vogt lamented, was impacted on by fluctuations in currency and subdued economic growth in some countries.
A decline in volume in Afrox’s hard goods business and marginal volume increases in its industrial packaged gas business are a result of low economic growth in South Africa, he added.
Gross profit after distribution expenses (GPADE) for operations, Vogt enthused during the results presentation on Monday, as a whole, improved by 6.7% to R913-million, up from R856-million in the prior comparable period, or 7.5% excluding currency effects.
“Our focus on cost containment resulted in only a 3% increase in operating expenses during the period under review,” he said.
Owing to the improvement in volumes in certain sectors of the business and successful recovery of cost inflation by effective pricing mechanisms, Vogt added that revenue for the company increased by 3.9% to just over R2.9-billion, compared to just below R2.8-billion in 2017, or 2.1% excluding the effects from currency and LPG market price changes.
The volume improvement, he explained, which was assisted by the continued drive to manage costs resulted in an increase of 7.3% in Ebitda to R620-million. This improvement, Vogt noted, contributed to the 11.5% increase in HEPS, and basic earnings per share increasing by 11.2% to 105c.
Diluted earnings a share increased by 10% to 103.8c in the six-month period.
Despite an increased investment in trade working capital, as a result of increased inventory build-up from overseas suppliers and in trade receivables, Afrox ended with a net cash position of R131-million.
Vogt further mentioned that the lower level of capital expenditure of R140-million is indicative of the continued uncertainty in the economic climate and current overcapacity in the production facilities of the group.
The return on capital employed improved marginally, he noted, to 22.7%, which reflects the current weak economic environment.
Overall revenue in Afrox’s atmospheric gases segment increased by 2.7% to just over R1.1-billion, which Vogt noted reflects revenue growth in all business areas of this operating segment.
“This growth in revenue was achieved despite prevailing challenging economic conditions impacting our compressed gas cylinder business,” he noted.
He explained that the diverse portfolio in a broad range of products and solutions within the Afrox industrial gas business has shown high levels of resilience, in which Afrox’s offering led to an increase in market share and positive nominal growth within most sectors demonstrating Afrox’s ability to successfully compete in its core segment.
Within industrial gases, which comprise acetylene, oxygen, nitrogen and argon, the demand for Afrox’s products was above the comparative period, resulting in increased volumes at customer installations.
On-site revenue improved as a result of the passthrough of higher electricity cost, and volume growth from various customers, compensating for the loss of a large customer in the mining sector.
Packaged Gases volumes were below prior year levels, while an improved recovery of cost inflation through effective pricing management supported the improvement in revenue.
The continued growth in revenue from medical gases was as a result of increased demand in the public and private hospital sector, as well as the growing homecare market, Vogt said.
Special gases, meanwhile, experienced reduced volumes from various customers, while carbon dioxide bulk supply was constrained and resulted in lower-than-expected revenue.
GPADE improved by 9.5% to R414-million.
Further, revenue for Afrox’s LPG segment increased by 10.6% to just over R1-billion, or 6.9% on a comparable basis owing to higher volumes having enabled economies of scale and improved levels of supply, combined with nonrecurring positive effects from improved cylinder management.
This resulted in a strong GPADE growth of 20.1% to R221-million, Vogt said.
Production from local refineries, meanwhile, was below the comparative period which resulted in an increase in imported product. Vogt explained that overall LPG product supply remains key in growing the domestic market as imported product has become more competitive as a direct result of Afrox's efforts to offer a more reliable supply scheme.
The continued investment in additional LPG cylinders and the implementation of an import programme to address short supply added to this positive development, he added.
Revenue for Afrox’s hard goods segment decreased by 3.2% to R330-million owing to lower volumes as a result of reduced business activity in the South African mining sector and lower production than the prior year period in the manufacturing industry.
However, despite the overall negative trend in the related sectors of the economy, Vogt pointed out that revenue growth was supported by inflationary price increases and the currency effects from imported products.
“We experienced a reduction in volumes in welding, gas equipment and our self-rescue pack business area, which were all negatively impacted on by the continued downturn in mining, iron and steel and manufacturing.
“Afrox is exploring various options to strengthen supply, production and logistics of the operating segment, continued focus on cost containment, efficiencies in our factories and improved, just-in-time price management assisted the overall business to mitigate the negative market trends.”
GPADE decreased by 2.3% to R129-million, from R132-million in the 2017 period. This improvement, Vogt noted, is owing to further efficiency improvements, as well as the improved price cost recovery and long-term import contracts with global suppliers.
Revenue for the company’s emerging Africa segment increased by 1.4%, which was adjusted for the negative effect from currency. As reported, revenue decreased by 2.9% to R365-million from higher volumes in some countries and adjustments for inflation in the company’s pricing.
“Emerging Africa experienced persistent weaker economic conditions. Supply constraints in LPG and carbon dioxide from South Africa to the Emerging Africa subsidiaries exacerbated the reduction in volume,” Vogt noted.
Mozambique, in addition, reported volume growth and, in Malawi, volumes increased owing to an improved performance from LPG into the agricultural sector. GPADE, excluding currency effects, decreased by 4% or 8% as reported to R149-million.
Emerging Africa's GPADE margin reduced to 40.6% compared with June 2017.
Afrox on Monday declared a cash dividend of 52c a share, declared out of the after-tax income for the six months ended June 30.
“We’ve had bit of a decline in our African business owing to a shortage of products and subdued economic activities, especially in Namibia, but we’ve been successful in atmospheric gases, driving margins and driving pricing and volumes, as well as in LPG,” Venter told Engineering News Online, adding that “it’s bit of a mixed bag around pricing and volume, but in the second half [of the year], we certainly see Africa coming back”.
Following the company’s results announcement, Afrox’s share price saw an increase of 5.17% on Monday morning.