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Sephaku lifts volumes in highly competitive cement market

LELAU MOHUBA
Sephaku Holdings’mixed concrete subsidiary Métier recorded a 7.3% increase in net profit to R67.4- million, despite revenue having declined by 3.9%

LELAU MOHUBA Sephaku Holdings’mixed concrete subsidiary Métier recorded a 7.3% increase in net profit to R67.4- million, despite revenue having declined by 3.9%

Photo by Duane Daws

14th July 2017

By: Ilan Solomons

Creamer Media Staff Writer

     

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JSE-listed minerals exploration, development and investment company Sephaku Holdings’ (SepHold’s) net profit increased by 12.8% year-on-year to R68.1-million for the year ended March 31, despite its revenue having decreased to R839.9-million on the back of lower prices and reduced demand in the mixed concrete market.

CEO Dr Lelau Mohuba noted that operating profits increased to R84.7-million from R84.2-million the year before. Basic earnings per share increased to 33.63c from 30c, and earnings per share to 33.37c from 29.84c, despite the challenging market conditions that had prevailed during the year under review.

He further highlighted that SepHold’s mixed concrete subsidiary, Métier, had recorded a 7.3% increase in net profit to R67.4- million, despite revenue having declined by 3.9%.

“The mixed concrete sector experienced intense price competition for supply contracts, resulting in downward pressure on prices. The competition was driven by the continued contraction in large-scale construction projects and new entrants into key markets,” he stated.

Mohuba elaborated that the increase in the number of independent mixed concrete manufacturers was primarily due to the lower pricing for bulk cement. He pointed out that the “most aggressive competitors” were the vertically integrated companies that provided a “captive market” for the related cement and aggregates manufacturers.

He argued that Métier’s understanding of the market and its ability to secure profitable concrete supply deals were instrumental in the subsidiary maintaining its share of the market.

The geographical diversification of Métier’s plants and the manufacture of specialised concrete also enabled the subsidiary to maintain an operating margin of 12.9%, which was a slight improvement from 12.7% in the previous year.

He said the subsidiary’s performance further demonstrated management’s mettle by reducing in the cost of sales by 5.2% to R483.7-million and operational expenses by 3.7% to R250.4-million to support margins.

Following positive results for the past two years, Métier was able to pay a R50-million dividend to SepHold and reduced its overall bank debt obligations by R87-million to R215.9-million.

Mohuba pointed out that the group had added a twelfth plant, in the south of Gauteng, which started production in March. He added that the new plant was well aligned to the subsidiary’s overall strategy and would enable Métier to increase its footprint to reduce overreliance on the current growth nodes by diversifying its customer base.

Meanwhile, SepHold’s other subsidiary, cement producer Sephaku Cement (SepCem), recorded an 4% year-on-year rise in sales volumes.

However, the average price per ton decreased by 4.6% year-on-year for the period ended December 31, 2016. SepCem’s results are for the year ended December 31, owing to Dangote Cement’s shareholding in the company.

SepCem’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin increased to 23.1% from 21.9% and its net profit increased to R68.9-million from R50.4-million, of which R24.8-million was equity-accounted for by SepHold through its 36% stake in the entity.

The net profit included one-off income from the closure agreement with Chinese engineering firm Sinoma International Engineering on the final handover of the plants and reflects the increases in the cost of sales, operating expenses and finance costs.

Mohuba commented that the cement market remained “highly fragmented”, with all manufacturers using price competition to defend their sales volumes.

Import volumes decreased by 53% to 389 000 t from 820 000 t for the year ended December 2016. However, Mohuba pointed out that bagged cement pricing started to stabilise at the end of the 2016 calendar year.

Nonetheless, the contestation continued in the bulk cement market, owing to the limited number of new, significant construction projects.

Bagged cement represented between 70% and 80% of sales volumes because of the limited activity in the bulk use market. “SepCem focused on achieving the optimal product mix in all its markets to maintain its sales volumes,” remarked Mohuba.

He said the “highly competitive” market and downward pressure on pricing resulted in SepCem’s loan covenants, namely the debt service cover ratio, being increasingly under pressure.

“SepCem is in negotiations with its lenders to review the capital repayment profile without changing the original payment period so as to reduce pressure on the ratio going forward,” stated Mohuba.

SepHold FD Neil Crafford-Lazarus, meanwhile, noted that sales volumes for the first quarter of this year, ended March 31, were 3.6% lower year-on-year, mainly owing to the high rainfall and competitive forces.

He pointed out that SepCem had implemented price increases in February, which have been sustained in most markets.

“By the end of March, the prices indexed from January were 4% and 5% higher for the bagged and bulk cement respectively,” he said.

Crafford-Lazarus explained that the application of a price differentiation model for the various provincial markets enabled SepCem to reduce the downward pressure on margins.

“In the same vein, efforts to lower operational costs by improving efficiencies continued through the optimisation programme. Although the continued decrease in prices limited the positive impact on the Ebitda margin, SepCem had achieved 50% of the targeted R115-million cost saving by end of December 2016. Management is targeting to complete the programme by the end of December 2017,” he highlighted.

In response to a question from Engineering News regarding whether SepCem had plans to increase export capabilities into the rest of Africa, SepCem CEO Pieter Fourie said the company did not believe this was a viable option as distribution costs accounted for the largest portion of SepCem’s cost base at 22% and that any attempted expansions would only add to this figure.

“We have limited exports to neighbouring countries, such as Botswana, Lesotho and Swaziland, but we do not regard these as exports, but rather as extensions to our South African base,” he stated.

Fourie remarked that the small volumes it had been sending to these countries had, in fact, decreased over the past year.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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