Sephaku reports higher profit, warns of industry headwinds

24th June 2022 By: Schalk Burger - Creamer Media Senior Contributing Editor

JSE-listed building and construction materials company Sephaku Holdings said its subsidiaries Métier and SepCem increased their net profit by double digits during the group’s financial year to March 31, mainly owing to improved revenues and lower finance expenses, Sephaku CEO Neil Crafford-Lazarus said on June 23.

Net profit after tax increased to R45-million, up from R20-million in the prior financial year.

The group lifted its basic earnings a share to 17.52c, up from 7.83c in the prior year, while headline earnings a share increased to 17.67c, from 6.09c the year before.

"The contractionary economic policies being implemented by the Reserve Bank to combat rising inflation will inevitably further reduce the building materials demand, barring the implementation of the proposed government infrastructure projects.

“Industry experts project that residential building demand will decline as interest rates increase.

"Owing to the cyclicality of the construction industry, the demand for building materials will remain low or decline, depending on the magnitude of economic contraction," Sephaku said in its financial results statement.

"Specifically on mixed-concrete demand, the government’s high debt levels seem to have limited its ability to implement the planned infrastructure projects. In addition, the private infrastructure investors’ confidence in South Africa’s economic growth and business prospects continues to ebb."

Meanwhile, the excess supply of non-residential properties and the re-introduction of various bouts of rotational load-shedding since November 2021 have further entrenched the apathy towards private construction projects, as reflected in the decline in non-residential building plans. These factors are expected to impact the mixed-concrete sector’s future performance negatively, Sephaku highlighted.

The group will continue to focus on cost management to sustain the gains from the numerous initiatives implemented in the year under review.

SepCem and Métier will continue to strengthen their balance sheets by reducing debt while seeking diversification opportunities within the construction value chain, the company said.

"At the beginning of April, a renewed optimism in construction activity was recorded based on the prevailing strong commodity cycle, which was largely expected to increase infrastructure demand.

“The sentiment was soon dampened by the deceleration in global growth and concerns related to the potential negative effects of the Russia-Ukraine war. Therefore, as we began the 2023 financial year, we recognised the headwinds against macroeconomic growth in general and our industry," said Crafford-Lazarus.

"We remain vigilant in managing costs and agile in our sales approach to support profitability and maintain our market share," he said.

Meanwhile, the group's wholly owned subsidiary Métier increased total sales volumes by 18% year-on-year, albeit from the anomalously low comparative base due to the pandemic-related restrictions in the 2021 financial year.

"Although Métier recorded an increase, the volumes achieved by the subsidiary were essentially flat year-on-year considering the ten months of active trading in the 2021 financial year. Management estimated the mixed-concrete sector demand to be slightly below pre-Covid-19 levels by year-end, emphasising the ongoing challenge of supplying ready-mixed concrete to a stagnant market," Sephaku highlighted.

Métier’s revenue increased by 24% to R786-million, up from R634-million during the prior financial year, owing to increased sales volumes and pricing.

"Increasing inflation-related input costs in the quarter ended March 31 resulted in all major mixed concrete producers, including the subsidiary, implementing significant price increases. The flat gross margin of 38% year-on-year demonstrates management’s ability to control input costs to support profitability," Sephaku said.

Consequently, earnings before interest, taxes, depreciation and amortisation (Ebitda) increased by 36% to R75-million, up from R55-million achieved during the preceding year, and earnings before interest and taxes (Ebit) increased by 45% from R33-million to R48-million, the company said.

Further, operating expenses increased by 16% from the anomalously low base in the comparative prior period owing to cost-saving initiatives. Ebitda margins increased to 9.6%, up from 8.7% in the 2021 financial year, and Ebit margins increased 6.2% from 5.2% the prior year.

Métier’s net profit after tax increased by 76%, from R17-million to R30-million, owing to the higher revenue and the lower finance expense resulting from a decreasing debt balance, Sephaku said.

Although the price increases applied in March were sustained, the expanding inflation, significant fuel price increases and rising interest rates are expected to cause downward pressure on profitability in the 2023 financial year, as input costs and operating expenses increase.

Métier’s hybrid logistics model and its strong relations with outsourced transporters enable the subsidiary to control its transport expenses better.

In addition, Métier has established a portfolio of competitively priced suppliers for key inputs. To further mitigate against a sharp decline in profitability, the subsidiary increased prices in June, Sephaku added.

The subsidiary continued to apply stringent credit approval processes to mitigate the risk of financial loss from defaults.

"The proliferation of medium-sized construction companies with cashflow management challenges increased the risk necessitating a preference for customers with proven and consistent payment behaviour. As of March 31, the loss allowance for trade and other receivables was reduced to R791 000, from R1.9-million during the 2021 financial year, owing to a R1.1-million provision reversal on settled trade receivables."

Further, Métier focused on reducing the amortising loan facility, resulting in a capital balance of R48-million at financial year-end, down from R71-million during the prior financial year. The facility bears an interest rate of three-month Johannesburg Inter-bank Average Rate plus 4.25%.

"The subsidiary’s management continues to comply with the debt obligations and is confident that it will repay its instalments as scheduled for the 2023 financial year," Sephaku said.

Meanwhile, Métier established its first plant at Bellville, in the Western Cape, and started supplying customers in September 2021. The subsidiary achieved targeted volumes by December 2021 at good profit margins in this province. Métier intends to gradually enhance its reputation in this market to ensure the brand is well accepted.

Further, the operations in the KwaZulu-Natal experienced unique challenges, namely the disruption of construction projects by the business forums and the floods in the quarter ended March.

"The demand in KwaZulu-Natal reverted to pre-Covid-19 levels during the year characterised by increased competition from independent ready-mix producers resulting in flat sales volumes. Métier focused on achieving an optimal product mix that would result in raw material and transport cost savings," the group said in its results statement.

Additionally, the Gauteng-based operations experienced aggressive pricing tactics from vertically integrated competitors as demand declined. The sales were 10% below volumes achieved in the 2021 financial year, mainly owing to the continued low demand in the province.

"Management focused on efficiently securing inputs, tightly managing logistics costs and implementing effective sales management to improve profit margins," the company said.

Further, Métier successfully implemented price increases in the quarter ended March in the Gauteng and KwaZulu-Natal markets.

"Overall, integrated ready-mixed producers continued to close plants in KwaZulu-Natal and Gauteng, but were immediately replaced by highly competitive independent ready-mix producers with lower cost bases. Métier’s competitive edge based on its service excellence, deep product knowledge and professionalism has positioned the subsidiary well to retain or grow its market share in the three provinces," Sephaku said.

SepCem increased its revenue by 7% to R2.6-billion, up from R2.4-billion during the preceding financial year owing to higher pricing.

The resultant Ebitda was 2% lower at R375.4-million, down from R381.6-million, at a margin of 14.6%, lower than 15.9% achieved in the 2021 financial year. The decrease in Ebitda was mainly owing to the insourcing of clinker in the first quarter of the 2021 financial year caused by a shortage at SepCem.

The operating profit remained flat at R219.4-million, mainly owing to the lower depreciation expense in the period under review. Similarly, the lower finance expense owing to a lower debt balance resulted in an 85% increase in net profit after tax from R44.4-million to R81.9-million.

The SepCem 36% equity-accounted profit in the group for the 2022 financial year profit and loss statement is R28.9-million compared with R15.9-million in the prior financial year.