JSE: AFT (Afrimat)
Writing can be quite a challenge. Whenever I sit down to put my thoughts and experiences on paper, I often find it daunting to distill the hundreds, sometimes thousands, of ideas in my head onto a single page. But here goes nothing; this is one of those rare opportunities when I get to delve into a topic I genuinely enjoy — Investments. I’ll try to keep it straightforward for you and lay out what you can expect from this article. I’ll begin by discussing my personal investment philosophy at a high level and then delve into Afrimat, sharing my insights and explaining why I include this company in my personal portfolio.
I have a strong liking for simplicity. In fact, I enjoy simplifying complex matters into something nearly anyone can grasp, and this underpins my personal investment approach (bearing in mind that specifics may evolve as I gain more information, though the fundamentals will remain the same). In one sentence, my investment philosophy is extremely focused, fundamentally based, and long-term. To elaborate further, when I say “focused,” I mean less is more; I’d rather have a few select stocks than a multitude. By “fundamental,” I’m asking whether it’s a solid business (more on this later), and “long-term” for me means a timeframe of at least five years, nothing less.
About Afrimat:
Now, let’s shift gears and talk about Afrimat. Afrimat falls into the category of a mid-tier miner. They also process and supply a diverse range of industrial minerals, including, but not limited to, phosphate, which they began supplying to the agricultural sector this year. Afrimat’s business is divided into five segments, but for the sake of brevity, I’ll focus on the primary revenue drivers: Bulk Commodities, Construction Materials, and Industrial Minerals. Afrimat primarily engages in open-pit mining and processing of iron ore, anthracite (high-grade coal), manganese, aggregates, concrete-based products, and ready mix. They operate in all South African provinces except the North West.
Business Performance:
No doubt, the world is well aware of South Africa’s challenges, whether it’s Eskom, infrastructure issues, inflation, and the list goes on. Many businesses faced tough times, and Afrimat was no exception. However, it’s often in these challenging times that opportunities arise.
Bulk Commodities:
The bulk commodities sector is Afrimat’s largest revenue contributor, accounting for 50% of their revenue. This segment includes two iron ore mines and one anthracite mine, contributing almost 82% of the group’s operating profit. Although revenue for this segment saw a modest 3% increase to R2.4 billion, operating profit was down for the year at -8.4%, primarily due to a decrease in iron ore prices.
Construction Materials:
This segment, with thin margins and dependence on economic activity, is my least favorite. The challenging economic environment took a toll on this segment, with revenue up at R1.8 billion, about 3.3% better than the prior year, but operating profit down 17.7%, mainly due to decreased economic and construction activity.
Industrial Minerals:
The industrial minerals segment, focusing mainly on limestone, dolomite, and silica, also felt the impact of the economic slowdown. While revenues increased by 17.5% to just over R553 million, operating profit was 42% lower than the previous year.
Company Performance:
Having provided a high-level overview of each segment’s performance, let’s now examine how the company performed as a whole. Afrimat generated its second-highest operating profit in the group’s history. Top-line revenue increased by 4.9%, a testament to the challenging economic environment. The company maintains a robust balance sheet with highly cash-generative businesses and careful attention to debt levels. Despite the impact on profit margins, they remain healthy at 19%.
Investment Case:
I’ve aimed to offer a high-level overview of both individual segments and overall business performance, avoiding overwhelming you with intricate details. As mentioned earlier, my investment philosophy is grounded in fundamentals and a long-term perspective. Viewing this company through a longer-term lens, it’s evident that Afrimat performed admirably under extremely trying conditions, securing the second-highest profit in the group’s history. Over the period from 2009 to 2023, they achieved a remarkable 20.6% growth in profit after tax — a feat few businesses can match. With a strong balance sheet, an experienced management team, and various upcoming projects, the future appears promising for Afrimat (and I haven’t even touched on the acquisition of Lafarge assets from Holcim). As I write this, Afrimat is trading at approximately R57 per share, resulting in a P/E ratio of about 12.8x. At these levels, I’m more than pleased to add more of this company’s stock to my personal portfolio.
If you’ve made it this far, thank you for reading. I hope you found this article beneficial. Keep learning and enjoy your week!
