Afrimat’s share price leapt 12% yesterday after it announced the acquisition of 100% of leading building materials group Lafarge South Africa (LSA) for just more than R1 billion.
The mid-tier mining group’s share price was up 10.16% at R59.76 late yesterday morning, just 2% shy of the 52-week high of R61.01.
Afrimat chief financial officer Pieter de Wit said they had been in talks with LSA for some time before agreeing on the price, and LSA’s parent Holcim Group’s exit from the local market was in line with its exit from all other Asian and African markets, so that Holcim could focus on European and US markets.
De Wit said in a telephone interview that this was Afrimat’s biggest transaction and time would be needed to integrate LSA’s cement, aggregates, quarries and fly-ash operations into the group. The Lafarge brand name would also disappear.
He said LSA holds about the second-biggest market share in the aggregates business after Afrimat, while LSA’s two fly-ash operations had previously given it a uniquely competitive edge in the local market.
LSA had made a modest R38 million profit in its 2022 financial year, well down from R311m in 2021, but De Wit said they had already identified a range of synergies to turn the business around, and LSA had already undertaken a number of initiatives, which were not yet in the financial figures.
Smalltalkdaily Research analyst Anthony Clark said this “is a sweet deal” for Afrimat because LSA was reasonably well managed, but had been ignored by its overseas parent.
“Afrimat gains leading national market share once Lafarge aggregates is combined with its own business, giving cost efficiencies and some strategic new minerals needed in the cement blending market. This deal is about aggregates and extenders and not about cement,” said Clark.
Extenders are the product blenders use to produce cheaper cement. Fly-ash is an extender.
Mergence Investment Management portfolio manager Izak van Niekerk said: “It looks like a very good and hence low-risk price they are paying.”
He believes Afrimat will turn the LSA business around as it had done with many other acquisitions it had made in the past.
“It looks like they are paying about R800m for assets with a heavily written down book value of about R2.3bn … they commented that the replacement value of the assets is significantly higher than this,” said Van Niekerk.
“The key will be their operational execution. If they can return the business to similar Ebidta (earnings before interest, taxes, depreciation and amortization) generated in 2021, then the purchase price can be paid back in less than three years on operational cash flow.”
Afrimat, which mines bulk commodities, industrial minerals and construction materials, entered into a share purchase agreement with Holcim subsidiary Caricement, in terms of which the company will acquire 100% of LSA and its subsidiaries, a statement from Afrimat said yesterday.
Afrimat’s construction materials division and its subsidiaries supply a wide variety of aggregates and concrete-based products to the market.
A key focus at Afrimat are operational efficiency initiatives, which are aimed at expanding volumes, reducing costs and developing the required skill levels across all staffing categories.
“Consequently, the acquisition is in line with Afrimat’s strategy to expand the current national footprint and products and to drive efficiencies within the construction materials segment,” the group said in a statement.
The purchase price for the acquisition was $6 million (R108.8m). In addition, Afrimat agreed to repay loan amounts owing by LSA to its parent, equating to R900m. Afrimat would pay the seller R500m in cash on the closing date of the deal, leaving an outstanding R400m, which would be paid to the seller within 12 months of the closing date of the transaction.
The deal is subject to Competition Commission and other government department approvals.
For the year to December 31, 2022, LSA’s net asset value was R1.4bn, compared to R2.3bn a year before.
In the year to February 28, Afrimat reported a 4.9% increase in revenue to R4.9bn, while operating profit fell 13.3% to R1bn. Headline earnings a share declined 15.7% to 457.6 cents. A final dividend of 110c per share was declared. The balance sheet, however, remained very strong at that stage with cash generated from operating activities of R1bn, as well as R680m from a successful equity raise.
CEO Andries van Heerden said at the time: “Diversification, increased volumes from the mines coming online and efficiency improvements remain the cornerstone of our strategy and are used to counter macroeconomic impacts beyond management’s control.”
BUSINESS REPORT