Construction in South Africa is tough and infrastructure spend from government is low. Private fixed investment has been in a downward cycle for many years and business confidence is dire.
Spending is mostly focused on smaller projects and these are awarded to unlisted, mostly unknown, black-empowered companies.
There is one area where money is still spent and that is on roads, and there seems to be a lot of activity in this sector.
The order book for road construction and road rehabilitation of even the bigger listed companies is steady.
According to the Safcec State of the Industry report, road construction contributed almost 48% of industry revenue in the first quarter of this year. The Safcec numbers also show a marked increase in earthwork activity from less than 1% of industry turnover to 5.5%.
The strong road construction market has benefited construction material suppliers and companies such as Afrimat continue to grow. Afrimat is listed in the construction and building sector, and is a black-empowered, diverse company supplying materials, resources and contracting services to industries such as mining, construction, road and rail.
Backed by more than 50 years’ experience, Afrimat supplies a broad range of materials, ranging from mining and aggregates, concrete products (bricks, blocks and paving) to ready-mix, as well as industrial minerals. The company operates through five key divisions: Mining & Aggregates, Concrete Products, Readymix and Industrial Minerals.
The company’s history stems back to the mid-1960s, with the merger of Prima Quarries in the Western Cape and Lancaster Group in KwaZulu-Natal, and they listed on the JSE in 2006.
The group has managed to buy great businesses such as Exarro’s Gen Douglas (for a steal!), SA Block, SA Clinker and Cape Lime. In addition to supplying materials, Afrimat has a strong presence in contracting services such as drilling, blasting, mobile crushing and screening.
They also service major infrastructure and construction projects for a range of enterprises, from large public and government-owned entities to small private sector clients.
Afrimat is establishing quarries in Mozambique and are planning to buy into the rest of Africa.
Afrimat also boasts a low staff turnover, which has resulted in a deep skills pool, while staff transformation and community upliftment are integral to the company’s success.
In September 2016, Patrice Motsepe’s African Rainbow Capital bought an 18.4% stake and agreed to be locked in for at least four years. They are a strategic long-term investor with no predefined exit strategy.
Afrimat’s chief executive Andries van Heerden said that “Afrimat is of the view that this will create a long-term and sustainable BEE partner with certainty around shareholding, which will build further value for Afrimat. ARC has also shown a willingness in wanting to work with Afrimat on our proposed growth strategy.”
In May, Afrimat published full year results to February 2017. Headline earnings per share increased by 25.4% to 196.4%. The undemanding price/earnings ratio of 12.7 make this company an attractive proposition.
Although management indicated at the recent AGM that the start to their new financial year was challenging and that they will not be able to sustain previous growth, the current valuation seems to be good value for money, especially since the share price dropped from R30 less than two months ago.
They expect earnings to be positive and ahead of their peers, but not as high as the market came to expect of them.
For many years they have maintained earnings growth of more than 20% a year and even if this comes down to 10% or to 15%, the share is still attractive below R25. The company has built up a diversified portfolio, which acts as a risk hedge for shareholders.
Amelia Morgenrood CFP is BCom (Hons) Financial Planning, and a member of the South African Institute of Stockbrokers. She is portfolio manager and regional director.