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AFE - AECI Limited - Reviewed condensed consolidated financial results for the

Release Date: 26/02/2008 07:05:08      Code(s): AFE
AFE - AECI Limited - Reviewed condensed consolidated financial results for the  
year ended 31 December 2007                                                     
AECI LIMITED                                                                    
Incorporated in the Republic of South Africa                                    
(REGISTRATION NUMBER 1924/002590/06)                                            
SHARE CODE: AFE        ISIN NO: ZAE000000220                                    
- Revenue +11%                                                                  
- Final dividend unchanged                                                      
- R1,4b capital programme on track                                              
- Share buy-back announced                                                      
INCOME STATEMENT                                                                
                                       %        2007        2006                
                                       change   R millions  R millions          
Continuing operations                                                           
Revenue(2)                              +13       8 521       7 558             
Net operating costs                               7 764       6 510             
Profit from operations                  -28       757         1 048             
Creation of pension fund employer                 -           179               
surplus account                                                                 
Release of provision for post-                    -           131               
employment medical aid benefits                                                 
Net income from pension fund employer             30          17                
surplus account                                                                 
Net income from plan assets for post-             36         -                  
employment liabilities                                                          
823         1 375              
Fair value adjustments on derivative             5           11                 
Financing costs (net of costs                    (159)       (143)              
Interest received                                 28          35                
Income from associates and investments            12          7                 
                                                 709         1 285              
Impairment of goodwill                            (20)        (6)               
Other impairments and disposals                   2           (15)              
Profit before tax                                 691         1 264             
Tax                                               (218)       (339)             
Net profit from continuing operations             473         925               
Net profit from discontinued                      (6)         28                
Profit before tax                                 46          48                
Closure costs                                     (117)       -                 
Impairments and disposals                         64          (6)               
Tax                                               1           (14)              
Net profit                                        467         953               
Attributable to preference and                    (12)        (37)              
minority shareholders                                                           
Profit attributable to ordinary                   455         916               
Headline earnings are derived from:                                             
Profit attributable to ordinary                   455         916               
Impairment of goodwill                            20          6                 
Other impairments and disposals before            (66)        21                
Tax effects of the above items                    (17)        (1)               
Headline earnings                                 392         942               
Per ordinary share (cents):                                                     
Headline earnings                       -58       355         853               
Diluted headline earnings(3)                      352         842               
Attributable earnings                             412         829               
Diluted attributable earnings(3)                  408         819               
Continuing earnings                               417         804               
Diluted continuing earnings(3)                    414         794               
Dividends declared                      +4        213         205               
Dividends paid                                    213         185               
Ordinary shares (millions)(4)                                                   
- in issue                                        110         110               
- weighted average number of shares               110         110               
- diluted weighted average number of              111         112               
BALANCE SHEET                                                                   
at 31 December                                                                  
                                                2007        2006                
                                                R millions  R millions          
Non-current assets                                3 558       3 478             
Property, plant and equipment                     1 568       1 580             
Investment property                               411         418               
Goodwill                                          986         1 019             
Pension fund surplus                              226         196               
Investments                                       124         119               
Deferred tax                                      243         146               
Current assets                                    4 699       4 317             
Inventory                                         1 580       1 700             
Accounts receivable                               2 024       2 242             
Assets classified as held for sale                667                           
Cash and cash equivalents                         428         375               

Total assets                                      8 257       7 795             
Equity and liabilities                                                          
Ordinary capital and reserves                     3 788       3 595             
Preference capital and minority interest in       141         132               
Total shareholders` interest                      3 929       3 727             
Non-current liabilities                           955         942               
Deferred tax                                      78          35                
Non-current borrowings                            502         518               
Non-current provisions                            375         389               
Current liabilities                               3 373       3 126             
Accounts payable                                  2 021       2 230             
Current borrowings                                927         797               
Liabilities classified as held for sale           250         -                 
Tax payable                                       175         99                

Total equity and liabilities                      8 257       7 795             
INDUSTRY SEGMENT ANALYSIS                                                       
                 Revenue             Profit from         Net assets             
                 2007         2006   2007       2006     2007      2006         
                 R millions          R millions          R millions             
Mining solutions   2 778     2 492     163        261      1 377    1 019       
Specialty          5 618     4 629     570        511      2 833    2 354       
Property           451       644       75         314      496      449         
Group services,                                                                 
intergroup and     (326)     (207)     (51)       (38)     (94)     (166)       
8 521     7 558     757        1 048    4 612    3 656         
Discontinued      2 807     2 654     50         54       353      1 073        
Decorative         654       774       44         70       (5)      200         
Specialty          15        100       (3)        (10)     -        38          
Specialty          2 138     1 780     9          (6)      358      835         
                 11 328    10 212    807        1 102    4 965     4 729        
Net assets consist of property, plant, equipment, investment property and       
goodwill, inventory, accounts receivable less accountspayable. Assets in the    
property segment include land revaluation of R375 million (2006 - R405 million).
The net assets of the specialty fibres segment in 2007 include assets, and      
directly related liabilities, classified as held for sale.                      
CASH FLOW STATEMENT                                                             
                                            2007           2006                 
                                            R millions     R millions           
Cash generated by operations                  1 121          1 385              
Dividends received                            12             7                  
Financing costs                               (172)          (150)              
Interest received                            30             36                  
Taxes paid                                    (196)          (202)              
Changes in working capital                    (616)          (259)              
Expenditure relating to non-current           (67)           (130)              
Expenditure relating to restructuring         (1)            (13)               
Cash available from operating activities      111            674                
Dividends paid                                (237)          (206)              
Cash (applied to)/retained from operating     (126)          468                
Cash generated by/(utilised) in investment    75             (618)              
Proceeds from disposal of investments and     37             3                  
Proceeds from disposal of discontinued        751            -                  
Investments                                   (73)           (199)              
Net capital expenditure                       (640)          (422)              
Net cash utilised                             (51)           (150)              
Cash effects of financing activities          122            99                 
Increase/(decrease) in cash and cash          71             (51)               
Cash and cash equivalents at the beginning    375            409                
of the year                                                                     
Translation (loss)/gain on cash and cash      (5)            17                 
Classifed as held for sale                    (13)           -                  
Cash and cash equivalents at the end of the   428            375                
STATEMENT OF CHANGES IN EQUITY                                                  
                                            2007           2006                 
                                            R millions     R millions           
Net profit for the year                       467            953                
Dividends paid                                (237)          (206)              
Revaluation of derivative instruments         (1)            6                  
Foreign currency translation differences      (8)            17                 
net of deferred tax                                                             
Changes in the Group                          (17)           14                 
Other                                         (2)            3                  
Net increase in equity for the year           202            787                
Equity at the beginning of the year           3 727          2 940              
Equity at the end of the year                 3 929          3 727              
Made up as follows:                                                             
Issued ordinary capital                       453            453                
Non-distributable reserves                    271            295                
Surplus arising on revaluation of property,   243            261                
plant and equipment                                                             
Foreign currency translation reserve net of   17             20                 
deferred tax                                                                    
Retained earnings of associates               1              1                  
Other                                         10             13                 
Retained income                               3 064          2 847              
Preference capital                            6              6                  
Minority interest                             135            126                
                                             3 929          3 727               
OTHER SALIENT FEATURES                                                          
                                            2007           2006                 
R millions     R millions           
Capital expenditure - property, plant and     688            433                
- expansion                                   381            239                
- replacement                                 307            194                
Capital commitments                           1 251          650                
- contracted for                              340            91                 
- not contracted for                          911            559                
Future rentals on property, plant and         253            290                
equipment leased                                                                
- payable within one year                     77             65                 
- payable thereafter                          176            225                
Net contingent liabilities and guarantees     140            121                
Net borrowings                                1 001          940                
Gearing (%)                                   25             25                 
Current assets to current liabilities         1,4            1,4                
Net asset value per ordinary share (cents)    3 430          3 255              
Depreciation - continuing operations          164            152                
- discontinued operations                     69             71                 
(1)  Basis of preparation and accounting policies                               
The condensed consolidated financial results have been prepared in accordance   
with the historic cost convention except for certain financial instruments which
are stated at fair value. Accounting policies have been applied consistently by 
all entities in the Group and are consistent with those applied in the previous 
financial year.                                                                 
The condensed consolidated financial results comply with the Listings           
Requirements of the JSE Limited, International Financial Reporting Standards,   
the disclosure requirements of IAS 34 - Interim Financial Reporting and the     
South African Companies Act, 1973, as amended.                                  
(2)  Includes foreign sales of R1 533 million (2006 - R1 271 million).          
(3) Calculated in accordance with IAS 33. The Company has purchased call options
over AECI shares which will obviate the need for the Company to issue new shares
in terms of the AECI share option s cheme. In practice  therefore  there will be
no future dilution                                                              
(4)  Net of 10 311 120 (2006 - 10 311 120) treasury shares held by a subsidiary 
(5)  Disposal groups and discontinued operations                                
With effect from 1 October 2007 the entire interest in Dulux was sold for a     
consideration of R745 million and realised a profit of R394 million after tax.  
During the year the businesses of SANS Fibres wereeither discontinued or        
earmarked for future sale. Closure costs and impairments in respect of these    
businesses amounting to R358 million after tax have been charged against income 
in the year to31 December 2007. Dulux and SANS have been classified as          
discontinued operations and the comparative figures adjusted accordingly.       
(6)  The auditors, KPMG Inc., have reviewed these condensed consolidated        
financial results. The auditors` unqualified review report is available for     
inspection at the Company`s registered office.                                  
(7)  The condensed consolidated financial statements do not include all of the  
information required for full annual financial statements and should be read in 
conjunction with the consolidated annual financial statements for the year ended
31 December 2006.                                                               
The preparation of financial statements requires management to make judgements, 
estimates and assumptions that affect the application of policies and reported  
amounts of assets and liabilities, income and expenses. The estimates and       
associated assumptions are based on historical experience and various other     
factors that are believed to be reasonable under the circumstances, the results 
of which form the basis of making the judgements about carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.                                                
Headline earnings of R392 million, equivalent to 355 cents per ordinary share,  
were 58 per cent lower than in 2006. The current year`s headline earnings are   
stated after charging R108 million after tax (R117 million before tax) in       
respect of closure costs at SANS Fibres (SANS). In 2006, the inclusion of R233  
million after tax, following an agreement concluded with the AECI Pension Fund  
to create an employer surplus account, and a once-off profit of R223 million    
after tax on the sale of a surplus property at Milnerton, boosted results. In   
the current year, the Group earned R47 million income after tax on the assets   
created out of the pension fund surplus. If the effect of these transactions is 
excluded, headline earnings were R453 million, or 410 cents per share, compared 
with R487 million, or 441 cents per share, in 2006, a reduction of 7 per cent.  
Despite the reduction in profit, the directors are sufficiently confident about 
the future to maintain a final dividend of 141 cents per ordinary share. The    
dividend declaration is published in full elsewhere.                            
Group revenue increased by 11 per cent in total in 2007 whilst revenue from     
continuing operations increased by 13 per cent, reflecting some pleasing growth 
in the mining and specialty chemicals sectors. However, with high oil prices    
impacting on oil-based raw material costs, extended commissioning of new        
detonator manufacturing equipment and intense competition in the shocktube      
market, margins were under pressure. The operating margin on continuing         
operations declined to 9 per cent from 14 per cent in 2006.                     
African Explosives Limited (AEL) recorded strong growth in volumes and sales in 
the surface market sector in South Africa and its businesses in Africa. In South
Africa, however, the narrow reef market was impacted severely by lower volumes  
and intense competition. The slower than planned ramp-up of the first phase of  
automated production of initiating systems at Modderfontein, owing to larger    
than expected inter-batch variations in the powder drying section of the plant, 
also contributed to AEL`s disappointing decline in trading profit. A technical  
solution to the plant problem has been found and production rates for the first 
phase of the automation project are expected to increase to full design capacity
during the second and third quarters of 2008. Final completion and commissioning
of the second phase of the project is underway and production is expected to    
increase to over 85 per cent of design capacity of 80 million detonators by the 
end of 2008.                                                                    
Chemical Services (Chemserve) recorded a creditable 13 per cent increase in     
trading profit in 2007. Organic growth accounted for virtually all of the       
improvement, with some contribution from two small acquisitions. Although the   
drop-off in certain manufacturing sectors had an adverse effect, Chemserve      
benefited from innovative vendor management in platinum, gold and base metal    
mining in Southern Africa; infrastructure development which created demand for  
construction chemicals and related products; and consumer-driven markets such as
food, coatings, household and personal care products and some white goods. The  
year was significant in terms of Chemserve`s capital programme, with major      
projects underway for the construction and expansion of manufacturing capacity. 
Most of this is in the area of mining chemicals and it is expected that the     
investments will deliver significant benefits from 2009.                        
After a record performance in 2006, the property activities managed by Heartland
had a more subdued year and trading profits were R75 million, net of R83 million
of remediation costs. Net cash outflow totalledR48 million after expenditure of 
R66 million on remediation and R70 million expenditure on infrastructure. Sales 
of 86 hectares of land were achieved in the year compared with 160 hectares in  
Disposal groups and discontinued operations                                     
AECI`s strategic focus is increasingly on the supply of specialty products and  
services, based on chemistry, to customers in the mining and manufacturing      
sectors in Africa and elsewhere. The decorative coatings business, trading as   
Dulux, targeting primarily the retail consumer market, was not well aligned with
this strategy. Effective 1 October 2007, therefore, AECI agreed to sell the     
Dulux business to ICI plc for a cash consideration of R745 million which was    
received prior to the year end. The sale realised a profit after tax of R394    
million, which is excluded from headline earnings.                              
The polyester light decitex industrial (LDI) and heavy decitex industrial (HDI) 
businesses of SANS have been under severe pressure for some time owing to       
several factors. These include ongoing over-investment in polyester yarn plants 
(mainly in the Far East) resulting in surplus capacity and very low prices, and 
the lower cost base of manufacturers in the Far East. The highly competitive    
situation will not change. Furthermore, SANS` principal local customer for nylon
HDI decided to exit this business. In this context, and after failing to find a 
partner or owner which could add value to these components, or to SANS`         
operation as a whole, the decision was taken to close these businesses at the   
end of December 2007. An impairment chargeof R93 million after tax has been     
incurred in respect of these assets and is included in net profit from          
discontinued operations in the income statement.                                
The nylon LDI and the polyethylene terephthalate (PET) polymer businesses were  
profitable in 2007 and their immediate outlook remains positive. However, AECI  
is actively engaging with several parties interested in purchasing the nylon LDI
and PET businesses which have, therefore, been classified as assets held for    
sale. It is expected that the sale of these businesses will be completed within 
the next financial year. An impairment charge of R157 million after tax has been
taken in 2007 to write down the assets of these businesses to their expected    
sale values.                                                                    
Capital expenditure of R688 million included R381 million for expansion         
projects, mainly in respect of the major projects currently under construction  
at AEL and Chemserve. The capital expenditure was R455 million higher than the  
depreciation charge. Group working capital, including the working capital       
component of assets classified as held for sale, increased to R1 897 million,   
representing 17,8 per cent of annual sales (excluding businesses sold) compared 
with the corresponding figure of 17,1 per cent in 2006.                         
Notwithstanding the receipt of the proceeds for the sale of the Dulux business, 
Group borrowings increased to R1 001 million from R940 million in 2006          
reflecting the increased capital expenditure during the year. Cash interest     
cover returned to a more normal level of 7 times from the exceptionally high    
level of 13 times in 2006. Gearing remained at 25 per cent of shareholder funds,
the same level as in December 2006. No repurchases of ordinary shares were      
undertaken during the year. However, the Board has taken the decision to buy    
back up to 5 per cent of the Group`s issued shares in the market as and when the
market is favourable, as authorised at the 2006 Annual General Meeting (AGM).   
Authority is being sought at the AGM in May 2008 to repurchase up to a further  
10 per cent.                                                                    
The impairments and disposals in the discontinued operations section of the     
income statement comprise mainly the profit on sale of Dulux of R394 million    
less the non-headline SANS impairment of R314 million.                          
Reference has already been made to the disposal of Dulux and the closure of part
of the SANS operations in December. The remainder of SANS` businesses are       
expected be sold in 2008. In terms of the agreement between SANS and its partner
in the North Carolina, USA joint venture, SANS acquired the remaining 50 per    
cent of the shares it did not already own at a cost of R60 million during the   
year. This business is also expected to be sold during the course of 2008.      
Chemserve acquired two small local businesses during the year.                  
The trading outlook for 2008 appears challenging with the prospect of high oil  
prices, a higher interest rate environment, a weaker rand and uncertainty       
regarding power supply in South Africa. A weaker rand puts immediate pressure on
the Group`s import costs but assists with exports. Inflationary pressures are   
evident in many countries. Therefore, pressure on margins is expected to        
continue. The Group will focus on containing operating costs and will seek to   
recover increased input costs in the market where possible.                     
Apart from at SANS, the recent nationwide disruptions in electricity supply have
had a limited impact on the Group`s manufacturing plants. However, the delivery 
of products to certain of the Group`s customers was adversely affected,         
particularly the mines. As part of the solution to assure a steady supply of    
power, the Group is currently investigating co-generation alternatives.         
AECI is well-positioned and well-funded to grow both organically and by         
acquisition. 2008 should see improved results compared to 2007, particularly    
from Chemserve and Heartland. Beyond 2008, the benefits of capital investments  
are expected to start delivering significantly improved results in 2009 and     
The condensed consolidated financial results were authorised for issue by the   
directors on 25 February 2008.                                                  
Fani Titi                Schalk Engelbrecht                                     
Chairman                 Chief executive                                        
Woodmead, Sandton                                                               
25 February 2008                                                                
Directorate: F Titi (Chairman) +, S Engelbrecht (Chief executive), F P P Baker, 
R M W Dunne*+,G N Edwards, Z Fuphe+, M J Leeming+, L M Nyhonyha+, A C Parker+, L
C van Vught+, R A Williams*                                                     
*British    +Non-executive                                                      
Company secretary: A Kennedy                                                    
Date: 26/02/2008 07:05:07 Supplied by www.sharenet.co.za                     
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