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

Release Date: 24/02/2009 07:05:06      Code(s): AFE
AFE - AECI LIMITED - Reviewed condensed consolidated financial results for the  
year ended 31 December 2008                                                     
AECI LIMITED                                                                    
(Incorporated in the Republic of South Africa)                                  
(Registration No. 1924/002590/06)                                               
Share code: AFE     ISIN No.: ZAE000000220                                      
("AECI" or "the Company")                                                       
Revenue from continuing operations +48% to R12,8 billion                        
Dividend for the year +8% to 231c (final = 141c)                                
Operating profit on continuing businesses +39%                                  
HEPS +16% to 412c                                                               
Income statement                                                                
                                               2008       2007                  
%       R          R                     
                                       change  millions   millions              
Continuing operations                                                           
Revenue(2)                              +48       12 849    8 710               
Net operating costs                               11 814     7 963              
Profit from operations                  +39      1 035       747                
Net (loss)/income from Pension Fund                                             
employer surplus account                        (13)       30                   
Net (loss)/income from plan assets for                                          
post-employment liabilities                     (57)       36                   
                                                 965       813                  
Fair value adjustments on derivative                                            
instruments                                     (16)       5                    
Interest paid (net of costs                                                     
capitalised)                                    (233)      (159)                
Interest received                                28         28                  
Income from associates and investments           13         12                  
                                                757        699                  
Impairment of goodwill                           (42)       (20)                
Other impairments and disposals                  (4)        (32)                
Profit before tax                                711        647                 
Tax                                              (238)      (246)               
Net profit from continuing operations            473        401                 
Net (loss)/profit from discontinued                                             
operations                                      (94)       66                   
Profit before tax                                154        56                  
Closure costs                                     (204)     (117)               
Impairments and disposals                        (56)       98                  
Tax                                              12         29                  
Net profit                                       379        467                 
Attributable to preference and minority                                         
shareholders                                    6          (12)                 
Profit attributable to ordinary                                                 
shareholders                                    385         455                 
Headline earnings are derived from:                                             
Profit attributable to ordinary                                                 
shareholders                                    385         455                 
Impairment of goodwill                           42         20                  
Other impairments and disposals before                                          
tax                                             60         (66)                 
Surplus on disposal of property, plant                                          
and equipment                                    (38)       *                   
Tax effects of the above items                   (6)        (17)                
Headline earnings                                443        392                 
Per ordinary share (cents):                                                     
Headline earnings                       +16      412        355                 
Diluted headline earnings(3)                     410        352                 
Attributable earnings                            358        412                 
Diluted attributable earnings(3)                 356        408                 
Continuing earnings                              445        352                 
Diluted continuing earnings(3)                   443        349                 
Dividends declared                      +8      231          213                
Dividends paid                                   231        213                 
Ordinary shares (millions)(4)                                                   
- in issue                                       107        110                 
- weighted average number of shares              108        110                 
- diluted weighted average number of                                            
shares(3)                                        108       111                  
*nominal amount                                                                 
Balance sheet at 31 December 2008                                               
2008        2007                   
                                             R millions  R millions             
Non-current assets                             4 510       3 557                
Property, plant and equipment                  2 431       1 567                
Investment property                            422         411                  
Goodwill                                       1 013       986                  
Pension Fund surplus                           213         226                  
Investments                                    98          124                  
Deferred tax                                   333         243                  
Current assets                                 6 441       4 699                
Inventory                                      2 795       1 580                
Accounts receivable                            3 188       2 024                
Assets classified as held for sale             14          667                  
Cash and cash equivalents                      444         428                  
Total assets                                   10 951      8 256                
Equity and liabilities                                                          
Ordinary capital and reserves                  3 852       3 788                
Preference capital and minority interest in                                     
subsidiaries                                  117         141                   
Total shareholders` interest                   3 969       3 929                
Non-current liabilities                        2 385       954                  
Deferred tax                                   61          78                   
Non-current borrowings                         1 745       502                  
Non-current provisions                         579         374                  
Current liabilities                            4 597       3 373                
Accounts payable                               3 225       2 021                
Current borrowings                             1 058       927                  
Liabilities classified as held for sale        -           250                  
Tax payable                                    314         175                  
Total equity and liabilities                   10 951      8 256                
Industry segment analysis                                                       
Profit from                                 
                   Revenue          operations       Net assets                 
                   2008    2007     2008      2007   2008    2007               
                   R millions       R millions       R millions                 
Mining solutions     4 052    2 698   248       163    1 963   1 386            
Specialty chemicals  8 434    5 618   851       570    3 992   2 824            
Property             432      450     45        75     524     497              
Specialty fibres                                               143              
(USA)               282      189     49        (10)   184                       
Group services,      (351)    (245)  (158)      (51)  (155)    (94)             
intergroup and                                                                  
                    12 849  8 710   1 035      747   6 508    4 756             
Decorative coatings -         654    -          44    -        (5)              
Specialty chemicals -         15     -          (3)   -       -                 
Specialty fibres     1 464   1 949    155       19      116    213              
14 313  11 328  1 190      807   6 624   4 964              
Net assets consist of property, plant, equipment, investment property and       
goodwill, inventory, accounts receivable less accounts payable.                 
Cash flow statement                                                             
2008        2007                  
                                              R millions  R millions            
Cash generated by operations                    1 590       1 122               
Dividends received                              12          12                  
Financing costs                                 (276)       (173)               
Interest received                               30          30                  
Taxes paid                                      (232)       (196)               
Changes in working capital                      (921)       (601)               
Expenditure relating to non-current provisions  (71)        (67)                
Expenditure relating to                                                         
restructuring/retrenchments                    (103)       (1)                  
Cash available from operating activities        29          126                 
Dividends paid                                  (250)       (237)               
Cash applied to operating activities            (221)       (111)               
Cash (utilised in)/generated by investment                                      
activities                                     (1 002)      74                  
Proceeds from disposal of investments and                                       
businesses                                     23          17                   
Proceeds from disposal of discontinued                                          
operations                                      -          761                  
Investments                                     (102)       (59)                
Net capital expenditure                         (923)       (645)               
Net cash utilised                               (1 223)     (37)                
Cash effects of financing activities            1 136       108                 
(Decrease)/increase in cash and cash                                            
equivalents                                    (87)        71                   
Cash and cash equivalents at the beginning of                                   
the year                                        428        375                  
Translation gain/(loss) on cash and cash                                        
equivalents                                     90          (5)                 
Classified as held for sale                     13          (13)                
Cash and cash equivalents at the end of the                                     
year                                           444         428                  
Statement of changes in equity                                                  
2008        2007                  
                                              R millions  R millions            
Net profit for the year                         379         467                 
Dividends paid                                  (250)       (237)               
Revaluation of derivative instruments           6           (1)                 
Foreign currency translation differences net                                    
of deferred tax                                146         (8)                  
Changes in the Group                            (3)         (17)                
Other                                           *           (2)                 
Net increase in equity for the year before                                      
share repurchase                                278         202                 
Share repurchase                                (238)       -                   
Equity at the beginning of the year             3 929       3 727               
Equity at the end of the year                   3 969       3 929               
Made up as follows:                                                             
Issued ordinary capital                         215         453                 
Non-distributable reserves                      427         271                 
Surplus arising on revaluation of property,                                     
plant and equipment                            240         243                  
Foreign currency translation reserve net of                                     
deferred tax                                   138         17                   
Other                                           49          11                  
Retained income                                 3 210       3 064               
Preference capital                              6           6                   
Minority interest                               111         135                 
                                               3 969       3 929                
*nominal amount                                                                 
Other salient features                                                          
                                              2008        2007                  
                                              R millions  R millions            
Capital expenditure - property, plant and                                       
equipment                                      1 044       688                  
- expansion                                     683         381                 
- replacement                                   361         307                 
Capital commitments                             978         1 251               
- contracted for                                550         340                 
- not contracted for                            428         911                 
Future rentals on property, plant and                                           
equipment leased                               317         253                  
- payable within one year                       144         77                  
- payable thereafter                            173         176                 
Net contingent liabilities and guarantees       115         140                 
Net borrowings                                  2 359       1 001               
Gearing (%)                                     59          25                  
Current assets to current liabilities           1,4         1,4                 
Net asset value per ordinary share (cents)      3 601       3 430               
Depreciation - continuing operations            211         176                 
- discontinued operations                       5           61                  
(1)  Basis of preparation and accounting policies                               
The reviewed condensed consolidated financial results have been prepared in     
accordance with the historic cost convention except for certain financial       
instruments, which have been 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 reviewed condensed consolidated financial results and accounting policies   
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 R3 379 million (2007: R1 722 million).           
(3)  Calculated in accordance with IAS33. 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 scheme. In practice, therefore, there will be 
no future dilution.                                                             
(4)  Net of 11 884 669 (2007: 10 311 120) treasury shares held by a subsidiary  
(5)  Discontinued operations                                                    
Following unsuccessful attempts to dispose of the SANS Fibres businesses, the   
decision was taken that SANS Technical Fibers, Stoneville, USA will run as a    
stand alone - and self-sustaining entity for the foreseeable future and has,    
therefore, been reclassified as a continuing operation with the comparative     
figures adjusted accordingly. The remaining South African businesses of SANS    
Fibres will discontinue manufacturing activities at the end of March 2009. As a 
result, closure costs and impairments in respect of these businesses amounting  
to R204 million before tax have been charged against income in the year to 31   
December 2008.                                                                  
(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 reviewed 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 2007.                                                    
(8)  The preparation of the 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.             
The Group`s revenue from continuing operations grew by an impressive 48% to     
R12,8 billion (2007: R8,7 billion) on the back of rising commodity prices in the
first nine months of the year, as well as volume growth in all of AECI`s        
business segments other than property. Operating profit on continuing operations
increased by 39% to over R1 billion - a performance similar to 2006. Unlike that
year, however, no once-off major property transaction facilitated this          
achievement. Operating margins in respect of continuing operations were         
marginally lower at 8,3% (2007: 8,6%), primarily as a result of high commodity  
prices relating to sulphur and ammonia. Fixed costs remained well controlled.   
Headline earnings of R443 million, equivalent to 412 cents per ordinary share,  
increased by 16% compared to the previous year (2007: 355 cents per ordinary    
Headline earnings per share were adversely impacted by costs associated with the
closure of operations at SANS Fibres (SANS) in Bellville, Western Cape,         
communicated to the market in November 2008. These manufacturing operations will
cease at the end of March 2009. Closure costs were calculated at R148 million   
after tax (R204 million before tax).                                            
The Pension Fund employer surplus account and the plan assets for post-         
employment liabilities incurred losses of R70 million, compared with a profit of
R66 million in 2007. This also had a negative effect on HEPS and was largely    
attributable to the significant fall in South African equity markets, where the 
Pension Fund invests a substantial portion of its assets, in the second half-   
Notwithstanding the currently uncertain economic environment and the challenges 
that the Group faces in 2009, as detailed later in this commentary, AECI`s Board
of directors remains confident that the Company has a robust strategy and the   
correct focus to successfully meet these challenges. Accordingly, an increased  
final ordinary dividend of 150 cents per ordinary share (2007: 141 cents) has   
been declared. This brings the dividend for the year to 240 cents per share,    
compared with 213 cents in 2007.                                                
Mining solutions                                                                
The mining solutions segment`s pleasing revenue growth of 50% can be attributed 
to high commodity prices and volume growth in explosives. Much of the volume    
growth was delivered by the African subsidiaries of African Explosives Limited  
(AEL) while the company`s Surface and Massive business in South Africa grew     
steadily. Customers in the South African Narrow Reef sector were plagued by     
electricity shortages early in the year and by the global slowdown towards the  
end of 2008, both factors impacting negatively on their volumes.                
Operating profit increased by 52% year-on-year after taking into account a      
significant stock write down as a result of falling ammonia prices towards year-
end. Operating margins, affected by the high price of ammonia, remained in line 
with the previous year at approximately 6%. This margin performance remains well
below that of AEL`s global peers.                                               
AEL`s international business recorded solid growth in South East Asia and       
additional global sales channels are being developed. Sustaining the trend set  
in 2007, the DetNet joint venture delivered significant growth in operating     
profit, with increased volumes and further improvements made to established and 
new offerings in its product range.                                             
The capital investment plan remains on target to be completed in 2010. During   
the year, the business invested R389 million in capital projects, of which R132 
million was spent on the Initiating Systems Automation Programme (ISAP). To date
R408 million has been spent on the ISAP investment. A strategic review of this  
investment earlier in the year confirmed that its business case remains         
attractive. Capital investments of R101 million were also made in the rest of   
Africa and Indonesia to support the business`s growth strategy.                 
Specialty chemicals                                                             
Chemical Services Limited (Chemserve) is the specialty chemical arm of AECI and 
its performance continued to exceed expectations, with growth in revenue of 50% 
from R5,6 billion in 2007 to R8,4 billion in 2008 and an increase in operating  
profit of 49% from R570 million in 2007 to R851 million in 2008. Revenue growth 
is attributable to the increase in commodity prices and volumes, primarily in   
the mining and agriculture sectors. Businesses in Chemserve serving market      
sectors such as consumer, automotive and manufacturing, delivered mixed results 
in respect of volume growth but were well managed and improved their margins. In
addition to its exceptional revenue performance, Chemserve`s fixed costs were   
well controlled. Operating margins remained at levels similar to those in the   
prior year. Chemserve continued to explore potential activities outside the     
African continent and has identified promising opportunities for 2009.          
The capital expansion programme approved in 2007 progressed well,               
notwithstanding some timing delays and cost increases due to scope and design   
changes. During the year, R595 million was spent on various strategic growth    
projects. All projects have been reviewed and their business cases remain       
financially and strategically sound. The guar project and one of the two        
xanthate reactors were commissioned in the last quarter. Both are being ramped- 
up as planned. The sulphonation plant at Chloorkop, and the second xanthate     
reactor, the acrylamide and polyacrylamide plants as well as the carbon         
disulphide plant at Sasolburg will all be commissioned in 2009, as will the     
oleochemical plant in Brazil.                                                   
Property managed by Heartland                                                   
Heartland`s operating results of R45 million (2007: R75 million) net of         
remediation costs of R91 million (2007: R83 million) were in line with AECI`s   
forecast at half-year. Heartland has continued to invest in infrastructure to   
make land ready for sale once the market recovers from its current depressed    
position. During the year the company disposed of 35 hectares of land (170      
000mSquared of commercial and industrial bulk rights). Heartland invests in bulk
infrastructure in lieu of bulk services contributions and intends investing     
approximately R900 million over the next five years to release about 1 000      
hectares of land for sale. This investment will be controlled and managed in    
line with expected market conditions over the period.                           
The properties at Modderfontein and Somerset West were valued at R2,5 billion at
mid-year by an independent consultant. No adjustment to the balance sheet has   
been effected to realise this value.                                            
Discontinued operations                                                         
AECI`s decision to exit the industrial nylon fibres and the polyethylene        
terephthalate (PET) businesses of SANS Fibres (SANS) is in line with the        
Company`s long-term strategy of growing its position as a leading supplier of   
specialty products and services to the mining and manufacturing sectors in      
Africa and other international geographies. After protracted but unsuccessful   
attempts to dispose of the businesses, the Board announced the contemplated     
closure of the Bellville businesses. Both will discontinue manufacturing        
activities at end-March 2009. The fibres business at Stoneville, USA, will be   
run as a stand-alone and self-sustaining entity for the foreseeable future. This
business has been accounted for in continuing operations.                       
SANS, as a discontinued operation, delivered an operating profit of R155 million
(2007: R19 million). This excellent performance is due to weakening of the local
currency and an increased off-take of high margin product after the closure     
announcement. Closure costs of R204 million have been provided for in the 2008  
accounts. The SANS property in Bellville will be disposed of in the foreseeable 
The Group`s gearing increased to 59% at year-end (2007: 25%). This increase is  
due to:                                                                         
capital spend exceeding R1 billion, largely to drive the growth strategies of   
the mining solutions and specialty chemicals segments;                          
a net working capital increase of R921 million, owing mainly to increased       
revenue and the increased level of export revenue, where the trade cycle is much
longer. The average working capital ratio to annual gross revenue deteriorated  
to 19,4% (2007: 17,8%);                                                         
a share buy-back of just under 3% of the Company`s issued ordinary share        
capital, at a cost of R238 million.                                             
In the latter part of the year, the Group successfully negotiated term debt with
various financial institutions and now has adequate funding to support its      
growth programme going forward. The increase in borrowings resulted in a        
decrease in headline earnings per share and earnings per share of approximately 
69 cents.                                                                       
Cash interest cover at 4,6 times (2007: 8,1 times) has deteriorated largely due 
to the capital spend and the working capital increase in line with revenue.     
The post-employment medical aid liability was actuarially valued and an         
effective 0,5% adjustment of R123 million was required to increase the liability
at year-end.                                                                    
In September, AECI welcomed Mark Kathan as financial director and chief         
financial officer. He succeeded Roger Williams who resigned in August for family
reasons. At year-end, Lex van Vught retired as a non-executive member of the    
Board, after a 40 year career in the Group.                                     
Outlook and strategic focus                                                     
It appears that the severe impacts of global recessionary trends will remain    
with us through 2009. The mining sector, AECI`s area of focus, has already      
suffered adverse impacts. Lower commodity prices are resulting in lower returns 
for customers in this sector and those supplying the retail, manufacturing and  
automotive sectors have recorded some sharp declines in activity in recent      
months. The outlook for volume growth in 2009, therefore, is not promising.     
The Company will need to be extremely vigilant of the overall business          
environment and avoid short-term decisions that could have adverse long-term    
impacts. 2009 will be a challenging year with much uncertainty and, therefore,  
the preservation of cash will be a priority. Specifically, the Board has asked  
AECI`s management to:                                                           
control working capital aggressively;                                           
progress key capital projects, while delaying replacement capital spend;        
apply cost leadership principles through all businesses and activities;         
maintain market share and margins through continued excellent service.          
It is essential that the Company maintain its level of profitability in 2009 and
that it be well positioned for growth from 2010, when the environment is        
expected to improve and the benefits of the capital investment programme begin  
to accrue.                                                                      
Fani Titi                                 Graham Edwards                        
Chairman                                  Chief executive                       
Woodmead, Sandton                                                               
23 February 2009                                                                
Directors: F Titi (Chairman), GN Edwards (Chief executive)+, FPP Baker+, RMW    
Dunne*, S Engelbrecht, Z Fuphe, KM Kathan+, MJ Leeming, LM Nyhonyha, AC Parker. 
+Executive    *British                                                          
Company secretary: A Kennedy                                                    
Date: 24/02/2009 07:05:05 Supplied by www.sharenet.co.za                     
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