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Afe - Aeci Limited - Condensed Consolidated Unaudited Interim Financial

Release Date: 26/07/2011 07:08:02      Code(s): AFE
AFE - AECI Limited - Condensed consolidated unaudited interim financial         
results for the half-year ended 30 June 2011                                    
AECI LIMITED                                                                    
(Incorporated in the Republic of South Africa)                                  
(Registration No. 1924/002590/06)                                               
Share code: AFE ISIN No.: ZAE000000220                                          
("AECI" or "the Company")                                                       
CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL RESULTS FOR THE HALF-YEAR    
ENDED 30 JUNE 2011                                                              
*    Good safety performance maintained                                         
*    Revenue from continuing operations up 10% to R5 969 million                
*    HEPS up 11% to 265c                                                        
*    Dividend of 78c declared                                                   
*    All strategic growth projects in ramp-up phase                             
COMMENTARY                                                                      
Performance                                                                     
The Group delivered an improvement in performance for the first six months of   
2011 compared to that for the corresponding period last year, despite           
volatile trading conditions in both the mining and manufacturing sectors.       
Revenue from continuing operations increased by 10% to R5 969 million (2010:    
R5 425 million), assisted by global increases in commodity prices but           
tempered by the continued strength of the rand, which averaged R6,88/1US$ in    
the half-year (2010:  R7,50/1US$).  Volumes were 2,3% higher.  Headline         
earnings of R284 million improved by 11% (2010: R255 million) and profit from   
operations was 13% higher at R546 million (2010: R484 million).                 
Headline earnings were negatively impacted by a higher tax charge due to the    
higher dividend paid in May as well as additional tax provisioning resulting    
from the Founders Hill judgement.                                               
The Board has declared an interim cash dividend of 78 cents per ordinary        
share (2010:  70 cents cash dividend).  The dividend declaration is published   
in full elsewhere.                                                              
In 2010, the Group achieved its best ever safety performance.  A high degree    
of focus in this area was maintained and additional initiatives are being       
implemented to achieve further improvements.                                    
Mining services                                                                 
Revenue from AEL Mining Services ("AEL") was 11% higher at R2 542 million       
(2010: R2 286 million), driven by a 16% escalation in ammonia prices.  This     
also resulted in higher working capital levels.  Overall volumes grew by        
2,5%.  Profit from operations improved by 8% to R200 million (2010: R185        
million) and the operating margin was 7,9% (2010: 8,1%).  The mining services   
environment has become more competitive and a substantial portion of AEL`s      
business was subjected to tender processes in the half-year.  Following these   
processes, AEL was able to retain more than 90% of its business and the         
market share changes did not impact performance for the period.  A mechanical   
failure on one of AEL`s nitric acid plants, at Modderfontein, negatively        
impacted results for the period.                                                
In South Africa, strong growth was recorded in AEL`s Surface and Massive        
businesses servicing the platinum, diamonds and chrome mining sectors.          
Volumes in deep level mining continued to decline.  Coal mining was adversely   
affected by exceptionally high rainfall in the early part of the year.          
Good growth was delivered by the copper mining sector in Central Africa and     
diamond mining in Botswana continued to perform creditably.  The contribution   
from gold mining in West and East Africa remained flat.                         
The International business maintained its steady growth trend in South East     
Asia, notwithstanding the effects of very high rainfall in the period.          
Pleasing ramp-up of the Initiating Systems Automation Programme (ISAP)          
project at Modderfontein continued, with about 40 million detonators            
manufactured by end-June.  The target date for full ramp-up of ISAP remains     
the first half of 2012. The retrenchment of employees from conventional shock   
tube manufacturing facilities has commenced although the process has been       
somewhat delayed to an extent owing to high shocktube demand, the building of   
inventories and a fire on a conventional plant.  As a result, full ISAP-        
related cost savings are only expected in the second half of the year.          
Specialty chemicals                                                             
Revenue improved by 8% to R3 280 million (2010: R3 039 million).  Volume        
growth for the period reflected a moderate improvement of 2%, owing to the      
recovery in mining and in certain manufacturing sectors.  The rally in          
commodity chemical prices drove prices higher although this was offset to       
some extent by the effects of the strong local currency.  Profit from           
operations improved by 11% to R386 million (2010: R349 million) and the         
operating margin was 11,8% (2010: 11,5%).                                       
Excellent performances were delivered by ImproChem, Industrial Oleochemical     
Products, Lake International and Resitec and the results of Crest Chemicals     
were also pleasing.  Senmin had a slow start to the year due to delays in the   
final certification of its polyacrylamide facility.  For the six months         
overall, however, the business delivered another solid performance.  The new    
xanthates dryer is currently being installed and commissioned and will remove   
the bottleneck that previously constrained plant output.                        
As of 1 July 2011, Infigro and SA Paper Chemicals (SAPC) were merged.  This     
new structure provides the business with critical mass to operate in the        
focused areas of paper chemicals, perlite and leather chemicals.                
Two acquisitions were completed in the second quarter.  Qwemico has been        
integrated into Plaaskem and T&C Chemicals into ImproChem and SAPC.  The        
acquisition of the remaining 20% of Cobito was finalised in July 2011 and the   
acquisition of Croxton Chemicals, to be integrated into Crest Chemicals, will   
be finalised in the second half-year.  The total investment for these           
transactions is R161 million.                                                   
Property                                                                        
Heartland`s operating profit improved by 24% to R36 million (2010: R29          
million), primarily based on income from the leasing and services businesses.   
The property development market remained subdued and no marked changes to       
this environment are expected in the immediate future.                          
Two property sales were finalised during the period.  This is somewhat          
encouraging as is the increased rate at which enquiries are being received      
for industrial, warehousing and office space.  Bulk infrastructure              
development, in line with market demand, is commencing at Longlake in           
Modderfontein.                                                                  
In the current rental portfolio, which has performed extremely well in the      
past, the trend is towards increased vacancy rates and a reduction in tenant    
retentions.  This is attributable predominantly to the weakening of South       
Africa`s manufacturing sector.                                                  
Specialty fibres                                                                
SANS Technical Fibers, in the USA, achieved a 28% improvement in revenue to     
R165 million (2010: R129 million), with volume growth of 14% in a global        
growth environment for the automotive and footwear sectors.  Profit from        
operations more than doubled to R27 million (2010: R10 million).  The higher    
operating margin of 16,4% is largely due to enhanced efficiencies resulting     
from additional capacity installed in 2010.                                     
Finance and taxation                                                            
The Group`s strategic capital investment programme is nearing completion.  In   
the first half, R229 million (2010: R305 million) was invested with R109        
million of this for expansion projects.                                         
Gearing increased to 49% from 40% in December 2010, mainly owing to an          
increase in working capital.  Higher commodity prices and the building of       
inventories, to minimise the disruption of products and services to customers   
during the period of anticipated industrial action, were key in this regard.    
Net working capital as a percentage of sales was 20,2% (2010: 18,7%) and net    
interest cover was at 7,3 times (2010: 4,8 times).                              
Taxation judgement - Founders Hill (Pty) Limited                                
The Supreme Court of Appeal (SCA) handed down its decision in the Founders      
Hill (Pty) Limited case in May.  The SCA found in favour of the South African   
Revenue Service (SARS) with regard to the capital versus revenue nature of      
proceeds of land sales at Founders Hill.  The SCA held that that the land was   
trading stock when Founders Hill (Pty) Limited acquired it from AECI Limited.   
However, SARS was directed to reverse the interest charged in the assessments   
owing to the fact that AECI Limited had taken tax advice and that proper        
disclosure of the transactions had been made in the relevant tax returns.       
Founders Hill (Pty) Limited has requested leave to appeal the decision of the   
SCA from the Constitutional Court.   SARS and the Minister of Finance have      
lodged an opposing affidavit.                                                   
AECI has provided R40 million for all taxes assessed in respect of three        
other subsidiaries that have tax issues similar to those of Founders Hill       
(Pty) Limited.                                                                  
B-BBEE transactions                                                             
As indicated in February 2011, the AECI Board has pursued the B-BBEE            
transaction that was initially contemplated in 2009.  Two B-BBEE transactions   
are currently being proposed to shareholders:                                   
*    the acquisition of the Kagiso Tiso Holdings consortium`s shareholding in   
    AEL Mining Services in exchange for ordinary shares in AECI;                
*    the issue of new shares to facilitate the establishment of an Employee     
    Share Trust and a Community Share Trust.                                    
Changes to the Board                                                            
At the Annual General Meeting (AGM) of shareholders in May, Fani Titi           
indicated that he will step down as Chairman of the Company at the next AGM,    
scheduled for May 2012.  The Board is pleased to announce that Schalk           
Engelbrecht will assume the role of Chairman at that time.  In the period       
under review, the Board welcomed Liziwe Mda as a Non-Executive Director and     
Nomini Rapoo as Company Secretary.                                              
Outlook and strategic focus                                                     
Historically, the AECI Group trades better in the second half-year owing to     
seasonal effects in agricultural and the consumer sectors.  However, the        
potential impact on Group companies and their customers resulting from the      
current industrial action is of concern.                                        
AECI management`s focus for the rest of 2011 will remain on:                    
*    the successful incorporation of acquisitions into existing businesses in   
the specialty chemicals cluster;                                            
*    the continued ramp-up of ISAP and of Senmin`s new plants;                  
*    the careful management and reduction of working capital levels; and        
*    cost-focused leadership.                                                   
Fani Titi Graham Edwards                                                        
Chairman  Chief Executive                                                       
Woodmead, Sandton   25 July 2011                                                
Income statement                                                                
2011        2010       2010                     
                                First half  First half Year                     
                         %      Unaudited   Unaudited  Audited                  
                         chang  R millions  R millions R                        
e                             millions                 
Revenue?(2)               +10     5 969       5 425      11 569                 
Net operating costs               (5 423)     (4 941)    (10 507)               
Profit from operations    +13     546         484        1 062                  
Net income/(loss) from            1           4          (6)                    
Pension Fund employer                                                           
surplus accounts                                                                
Net income/(loss) from            14          6          (5)                    
plan assets for post-                                                           
retirement medical aid                                                          
liabilities                                                                     
                                 561         494        1 051                   
Interest expense?(3)              (106)       (99)       (173)                  
Interest received                 16          14         21                     
Share of profit of                *           1          2                      
associate companies                                                             
471         410        901                     
Impairment of goodwill            -           -          (28)                   
Impairment of property,           -           (4)        (4)                    
plant and equipment                                                             
Gain on acquisition of            -           -          4                      
subsidiary                                                                      
Profit before tax                 471         406        873                    
Income tax expense                (152)       (117)      (233)                  
Profit for the period             319         289        640                    
Profit for the period                                                           
attributable to:                                                                
- ordinary shareholders           295         269        600                    
- preference                      1           1          2                      
shareholders                                                                    
- non-controlling                 23          19         38                     
interest                                                                        
319         289        640                     
Headline earnings are                                                           
derived from:                                                                   
Profit attributable to            295         269        600                    
ordinary shareholders                                                           
Impairment of goodwill            -           -          28                     
Impairment of property,                                                         
plant and equipment               -           4          4                      
Loss on disposal of               -           -          16                     
subsidiary                                                                      
Profit on disposal of                                                           
property,                                                                       
plant and equipment               (13)        (1)        (5)                    
Profit on disposal of                                                           
associates                                                                      
and investments                   -           (18)       (22)                   
Tax effects of the above          2           1          2                      
items                                                                           
Non-controlling interest          -           -          (4)                    
effects of the above                                                            
items                                                                           
Headline earnings                 284         255        619                    
Per ordinary share                                                              
(cents):                                                                        
Headline earnings         +11     265         238        577                    
Diluted headline                  264         237        575                    
earnings?(4)                                                                    
Basic earnings                    275         251        559                    
Diluted basic                     274         250        558                    
earnings?(4)                                                                    
Dividends declared        +11    78           70         205                    
Dividends paid                    135         62         132                    
Ordinary shares                                                                 
(millions)?(5)                                                                  
- in issue                        107         107        107                    
- weighted average                107         107        107                    
number of shares                                                                
- diluted weighted                                                              
average number                                                                  
of shares?(4)                     108         108        108                    
*Nominal amount                                                                 
Statement of comprehensive income                                               
                                2011        2010       2010                     
                                First half  First half Year                     
Unaudited   Unaudited  Audited                  
                                R millions  R millions R                        
                                                       millions                 
Profit for the period             319         289        640                    
Other comprehensive income net                                                  
of tax:                                                                         
Revaluation of derivative         *           *          *                      
instruments                                                                     
Foreign currency translation      23          17         (84)                   
differences net of deferred tax                                                 
Other                             *           *          *                      
Total comprehensive income for    342         306        556                    
the period                                                                      
Total comprehensive income                                                      
attributable to:                                                                
- ordinary shareholders           320         288        516                    
- preference shareholders         1           1          2                      
- non-controlling interest        21          17         38                     
                                 342         306        556                     
*Nominal amount                                                                 
Statement of financial position                                                 
                                2011        2010       2010                     
                                30 June     30 June    31 Dec                   
                                Unaudited   Unaudited  Audited                  
R millions  R millions R                        
                                                       millions                 
Assets                                                                          
Non-current assets                5 756       5 581      5 667                  
Property, plant and equipment     3 622       3 451      3 564                  
Investment property               446         446        440                    
Goodwill                          1 074       1 063      1 035                  
Pension Fund employer surplus     231         240        230                    
accounts                                                                        
Investments                       26          22         20                     
Loan receivables                  20          12         22                     
Deferred tax                      337         347        356                    
Current assets                    5 461       4 603      4 647                  
Inventories                       2 180       1 828      1 892                  
Accounts receivable               2 421       2 080      2 023                  
Cash and cash equivalents         860         695        732                    
Total assets                      11 217      10 184     10 314                 
Equity and liabilities                                                          
Ordinary capital and reserves     4 489       4 159      4 314                  
Non-controlling interest          169         132        148                    
Preference share capital          6           6          6                      
Total shareholders` interest      4 664       4 297      4 468                  
Non-current liabilities           1 817       2 570      2 200                  
Deferred tax                      117         86         121                    
Non-current borrowings            709         1 697      1 133                  
Non-current provisions            991         787        946                    
Current liabilities               4 736       3 317      3 646                  
Accounts payable                  2 158       1 873      2 176                  
Current borrowings                2 452       1 319      1 368                  
Tax payable                       126         125        102                    
Total equity and liabilities      11 217      10 184     10 314                 
Statement of cash flows                                                         
2011        2010       2010                     
                                First half  First half Year                     
                                Unaudited   Unaudited  Audited                  
                                R millions  R millions R                        
millions                 
Cash generated by operations      807         664        1 654                  
Dividends received                -           -          2                      
Interest paid                     (119)       (143)      (268)                  
Interest received                 16          14         21                     
Income tax paid                   (88)        (112)      (209)                  
Changes in working capital        (731)       (265)      *                      
Expenditure relating to non-      (25)        (1)        (37)                   
current provisions                                                              
Expenditure relating to           -           (4)        (33)                   
retrenchments and restructuring                                                 
Cash (utilised)/available from    (140)       153        1 130                  
operating activities                                                            
Dividends paid                    (146)       (67)       (146)                  
Cash flows from operating         (286)       86         984                    
activities                                                                      
Cash flows from investing         (256)       (280)      (581)                  
activities                                                                      
Proceeds from disposal of         -           32         35                     
investments and businesses                                                      
Investments                       (57)        (7)        (7)                    
Net capital expenditure           (199)       (305)      (609)                  
                                 (542)       (194)      403                     
Cash flows from financing         662         206        (299)                  
activities                                                                      
Finance lease receivables         2           1          11                     
Borrowings                        660         205        (310)                  
Increase in cash and cash         120         12         104                    
equivalents                                                                     
Cash and cash equivalents at                                                    
the beginning                                                                   
of the period                     732         668        668                    
Translation gain/(loss) on cash   8           15         (40)                   
Cash and cash equivalents at      860         695        732                    
the end of the period                                                           
*Nominal amount                                                                 
Statement of changes in equity                                                  
                                2011        2010       2010                     
                                First half  First half Year                     
                                Unaudited   Unaudited  Audited                  
R millions  R millions R                        
                                                       millions                 
Total comprehensive income for    342         306        556                    
the period                                                                      
Dividends paid                    (146)       (67)       (146)                  
Equity at the beginning of the    4 468       4 058      4 058                  
period                                                                          
Equity at the end of the period   4 664       4 297      4 468                  
Made up as follows:                                                             
Ordinary share capital            107         107        107                    
Share premium                     108         108        108                    
Reserves                          189         270        164                    
Property revaluation surplus      237         237        237                    
Foreign currency translation      (56)        22         (81)                   
reserve net of deferred tax                                                     
Other                             8           11         8                      
Retained earnings                 4 085       3 674      3 935                  
Preference share capital          6           6          6                      
Non-controlling interest          169         132        148                    
                                 4 664       4 297      4 468                   
Other salient features                                                          
                                2011        2010       2010                     
                                First half  First half Year                     
                                Unaudited   Unaudited  Audited                  
R millions  R millions R                        
                                                       millions                 
Capital expenditure - property,   229         305        634                    
plant and equipment?(3)                                                         
- expansion                       109         213        385                    
- replacement                     120         92         249                    
Capital commitments?(6)           142         156        88                     
- contracted for                  117         97         49                     
- not contracted for              25          59         39                     
Future rentals on property,                                                     
plant                                                                           
and equipment leased              141         124        196                    
- payable within one year         30          28         96                     
- payable thereafter              111         96         100                    
Contingent liabilities            48          87         97                     
Net borrowings                    2 301       2 321      1 769                  
Gearing (%)                       49          54         40                     
Current assets to current         1,2         1,4        1,3                    
liabilities                                                                     
Net book value per ordinary       4 186       3 878      4 022                  
share (cents)                                                                   
Depreciation                      191         154        332                    
ZAR/US$ closing exchange rate     6,79        7,66       6,65                   
(rand)                                                                          
ZAR/US$ average exchange rate     6,88        7,50       7,32                   
(rand)                                                                          
Industry segment analysis                                                       
           Revenue           Profit from         Net assets                     
operations                                         
           2011       2010   2011        2010    2011      2010                 
           First             First               30 June                        
           half              half                                               
Unaudited         Unaudited           Unaudited                      
           R                 R                   R                              
           millions          millions            millions                       
                                                                                
Mining       2 542      2 286  200         185     2 685     2                  
services                                                    434                 
Specialty    3 280      3 039  386         349     4 055     3                  
chemicals                                                   828                 
Property     194        168    36          29      751       691                
Specialty    165        129    27          10      160       153                
fibres                                                                          
(USA)                                                                           
Group        (212)      (197)  (103)       (89)    (66)                         
services                                                    (111)               
and                                                                             
intersegme                                                                      
nt                                                                              
            5 969      5 425  546         484     7 585     6                   
                                                           995                  
Net assets consist of property, plant, equipment, investment                    
property, goodwill, inventory and accounts receivable, less                     
accounts payable.                                                               
Notes                                                                           
(1)  Basis of preparation                                                       
The condensed consolidated unaudited interim financial results are          
    prepared in accordance with the recognition and measurement requirements    
    of International Financial Reporting Standards, the presentation and        
    disclosure requirements of IAS 34 - Interim Financial Reporting, the        
AC500 series issued by the Accounting Practices Board, the Listings         
    Requirements of the JSE Limited, and in the manner required by the South    
    African Companies Act No. 71 of 2008. Accounting policies have been         
    applied consistently by all entities in the Group and are consistent        
with those applied in the previous reporting period. The preparation of     
    these condensed consolidated unaudited interims financial results for       
    the half-year ended 30 June 2011 was supervised by the Financial            
    Director, Mr KM Kathan CA(SA).                                              
(2)  Includes foreign and export revenue of R1 665 million (2010 first half:    
    R1 460 million).                                                            
(3)  Interest capitalised in the period amounting to R14 million (2010 first    
    half: R46 million).                                                         
(4)  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.                                
(5)  Net of 11 884 699 (2010: 11 884 699) treasury shares held by a             
    subsidiary company.                                                         
(6)  Not included in capital commitments for the current year are               
    acquisitions already approved by the Board amounting to R114 million        
(2010 first half: nil).                                                     
(7)  The preparation of the interim 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 accounting policies            
    involving particular complex or subjective judgements or assessments are    
    deferred tax assets, environmental remediation, asset lives and residual    
values and post-retirement benefit obligations.                             
    Sponsor                                                                     
    RAND MERCHANT BANK (A division of FirstRand Bank Limited)                   
Date: 26/07/2011 07:08:01 Supplied by www.sharenet.co.za                     
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