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KAP INDUSTRIAL HOLDINGS LIMITED - Operational update for the period 1 July 2019 to 30 November 2019

Release Date: 09/12/2019 15:00
 
Wrap Text
Operational update for the period 1 July 2019 to 30 November 2019

KAP INDUSTRIAL HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1978/000181/06)
JSE alpha code: KAP
(“the Company”)

OPERATIONAL UPDATE FOR THE PERIOD 1 JULY 2019 TO 30 NOVEMBER 2019

The following operational update is published in order to provide transparent guidance to
stakeholders in relation to the performance of the Company. It is the Company’s objective to
publish an operational update of this nature every six months.

General
The macroeconomic and socio-political environment in South Africa remained challenging
during the period under review with limited real economic growth, subdued consumer
spending and high levels of unemployment.

Integrated Timber
The division’s panel operations performed well for the period with production volume growth
in anticipation of two major upgrade projects, which are planned for the second half of the
year. These projects will expand particleboard capacity and improve efficiencies at both the
Ugie and Piet Retief plants and are scheduled to be commissioned in February and March
2020 respectively. The recently commissioned MFB upgrading press performed above
expectation, thereby supporting the division’s strategy of increased value-added product
sales. The resin operations performed well for the period, however production and sales
volumes are likely to decline in the second half of the year due to the loss of a material contract.

Management in the division’s forestry, sawmilling and pole operations in the southern Cape
continued to successfully manage the impact of the 2017 and 2018 plantation fires, effectively
completing the harvesting of all utilisable timber. A project to re-configure the processing
plants to better utilise the future available timber in the region will be completed in the second
half of the year. Demand for structural timber and agricultural poles remained stable.

Automotive Components
Following a strong first quarter, new vehicle assembly volumes slowed significantly during the
second quarter with certain OEM’s closing during November for an extended annual
shutdown. Industry new vehicle assembly volumes are expected to reduce slightly for the full
year as a result of subdued global vehicle demand and preparations for certain model
replacements in South Africa.

The division’s aftermarket accessories operations were successfully rationalised and
restructured during the period. In this regard, the MAXE operations continued to perform well,
despite subdued domestic vehicle sales volumes. The remaining aftermarket accessories
operations were successfully disposed of with effect from 1 December 2019.

Integrated Bedding
The division operated well for the period. The Restonic mattress manufacturing operations
were well prepared to manage and execute on elevated sales volumes during the Black Friday
promotions, supported by increased production volumes. Vitafoam, the division’s industrial
foam operations, were negatively impacted by the lower volumes in the furniture sector. The
DesleeMattex mattress fabric operations showed improvement post a restructure in July 2019,
with increased focus on customer service, product management and plant efficiencies.
Polymers
The performance of the Polymers division continued to be adversely impacted by subdued
global demand, production capacity expansions and global trade flows, all of which placed
significant pressure on margins. The operational performance of the polymer plants remained
strong, with stable production volumes and increased sales volumes for the period.

                                                     PET                     HDPE                   PP
                                             Period        Period       Period   Period      Period   Period
                                              FY20          FY19         FY20     FY19        FY20     FY19
 Sales volumes (tonnes)                      93 505        79 235       68 921   61 927      53 562   49 696
 Production volumes (tonnes)                 84 902        84 887       65 902   70 562      51 640   49 677
 Average R/USD exchange                       14.75         14.17        14.75    14.17       14.75    14.17
PET – Polyethylene terephthalate | HDPE – High density polyethylene | PP – Polypropylene
Period refers to five months from 1 July to 30 November.

The continued variability in the raw material margins per ton is reflected as follows:

                                                Margin variance            Margin variance
                                                Period FY20 vs             Period FY20 vs
                                                  Period FY19#                      2H19*
 PET                                                     (48%)                      (22%)
 HDPE                                                    (35%)                         1%
 PP                                                         4%                        18%

# - Five months ended 30 November 2019 compared to the five months ended 30 November 2018.
* - Five months ended 30 November 2019 compared to the six months ended 30 June 2019.

Significant progress was made in regaining local PET markets, which supported volume
growth, however at significantly reduced margins. PET exports were scaled back significantly
during the period due to deteriorating global selling prices and margins. Good progress was
made in reducing inventory levels towards targeted levels. HDPE operations continued to feel
the effects of expanded global production capacity with resultant lower global margins.
Demand for HDPE remained strong and sales volumes improved. PP operations performed
well for the period, showing increased volumes and improving margins.

Despite low global margins, the division remains profitable and cash generative and is well
positioned to benefit from any cyclical upswing.

Contractual Logistics – South Africa
The recent restructure of the division has shown positive results during the period with slight
revenue growth and margin improvement. With the restructure complete and the cost base
reduced, management is focused on growing the contractual revenue base of the business
through market share gains.

Contractual Logistics – Africa
This was a challenging period for the division with multiple contract renewal negotiations taking
place in an environment of lower demand and increased competition. The division made good
progress during the period in retaining existing contracts, although at lower margins. New
contracts have been secured by the division which will allow it to expand operations during
the second half of the year.

Passenger Transport
Escalating unemployment rates and subdued consumer spending have resulted in lower
activity levels in the division. The commuter and personnel travel operations performed
satisfactorily for the period. The intercity and tourism operations continued to experience low
industry passenger numbers and aggressive competition. Renegotiation of onerous conditions
and the restructure of operations in certain commuter contracts are ongoing.

Outlook
The economic environment is expected to remain depressed for some time. Management
therefore remains focused on the execution of the Company’s strategy, the optimisation of its
operations, market share growth and generation of cash. The balance sheet of the Company
remains strong, with sufficient capacity and liquidity to facilitate further capacity expansion
opportunities and acquisitions, in line with the group’s strategy to grow earnings and enhance
shareholder returns. Management will drive organic expansion activities and will remain very
selective in terms of acquisition opportunities at this time.


Stellenbosch
9 December 2019

Debt Sponsor
Nedbank Corporate and Investment Banking

Date: 09-12-2019 03:00:00
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