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KAP INDUSTRIAL HOLDINGS LIMITED - Pre-Closed Period Operational Update for the June 2020 Financial Year and Trading Statement

Release Date: 26/06/2020 17:00
Code(s): KAP     PDF:  
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Pre-Closed Period Operational Update for the June 2020 Financial Year and Trading Statement

KAP INDUSTRIAL HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1978/000181/06)
Share code: KAP
ISIN: ZAE000171963
(“KAP” or “the Company”)


PRE-CLOSED PERIOD OPERATIONAL UPDATE FOR THE JUNE 2020 FINANCIAL YEAR
AND TRADING STATEMENT


The Coronavirus Covid-19 pandemic (“Covid”) continues to impact various aspects of global
society, with serious ramifications for the global economy. The severity of the lockdown
restrictions imposed in South Africa had a devastating effect on the South African economy.

FINANCIAL AND LIQUIDITY REVIEW

The board of directors of KAP (“Board”) is pleased to advise that the Company continued to
generate positive operating profit before depreciation, amortisation and capital items
(“EBITDA”) and positive cash flow from operations throughout the various levels of lockdown,
despite the significant restrictions imposed on some of the Company’s operations and the
general reduction in consumer spending during this period. This reflects the resilience of
KAP’s diversified industrial business model and positions the Company well for a post-Covid
recovery.

The Company’s financial and cash-flow forecasts continue to indicate that it will remain within
its existing banking facilities and will not breach relevant financial covenant ratios. In addition,
these forecasts indicate that the Company will have sufficient banking facilities and liquidity to
settle the R500 million listed corporate bond, KAP010, on maturity in September 2020.

DIVISIONAL OPERATIONAL REVIEW

The Integrated Timber division performed well for the year up to the 27 March 2020
lockdown. Demand for its products remained buoyant and major maintenance and upgrade
projects at its Ugie and Piet Retief particleboard plants were completed on budget and both
plants were successfully recommissioned. This division recommenced operations on a
phased approach during the lockdown, with Southern Cape operations recommencing on
20 April 2020, the Boksburg plant on 1 May 2020, the Ugie plant on 15 May 2020 and finally
the Piet Retief plant on 10 June 2020. Although its operations are not yet running at full
capacity, market demand is showing steady weekly growth, supported by a new product range
which the division successfully launched on a virtual platform during lockdown, which attracted
almost 2,000 customers and end-users.

The Automotive Components division was severely impacted by Covid due to some
international automotive assembly customers suspending operations before the official South
African lockdown, which had a significant impact on the division already in March 2020. Year
to date performance at 29 February 2020 was ahead of prior year performance in spite of
subdued automotive retail sales and lower new assembly volumes. The post-lockdown
recommencement of operations has been slow due to a phased start-up by its customers and
significantly reduced new automotive assembly volumes. All operating units are now active
albeit at materially lower output levels and as a consequence, the division has commenced
with restructuring activities in order to right-size its operations for lower anticipated future
automotive assembly and retail sales volumes.
The Integrated Bedding division performed well for the year up to the 27 March lockdown,
remaining in line with prior year profits despite a subdued furniture retail sector. The division
was able to operate its non-woven textile production lines throughout lockdown with strong
demand from both the medical and agricultural sectors and it produced a small volume of
medical grade foam mattresses. Its operations in Namibia were permitted to recommence one
month earlier than in South Africa and managed to also supply customers in Botswana,
thereby performing well for the year to date. The division’s primary operations at its foam,
textile and mattress plants all recommenced with effect from 1 June 2020, under lockdown
level 3. Although still operating below full capacity, current demand for its bedding products is
satisfactory.

The Polymers division operated throughout the lockdown period, supplying essential
products, primarily into the food packaging sector. Although the division was not able to
operate at full capacity, efficiency levels were not unduly affected by the lower operating levels
or supply chain disruptions. Demand for its products remained stable throughout the lockdown
and has shown steady improvement as restrictions have been eased. Sales and production
volumes are reflected as follows:

                                                  PET                       HDPE                    PP
                                             Period   Period            Period   Period       Period   Period
                                              FY20     FY19              FY20     FY19         FY20     FY19
 Sales volumes (tonnes)                     178 962 185 223            143 276 141 521       102 009 106 227
 Production volumes (tonnes)                189 296 193 634            140 754 148 143       104 021 106 611
 Average R/USD exchange                       15.54    14.15             15.54    14.15        15.54    14.15
PET – Polyethylene terephthalate | HDPE – High density polyethylene | PP – Polypropylene.
Period refers to eleven months from 1 July to 31 May.


Margins on PET remained under severe pressure due to global supply and demand factors,
exacerbated by the recent collapse in the oil price. The division was, however, provided with
increased protection against imports with the International Trade Administration Commission
(ITAC) increasing the general import tariff on PET from 10% to 15% with effect from 30 March
2020, while the previously provisional anti-dumping duties against certain Chinese firms were
gazetted by the Department of Trade and Industry (DTI) on 19 May 2020. Downward pressure
on HDPE margins continued to intensify due to global manufacturing capacity expansions and
subdued demand. Although a sustained lower oil price will have a positive effect on ethylene
raw material pricing and the division’s HDPE margins going forward, management continues
to engage with its primary supplier in order to secure more favourable ethylene supply terms.
PP margins remained at acceptable levels compared to the prior period.
The raw material margin changes on the various polymers are reflected as follows:
                                                Margin variance            Margin variance
                                                Period FY20 vs             Period FY20 vs
                                                  Period FY19#                      1H20*
 PET                                                     (39%)                         3%
 HDPE                                                    (34%)                      (38%)
 PP                                                         5%                      (11%)
# - Eleven months ended 31 May 2020 compared to the eleven months ended 31 May 2019.
* - Five months ended 31 May 2020 compared to the six months ended 31 December 2019.


The Contractual Logistics – South Africa division performed well for the year up until the
27 March lockdown, continuing to show significant efficiency improvements and gains in
market share as a result of securing meaningful new contracts. Financial performance of the
division at this stage was well above the prior period. A significant portion of this division was
able to operate throughout lockdown, providing logistics services in the food, packaging, fuel
and chemical industries operating in the essential services value chains. Its mining, cement
and general freight operations could only recommence operations on a phased basis from
lockdown level 4. With the exception of food distribution, general logistics activity reduced
substantially during lockdown level 5, but has subsequently shown steady improvement.
The Contractual Logistics – Africa division found trading conditions challenging for the year
but was successful in renewing a number of significant contracts and securing substantial new
business. The division operates primarily in fuel distribution and agriculture and as such was
able to continue with all of its operations throughout the lockdown period. Both cross border
and in-country fuel distribution volumes did however reduce during lockdown. The seasonal
start-up of agriculture operations was better than expected, enabling the division to ramp up
to full capacity in spite of Covid related restrictions. The implementation of new contracts
secured and contract renewals is progressing ahead of expectations, thereby providing good
growth opportunities for the division.

The Passenger Transport division continued its stable performance for the year up to the
27 March lockdown, with the restructuring of certain underperforming contracts showing good
improvement. A sustained lower diesel price also provided relief to the division and will
continue to do so at current levels. The division was able to continue with limited operations
in South Africa during lockdown level 5 and received standing kilometre compensation on
certain contracts where it was unable to operate. The division’s commuter and personnel
operations have seen a steady increase in activity through level 4 and into level 3, while
tourism and intercity travel operations remain suspended. Its operations in Mozambique
continued to grow and have been unaffected by Covid.

TRADING STATEMENT

In terms of the Listings Requirements of the JSE Limited, the Company reported on 26 March
2020 that it was satisfied that a reasonable degree of certainty existed that the Company’s
earnings would be more than 20% lower than in the previous reporting period due mainly to
depressed global polymer margins and the impact of Covid, together with the resultant
potential impairment of assets in terms of the Company’s annual impairment testing.

While the Company’s annual impairment testing is not yet complete, a reasonable degree of
certainty exists that EBITDA from continuing operations for the twelve months to 30 June 2020
will be between 19% and 28% lower than in the prior year and operating profit before capital
items from continuing operations will be between 35% and 48% lower than in the prior year.
Similarly, headline earnings per share (“HEPS”) and earnings per share (“EPS”) is expected
to be at least 45% lower than the prior year before the effect of any potential impairments.

A further trading statement will be issued in terms of the Listings Requirements of the JSE
Limited as soon as there is a reasonable degree of certainty as to the likely range of the
expected decrease in HEPS and EPS, taking into account any potential impairments.

OUTLOOK

Although the current situation is unprecedented, uncertain and constantly evolving, the Board
is confident that management is focussing on the right issues and that the Company is being
well managed through this crisis. Covid has highlighted certain areas for improvement in the
Company and revealed some new opportunities for growth, which management is pursuing.
The Board remains of the view that there will be a slow, but steady recovery in economic
conditions for which the Company is well positioned.

Covid infection rates in the Company remain extremely low and management continues to
focus on ensuring a safe working environment for its employees during this challenging time.

The financial information on which this announcement is based, has not yet been reviewed or
reported on by the Company’s auditors.
By order of the Board
KAP Secretarial Services Proprietary Limited

Stellenbosch
26 June 2020

Sponsor
PSG Capital

Date: 26-06-2020 05:00:00
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