Key message: The promise of earnings growth and stable operations needs to be delivered on in FY26 to maintain operating credibility.
- Afrimat recently hosted an Investor Day and we update our earnings after this event.
- Key takeaways from the event: Afrimat has been negatively impacted by a number of internal and external factors recently and earnings have suffered as a result. However, progress is being made on the key earnings drivers – Nkomati and Cement. It seems that 1H FY26 will still involve some headwinds but these businesses should start to contribute meaningfully from 2H FY26.
- In the cement division, shutdowns have been completed on Kiln 3 and 4. Kiln 3 is operating at an OEE of 60% and Kiln 4 was at this level prior to the shutdown. The two kilns are now primed to run at the expected 1.2mtpa output that should deliver a profit at normal industry EBITDA margins of at least 10%. Maintenance capex for the cement division should be approx. R65m per annum.
- In the iron ore division, disruptions at AMSA in the prior year impacted local sales significantly. The run rate in 2H FY25 and FY26 so far has been good – expected sales for FY26 is on track for at least 1.2mt. The purchase of the Salene iron ore rights adds to reserves and Doringfontein is the next deposit to be exploited. The Jenkins LOM of 20 years increases to 24 years with the adjacent Salene reserves.
- Nkomati has been a disappointment and slow to ramp up. Conditions in the u/g mine have been more difficult than expected and a change in mine plan and management was needed. The open cast operations had been held up by environmental approval delays and moving of graves and water Eskom lines. This is now largely complete and an optimised mine plane can now be followed in the o/c operations.
- We continue to expect a better performance in FY26 with an improvement in local iron ore sales, a better result from Nkomati and the cement business to break even at least. 1H FY26 is still likely to be impacted by some of the above factors and we reduce our FY26 HEPS forecast to 436c (from 563c) largely due the weaker 1H. Afrimat has a number of balls in the air at the moment and the next year will be key to settling the portfolio into stable operations and delivering the earnings that are promised for the operations.
- We adjust our Target Price to R63.40 (from R70).