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Rates crimp Wearne profits

Johannesburg - Rising interest rates have reduced the profits of ready-mix concrete supplier WG Wearne, with record fuel increases following closely behind, analysts said on Wednesday.

Paul Theron, an analyst at Vestact, said that even though the company had reported headline earnings of R39.2m for the full year to end-February, profits could have been higher if it hadn't been for rate increases and an upsurge in fuel prices.

Theron explained that the 267.2% increase in the group's net interest paid was partially because of a new interest-bearing liability on new hire-purchase agreements (worth R97.2m), but rising interest rates were also a "big factor" in crimping profits.

The South African economy has seen nine interest rate hikes of 50 basis points each since June 2006, placing companies and citizens under severe pressure.

However, Theron said that the company performed well over the period, with the market cheering the results by lifting the group's share price over 5% to 310c following the release of the results.

For the period, WG Wearne's revenue grew 53% to R538.8m. Earnings before interest, tax, depreciation and amortisation climbed 86% to R110.2m and headline earnings rose 51%.

Wearne's CEO John Wearne said that the group reported positive results despite high rainfall, rising interest rates and record fuel costs.

Power cuts dim numbers

But national power utility Eskom also left a cloud on the company's results, as the parastatal was forced to cut power to parts of the country due to electricity supply constraints.

Power cuts in December, January and February reduced the company's revenue from its crushing plants. The plants lost approximately R6 500 an hour when they stood without electricity and in January alone, losing over 60 hours of work as a result.

"This affected our results dramatically. We expected a 50% growth in headline earnings per share, but we were negatively affected by power cuts," said Wearne.

The company reported a 37% climb in headline earnings per share to 26.9c over the period.

Wearne said the company has put measures in place, by purchasing R10m in generators for uninterrupted supply of electricity.

'Huge growth potential

According to Theron, WG Wearne, which was established in 1910 and listed in 2006, is still a company that has huge growth potential.

Major projects it is involved in include the supply of R50m in ready-mixed concrete to the FNB Soccer City stadium and a R10m contract drilling at De Beers Voorspoed diamond mine.

Another contract for R9m includes crushing for the resurfacing of the N2 highway in the former Eastern Cape.

The company has also set its eyes on the Gauteng freeway project, which is set to add an extra lane made from concrete to the freeway around Gauteng, according to Wearne. "We are targeting it to get a stake in the concrete work," he said.

Theron added that the growth potential of the company, together with the earnings reported on Wednesday were strong catalysts for demand in the small stock.

"Even though it is a tiny stock in terms of market cap, I think it could grow faster. The indication of underlying growth rate is very high and the company has done some earnings-enhancing deals. It's looking pretty attractive after today's results," said Theron.

Fin24.com

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