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THERE’S SOMETHING to be said for being in the wrong place at the wrong time. That’s been the luckless fate of one of South Africa’s chemical majors – Afrox – over the past few years, characterised by a southbound share price and earnings stream. However, Afrox’s latest attempt at resurrecting its fortunes demonstrates sound management – although market commentators say it’s unlikely to send them hurrying to buy the share.
The acquisition in question is of technology and equipment worth R97m for a new carbon dioxide plant. Carbonated soft drinks makers are the main consumers of carbon dioxide and, to a lesser extent, industries involved in metallurgy. “The plant it’s replacing is old and inefficient relative to the current technological-advanced plants,” says Slabbert van Zyl, research analyst at Oasis Group. “The new plant will have a useful life of around 20 years and with CO2 demand expected to remain strong, it will generate attractive returns for the company over the medium to long term.”
Another analyst says carbon dioxide production services the stable side of the business, which is traditionally less susceptible to economic cycle variations. “It’s not a bad strategy, but it still doesn’t mean I’d rush out and buy the stock,” he added.
So what’s gone wrong at Afrox? Some of its problems are untimely management decisions: for example, Afrox invested heavily in capacity in its significant cylinder business at the peak of the cycle in 2006. The cylinder business supplies consumer industries, such as restaurants, so when the recession took a grip in 2008 Afrox was stuck in an extremely over-capacitated business. To an extent it’s still operating in that environment. The consumer recovery has been slow on the uptake, which means Afrox has suffered alongside the industries it supplies.
Manufacturing is another key sector, whose decline over the past two years has been to the company’s detriment – almost so, says Van Zyl, that the steady decline in its earnings over the same period has been “inevitable”.
The rand’s strength has been an additional aggravating factor and Afrox found itself unable to compete with imported products from Asia. Welding products proved to be its Achilles heel. Late last year Afrox announced write-downs at its manufacturing plant in SA – in effect, exiting the welding products business and going the alternative route of importing branded rods from Asia at a cheaper price than it could produce them here. “It was a tough and brave decision by management,” says Van Zyl.
Another setback for Afrox was the fact the Department of Energy placed a limit on the price of liquefied petroleum gas (LPG) – which the company distributes under the HandiGas brand – of around R5 218/metric ton in mid-2010. The price ceiling has contributed to negative sentiment about Afrox’s share price, says one analyst. Its price speaks for itself and any LPG-related bad press was just a blip over a long-term negative trend.
Afrox’s share price has consistently underperformed the JSE All Share for the past five years. Assuming 2007 as the base year, its share price has fallen over 20%. Over the same five-year period the All Share has appreciated by close to 80%.
So after a combination of bad luck and some difficult decisions, Afrox is unlikely to turn the corner this year. The medium and long term will have a more optimistic prognosis. Afrox is still a market leader in many of the fields in which it operates and its increased manufacturing capacity will further act in the group’s favour once manufacturing gains sustainable momentum.
The acquisition in question is of technology and equipment worth R97m for a new carbon dioxide plant. Carbonated soft drinks makers are the main consumers of carbon dioxide and, to a lesser extent, industries involved in metallurgy. “The plant it’s replacing is old and inefficient relative to the current technological-advanced plants,” says Slabbert van Zyl, research analyst at Oasis Group. “The new plant will have a useful life of around 20 years and with CO2 demand expected to remain strong, it will generate attractive returns for the company over the medium to long term.”
Another analyst says carbon dioxide production services the stable side of the business, which is traditionally less susceptible to economic cycle variations. “It’s not a bad strategy, but it still doesn’t mean I’d rush out and buy the stock,” he added.
So what’s gone wrong at Afrox? Some of its problems are untimely management decisions: for example, Afrox invested heavily in capacity in its significant cylinder business at the peak of the cycle in 2006. The cylinder business supplies consumer industries, such as restaurants, so when the recession took a grip in 2008 Afrox was stuck in an extremely over-capacitated business. To an extent it’s still operating in that environment. The consumer recovery has been slow on the uptake, which means Afrox has suffered alongside the industries it supplies.
Manufacturing is another key sector, whose decline over the past two years has been to the company’s detriment – almost so, says Van Zyl, that the steady decline in its earnings over the same period has been “inevitable”.
The rand’s strength has been an additional aggravating factor and Afrox found itself unable to compete with imported products from Asia. Welding products proved to be its Achilles heel. Late last year Afrox announced write-downs at its manufacturing plant in SA – in effect, exiting the welding products business and going the alternative route of importing branded rods from Asia at a cheaper price than it could produce them here. “It was a tough and brave decision by management,” says Van Zyl.
Another setback for Afrox was the fact the Department of Energy placed a limit on the price of liquefied petroleum gas (LPG) – which the company distributes under the HandiGas brand – of around R5 218/metric ton in mid-2010. The price ceiling has contributed to negative sentiment about Afrox’s share price, says one analyst. Its price speaks for itself and any LPG-related bad press was just a blip over a long-term negative trend.
Afrox’s share price has consistently underperformed the JSE All Share for the past five years. Assuming 2007 as the base year, its share price has fallen over 20%. Over the same five-year period the All Share has appreciated by close to 80%.
So after a combination of bad luck and some difficult decisions, Afrox is unlikely to turn the corner this year. The medium and long term will have a more optimistic prognosis. Afrox is still a market leader in many of the fields in which it operates and its increased manufacturing capacity will further act in the group’s favour once manufacturing gains sustainable momentum.
