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‘Prudence’ pays off

As a general rule, investors – unless they’re fearless bottom-of-the-cycle riders – wouldn’t be venturing too close to the JSE’s array of building suppliers. Quite a number of listed building suppliers – especially those that listed during the mid-Noughties boom – are in trouble.

But amid the industry horrors there are building supplies companies that remain in fine fettle – most notably, Afrimat [JSE:AFT]. Why has Afrimat – soundly profitable and paying dividends – emerged from the building sector downturn relatively unscathed? Certainly Afrimat – which owns quarries and sand mines, ready-mix batching plants and facilities to manufacture concrete products – doesn’t have a unique operational structure or a significant brand differentiation.

Finweek reckons the major difference is that Afrimat, which is well known for its conservative (or should we rather say “prudent”?) management under Andries van Heerden, never got its balance sheet in a twist. And probably the major reason it didn’t see its balance sheet buckle in bad times was due to its steadfast refusal to join the wild and woolly industry consolidation party between 2006 and 2008.

Perhaps it was the knowledge that its operations were already sufficiently diversified that helped keep Afrimat out of the M&A melee.

The spree of corporate activity among SA’s building suppliers saw mainly newly listed contenders falling over each other to buy growth and market share at “peaked” earnings multiples. And the market loved it… But when the downturn rolled in, Afrimat still had a solid balance sheet as well as reassuring cash flows, allowing it the luxury of repurchasing its own shares at attractive prices and also to restructure an improved empowerment deal. Afrimat was also able to pick up quality assets on the cheap – such as the recently acquired (and already profitable) Glen Douglas operation, which we reckon is going to add considerable impetus to its bottom line once the business is right-sized.

There is considerable value to be taken from Afrimat’s example… which will hopefully be remembered the next time a listings boom rolls round. 
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