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Other industrials are a mixed bag, comprising the Industrial Engineering, Industrial Transport and Industrial Metals and Mining sector.
The latter boasts stalwarts Kumba Iron Ore and ArcelorMittal that are all very involved in the steel industry.
After a 40% fall in iron ore prices over the past nine months of the 2009/2010 contract year those companies expect to see significant increases in iron ore pricing this year.
“Market consensus currently indicates increasing iron ore benchmark prices,” Kumba CEO Chris Griffith said at the recent presentation of the company’s annual results.
Major iron ore producers have signalled they’d be seeking increases of at least 40% in benchmark prices this year and analysts have forecast prices will rise by a further 10% next year.
Kumba and ArcelorMittal don’t form part of the three iron ore majors that set benchmark prices annually but rely on the outcome of negotiations for their own pricing.
Griffith said spot prices were currently trading 75% above benchmark prices – an improvement on the 80% to 90% gap reported earlier.
“Iron ore spot equivalent pricing is bullish, with contracts needing to rise by 80% to 90% to match $130/t spot prices. This points to upside risk to our forecasts of a 40% increase for fines and 50% increase for lump in 2010,” Citi Bank stated in its Iron Ore Monthly Monitor.
“Spot prices aren’t a direct indicator of where contract prices will settle, but it gives a clear indication of how tight the market is.”
The three iron ore majors – Vale, BHP Billiton and Rio Tinto – have started yearly price-setting talks with their main customers, China’s steelmakers.
And while Vale and BHP Billiton have sent out a clear message they’re seeking contract parity, the four-decade-old annual pricing system is likely to remain in place for some time.
World crude steel production started to recover during second half 2009, with most major steel producing countries posting an increase in output and Chinese steel production growing 14% year-on-year.
Kumba's steely resolve
However, global steel production was 8% lower at 1.19bn t last year than in 2008.
Kumba has benefited from the pick-up in global steel production seaborne iron ore imports into China, making up for slacking demand in its traditional markets in Europe, South Korea and Japan.
“We expect demand for iron ore to rise further during 2010 as Chinese domestic iron ore production falls and the recovery in steel markets outside China, in our traditional markets, starts to take hold,” Kumba says in its results statement.
Analysts’ forecasts indicate global steel consumption should grow in excess of 5% a year over the next three years, leading to an increase in iron ore demand.
ArcelorMittal expects the market will remain fragile throughout 2010.
It says (in its latest results statement) that strong growth is noticeable in developing markets, such as India, Brazil, Africa, the Middle East and especially China, where the outlook is particularly strong.
In developed markets, on the other hand, prospects are more subdued, especially in the United States and Europe, where only a modest recovery is expected over the near future.
“Stronger steel prices are further supported by rising coal and scrap prices,” it says.
“The average capacity utilisation for the global steel industry improved during the year to 71% in December 2009 from 58% a year earlier.”
ArcelorMittal and Kumba’s December 2008 results are used in the Top 200 comparison and the upcoming release of 2009 results will sketch a clearer picture on what can be expected and what the actual impact of steel prices were on both their bottom lines.
The industrial engineering index paints a clearer picture.
Now, a comparison
It was unable to reach the highpoint of 37 950 at the beginning of 2009 but made a huge comeback from its lowest point of 24 000 points at end-March.
Selecting the three biggest companies by market cap – Hudaco, Invicta and Bell – analysts don’t necessarily feel all are suitable for all investors, even if the sector has pulled its act together.
Following the rapid deterioration of international economies, Bell Equipment finds itself in difficult times.
The group is a very cyclical operation, as displayed by its results for the period ending June 2009.
Furthermore, the fallout in commodity prices should result in less support from the mining industries going forward, which provided the group with strong demand over recent times.
The group's apparent sensitivity to the exchange rate does add additional risk to its profile.
Bell manufactures and distributes a wide range of materials handling equipment, such as articulated dump trucks, front-end loaders, tractor loader backhoes, timber and sugarcane harvesting and loading machines, haulage tractors, graders and excavators.
Analysts say the share offers definite speculative appeal, trading on a 44% discount to its NAV and a 30% discount to the value of its current assets.
However, they advise – due to the uncertainty of the operating environment going forward, its liquidity concerns and its high gearing – investors to avoid the share for now.
However, they do feel that even due to subdued prospects for Hudaco the share presents an opportunity for the more long-term investor.
Hudaco is an importer and distributor of industrial consumable products.
Its main customers operate within the southern African manufacturing, mining, automotive aftermarket and security industries.
Analysts say it’s a good quality company with a high RoE of 389%, attractive operating margins and a solid dividend yield of 5.6%.
Although a difficult year is anticipated, they don’t consider a historic p:e multiple of eight times and p:/NAV ratio of 1.7 times to be an excessive valuation for a company of its quality.
Lastly, Invicta is an investment holding and management company and its operations comprise various importation and distribution of industrial engineering equipment and parts for various sectors.
It’s a solid company with a strong track record and has a consistently good RoE, decent operating margins and a historically good cash flow.
Analysts don’t consider the share to be expensive, trading on a historic p:e multiple of 5.6 times and 1.3 times its NAV.
And its share price is underpinned by a solid dividend yield of 5.8%. Despite possible short-term difficulties they feel the share offers value for the long-term investor.
The last sector included in “other industrials” is Industrial Transportation, which includes newsmaker Super Group.
It may not be the biggest in the sector or the best performing company but it did give the markets a lot to talk about.
Super Group delivered a poor set of results for the year ended June 2009, which was characterised by tough trading conditions, major managerial and operational changes, business disposals and the implementation of a restructuring plan aimed at streamlining it back to its core businesses and competencies.
In that environment revenue from continuing operations declined by 8% to R7.1bn, mainly due to certain low margin contracts not renewed within its Supply Chain SA operations during 2008 and a weaker sales performance by its dealership business.
Operating profit before depreciation was 4% up on the previous year.
Consequently, the operating margin contracted from 9.4% to 8.5%.
Weaker results
The drop in its trading profit and margin is largely attributable to lower sales volumes across the sectors in which Super Group operates, as well as the effect of restructuring and severance costs.
In addition, the strengthening rand resulted in lower translated earnings from operations overseas.
Significantly higher net finance costs resulted profit before tax declining by 55%.
The increase is largely attributable to the adverse mark-to-market fair value adjustments related to interest rate swaps of R47.9m compared against a positive amount of R16.8m for 2008.
That resulted in a decline in interest cover from 2.1 times to 1.4 times, still below our three times cover benchmark.
A lower tax charge resulted in headline earnings only 46% lower than the previous year.
An increase in the number of shares in issue resulted in HEPS from continuing operations declining by 58% to 35c.
But the group reported a total trading loss of R1.3bn, which translated into an EPS loss of 296c, primarily attributed to discontinued operations.
That was primarily due to closure costs, working capital impairments, provision for onerous leases, unusually large claims received by Emerald Insurance and slower consumer spending in its retail businesses.
Super Group has implemented an intensive restructuring strategy that’s set to continue into 2010.
It’s primarily focused on the recapitalisation of the group and the implementation of its realigned business strategy.
The proposed recapitalisation of the group, together with its debt restructuring package, will ease liquidity pressure and create the financial scope to allow the implementation of a value-maximising strategy.
Further focus areas include the recovery and growth effort within Super Group’s area of core competence, being supply chain and maximising value from medium-term disposal opportunities.
Global fallout
Tough economic trading conditions are expected to prevail in the year ahead and all indications are that consumer spending will remain under pressure due to local and global economic conditions.
Despite the prevailing economic environment the group’s core businesses are expected to show improved profitability and with the initiatives already being implemented throughout Super Group it’s positioned to improve market share.
In light of its high level of financial gearing the group embarked on a recapitalisation exercise.
That will either be achieved through a right issue to existing shareholders or the introduction of a strategic investor through the issue of shares for cash and a claw-back offer.
- Finweek
The latter boasts stalwarts Kumba Iron Ore and ArcelorMittal that are all very involved in the steel industry.
After a 40% fall in iron ore prices over the past nine months of the 2009/2010 contract year those companies expect to see significant increases in iron ore pricing this year.
“Market consensus currently indicates increasing iron ore benchmark prices,” Kumba CEO Chris Griffith said at the recent presentation of the company’s annual results.
Major iron ore producers have signalled they’d be seeking increases of at least 40% in benchmark prices this year and analysts have forecast prices will rise by a further 10% next year.
Kumba and ArcelorMittal don’t form part of the three iron ore majors that set benchmark prices annually but rely on the outcome of negotiations for their own pricing.
Griffith said spot prices were currently trading 75% above benchmark prices – an improvement on the 80% to 90% gap reported earlier.
“Iron ore spot equivalent pricing is bullish, with contracts needing to rise by 80% to 90% to match $130/t spot prices. This points to upside risk to our forecasts of a 40% increase for fines and 50% increase for lump in 2010,” Citi Bank stated in its Iron Ore Monthly Monitor.
“Spot prices aren’t a direct indicator of where contract prices will settle, but it gives a clear indication of how tight the market is.”
The three iron ore majors – Vale, BHP Billiton and Rio Tinto – have started yearly price-setting talks with their main customers, China’s steelmakers.
And while Vale and BHP Billiton have sent out a clear message they’re seeking contract parity, the four-decade-old annual pricing system is likely to remain in place for some time.
World crude steel production started to recover during second half 2009, with most major steel producing countries posting an increase in output and Chinese steel production growing 14% year-on-year.
Kumba's steely resolve
However, global steel production was 8% lower at 1.19bn t last year than in 2008.
Kumba has benefited from the pick-up in global steel production seaborne iron ore imports into China, making up for slacking demand in its traditional markets in Europe, South Korea and Japan.
“We expect demand for iron ore to rise further during 2010 as Chinese domestic iron ore production falls and the recovery in steel markets outside China, in our traditional markets, starts to take hold,” Kumba says in its results statement.
Analysts’ forecasts indicate global steel consumption should grow in excess of 5% a year over the next three years, leading to an increase in iron ore demand.
ArcelorMittal expects the market will remain fragile throughout 2010.
It says (in its latest results statement) that strong growth is noticeable in developing markets, such as India, Brazil, Africa, the Middle East and especially China, where the outlook is particularly strong.
In developed markets, on the other hand, prospects are more subdued, especially in the United States and Europe, where only a modest recovery is expected over the near future.
“Stronger steel prices are further supported by rising coal and scrap prices,” it says.
“The average capacity utilisation for the global steel industry improved during the year to 71% in December 2009 from 58% a year earlier.”
ArcelorMittal and Kumba’s December 2008 results are used in the Top 200 comparison and the upcoming release of 2009 results will sketch a clearer picture on what can be expected and what the actual impact of steel prices were on both their bottom lines.
The industrial engineering index paints a clearer picture.
Now, a comparison
It was unable to reach the highpoint of 37 950 at the beginning of 2009 but made a huge comeback from its lowest point of 24 000 points at end-March.
Selecting the three biggest companies by market cap – Hudaco, Invicta and Bell – analysts don’t necessarily feel all are suitable for all investors, even if the sector has pulled its act together.
Following the rapid deterioration of international economies, Bell Equipment finds itself in difficult times.
The group is a very cyclical operation, as displayed by its results for the period ending June 2009.
Furthermore, the fallout in commodity prices should result in less support from the mining industries going forward, which provided the group with strong demand over recent times.
The group's apparent sensitivity to the exchange rate does add additional risk to its profile.
Bell manufactures and distributes a wide range of materials handling equipment, such as articulated dump trucks, front-end loaders, tractor loader backhoes, timber and sugarcane harvesting and loading machines, haulage tractors, graders and excavators.
Analysts say the share offers definite speculative appeal, trading on a 44% discount to its NAV and a 30% discount to the value of its current assets.
However, they advise – due to the uncertainty of the operating environment going forward, its liquidity concerns and its high gearing – investors to avoid the share for now.
However, they do feel that even due to subdued prospects for Hudaco the share presents an opportunity for the more long-term investor.
Hudaco is an importer and distributor of industrial consumable products.
Its main customers operate within the southern African manufacturing, mining, automotive aftermarket and security industries.
Analysts say it’s a good quality company with a high RoE of 389%, attractive operating margins and a solid dividend yield of 5.6%.
Although a difficult year is anticipated, they don’t consider a historic p:e multiple of eight times and p:/NAV ratio of 1.7 times to be an excessive valuation for a company of its quality.
Lastly, Invicta is an investment holding and management company and its operations comprise various importation and distribution of industrial engineering equipment and parts for various sectors.
It’s a solid company with a strong track record and has a consistently good RoE, decent operating margins and a historically good cash flow.
Analysts don’t consider the share to be expensive, trading on a historic p:e multiple of 5.6 times and 1.3 times its NAV.
And its share price is underpinned by a solid dividend yield of 5.8%. Despite possible short-term difficulties they feel the share offers value for the long-term investor.
The last sector included in “other industrials” is Industrial Transportation, which includes newsmaker Super Group.
It may not be the biggest in the sector or the best performing company but it did give the markets a lot to talk about.
Super Group delivered a poor set of results for the year ended June 2009, which was characterised by tough trading conditions, major managerial and operational changes, business disposals and the implementation of a restructuring plan aimed at streamlining it back to its core businesses and competencies.
In that environment revenue from continuing operations declined by 8% to R7.1bn, mainly due to certain low margin contracts not renewed within its Supply Chain SA operations during 2008 and a weaker sales performance by its dealership business.
Operating profit before depreciation was 4% up on the previous year.
Consequently, the operating margin contracted from 9.4% to 8.5%.
Weaker results
The drop in its trading profit and margin is largely attributable to lower sales volumes across the sectors in which Super Group operates, as well as the effect of restructuring and severance costs.
In addition, the strengthening rand resulted in lower translated earnings from operations overseas.
Significantly higher net finance costs resulted profit before tax declining by 55%.
The increase is largely attributable to the adverse mark-to-market fair value adjustments related to interest rate swaps of R47.9m compared against a positive amount of R16.8m for 2008.
That resulted in a decline in interest cover from 2.1 times to 1.4 times, still below our three times cover benchmark.
A lower tax charge resulted in headline earnings only 46% lower than the previous year.
An increase in the number of shares in issue resulted in HEPS from continuing operations declining by 58% to 35c.
But the group reported a total trading loss of R1.3bn, which translated into an EPS loss of 296c, primarily attributed to discontinued operations.
That was primarily due to closure costs, working capital impairments, provision for onerous leases, unusually large claims received by Emerald Insurance and slower consumer spending in its retail businesses.
Super Group has implemented an intensive restructuring strategy that’s set to continue into 2010.
It’s primarily focused on the recapitalisation of the group and the implementation of its realigned business strategy.
The proposed recapitalisation of the group, together with its debt restructuring package, will ease liquidity pressure and create the financial scope to allow the implementation of a value-maximising strategy.
Further focus areas include the recovery and growth effort within Super Group’s area of core competence, being supply chain and maximising value from medium-term disposal opportunities.
Global fallout
Tough economic trading conditions are expected to prevail in the year ahead and all indications are that consumer spending will remain under pressure due to local and global economic conditions.
Despite the prevailing economic environment the group’s core businesses are expected to show improved profitability and with the initiatives already being implemented throughout Super Group it’s positioned to improve market share.
In light of its high level of financial gearing the group embarked on a recapitalisation exercise.
That will either be achieved through a right issue to existing shareholders or the introduction of a strategic investor through the issue of shares for cash and a claw-back offer.
- Finweek
