A new chapter commences
#themes: new management team, capital discipline, value creation
AECI is a diversified chemicals group that provides products and solutions to various companies in the mining, water treatment, plant and animal health, food and beverage, infrastructure and general industrial sectors.
The company currently has four main operating business segments, namely Mining (explosives and chemicals), Water, Agri Health and Chemicals. In FY23, we estimate that some 70% of operating profit came from the mining sector, 26% from the chemicals and water sectors and 4% from the agriculture sector.
AECI’s track record has been characterised by poor returns to shareholders, a poor allocation of capital, high levels of interest-bearing debt and increased investment in working capital. However, with in effect a new board and new executive management team now in place, a revised business strategy has been implemented with a clear focus on improving returns and reducing the current high levels of debt. Furthermore, we expect that non-core businesses will be disposed of by the end of 2025.
With the implementation of the new strategy, the ambition of AECI is to double the profitability of the core businesses, namely Mining and Chemicals, by 2026. In addition, Mining aspires to be the third-largest integrated explosives and chemicals solutions provider in terms of profitability, safety and operational excellence globally by 2030. Finally, through a combination of both operational and commercial excellence, management believes that between R1.2bn and R1.6bn in EBITDA can be unlocked by FY26E.
Our forecasts are based on the current operating structure of the company and do not assume any major restructuring that we believe to be imminent as management’s new strategy unfolds. Given the poor returns associated with many of the non-core assets, it can be assumed that our forecasts and valuation are conservative. Given the limited track record of the new executive management team and the still high forecast risk associated with Schirm (in particular Germany), it is probably fair to assume that any major re-rating of AECI will not occur until evidence of the success of the new strategy becomes apparent to shareholders.
Valuation: We initiate coverage of AECI with a fair value range of R119 to R132, providing an estimated total return of between 32% and 46% including a 3.5% dividend yield. The three valuation methodologies used are residual income, discounted cash flow and intrinsic value. We forecast FY24E and FY25E dHEPS of R14.28 (+28%) and R18.42 (+29%) respectively, with DPS over the same period of R2.50 (+14%) and R5.00 (+100%) respectively.
Risks: Implementation of new business strategy, value accreting acquisitions in the mining space, deteriorating South African infrastructure (Transnet and Eskom), over reliance on Sasol for the supply of ammonia, changing weather patterns and the impact on agriculture and an ongoing successful SAP implementation.
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