Financial results - six months ended 30 June 2026
#Themes: Mining remains the group's primary earnings and returns driver, Chemicals Core delivered a sound underlying result, while working capital and the residual legacy businesses remain the principal areas of concern. More importantly, the appointment of Alan Dickson as CEO appears likely to result in a refresh of the group's strategy, with a greater focus on sustainable earnings growth, free cash flow conversion and ROIC. With Mining generating an ROIC of 23% compared to 13% for the group, we believe a more rigorous review of where capital is employed could become an important part of the investment case.
Event: AECI reported mixed results for the six months ended 30 June 2026. Revenue declined 4% to R15.1bn, largely reflecting disposals completed in FY25A, while EBITDA increased 2% to R1.61bn and operating profit increased 21% to R837m. HEPS increased 8% to 653c, ahead of our forecast of 622c. Mining again performed well, with revenue increasing 6% to R9.3bn, EBITDA increasing 6% to R1.42bn and ROIC improving to 23%. Chemicals Core generated external revenue of R4.59bn (+2%), EBITDA of R365m and operating profit of R290m (+21%). However, net working capital increased to 19% of revenue, resulting in a free cash outflow of R952m, while Schirm Germany remained loss-making and required a further R320m impairment.
Reaction: The market reacted negatively to the results, with the share price falling sharply following publication. We believe the disappointment reflects a combination of weak free cash flow conversion, working capital materially above the group's 14%-16% target, another impairment at Schirm Germany, a still elevated tax rate and little visible improvement in the Property Services & Corporate cost base. While these are valid concerns, we believe that the market may be placing too much emphasis on 1H26A earnings when AECI has historically exhibited an approximate 45%/55% H1/H2 earnings split. This relationship remains relevant when considered alongside identifiable H2 earnings drivers: mining should benefit from new contract ramp-ups and the recovery of H1 pass-through timing effects, while Plant Health enters its stronger summer selling period and Water should benefit from improved export demand. The greater risk to investors, in our view, is cash conversion rather than earnings.
Catalysts: Several factors should support a re-rating. First, continued volume growth and improved utilisation at Modderfontein should provide further operating leverage within Mining. Utilisation of the more efficient nitric acid plant has already increased from the low-50% range to the low-70% range, while management's business cases assume utilisation closer to 87%. Second, the expected H2 working capital unwind should improve cash conversion, although we now expect year-end working capital to be 17%, slightly above the target range of between 14% and 16%. Third, the remaining goodwill and capitalised intellectual property at Schirm Germany has now been fully impaired, removing this source of future impairment volatility. Finally, Alan Dickson's strategy and portfolio review could become an important catalyst if capital is increasingly directed towards businesses capable of generating attractive and sustainable returns. His comments suggest that nothing within the existing portfolio should be regarded as off the table regarding disposals.
Valuation: We have reduced our FY26 HEPS forecast by 6% to allow for the weaker performances of Animal Health and Schirm, and for higher-than-expected corporate costs. We now assume a dividend cover of 2.5x and reduce our FY26 DPS forecast by 26% to 535c. Our valuation thesis remains centred on improving underlying earnings and returns, while recognising that a sustained re-rating will require evidence that higher divisional returns translate into stronger group free cash flow and ROIC. The future value valuation range has been reduced to R130 – R140 from R132 – R157 previously.
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