Model update to reflect new reporting structure and restructuring

#themes: new management team, capital discipline, value creation

Action/Event: Following the release of the company’s interim results and the unexpected R422m of restructuring costs reported in the period, we have reworked our financial model to reflect the new and updated reporting structure of the group.  

Reaction/Impact: The quantum of the upfront costs relates to transformation and divestment costs (R340m of consulting fees) and severance costs (82m). In addition, once-off costs of R204m relate to the extended closure of Mining’s Ammonia Nitrate plants and the impact of buying in product from a competitor. Although these were once off costs, we note that an additional R170m of fees will likely be incurred in 2H24 before the consultants move off site. In addition, the quantum of severance fees may well be reduced as displaced employees accept alternative positions in the group. Discussions with management suggest that the pay-back for these high fees will be under two years as cost savings and the benefits of improved efficiencies materialise. The speed at which the new executive team is executing on its new strategy is impressive, but this has come at a cost.  

Catalysts: The catalyst for the unlocking of value for shareholders remains, in our view, the disposal of non-core and poorly returning assets now housed in the Managed Businesses portfolio. We believe that management has become more confident on the timing of disposals and the likely proceeds to be realised. In fact, likely proceeds of R3bn to R3.5bn (up from a previously communicated R2.5bn) suggests that those assets ear-marked for disposal (barring the still under-performing Schirm asset in Germany) are performing better than expected. This bodes well for a disposal time-line of end FY25. We believe that this could be conservative. Mining remains the star asset and the planned refit of Schirm’s Wolfenbuttel into a Mining Chemicals production hub illustrates the evolving nature of management’s vision to be a clear number three in the world of Mining Explosives by 2030 (again we believe this timeline may well be conservative).

Valuation: We have allowed for the unacceptably high tax rate (due to poor tax planning for some of the African operations), higher finance costs and the up-front costs referred to above. Until the disposals are finalised, our base case assumes that those assets housed under Managed Businesses remain in this portfolio. Our FY24E and FY25E forecasts have been revised from R14.3 and R18.4 per share respectively to R8.1 and R13.6 per share respectively and our FY24E dividend forecast of R2.75 per share assumes a R110 share price and a dividend yield of 2.5%. Our three valuation methodologies used estimates a value for the share of between R111 and R118 compared to our previous valuation range of between R119 and R132, ignoring the upside from the disposal process.

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