AECI | Give and take
A E C I (AFE) delivered c.3% adjusted earnings growth in H1 '19, below our expectations of c.6% growth y/y. In our view, the guided operating expense savings of ZAR 300m per annum may be the catalyst for AFE to re-rate. Despite Schirm struggling, Much Asphalt performed better than expected due to contracts secured in KwaZulu Natal and the Western Cape. The deals alleviated the effect of no South African National Roads Agency (SANRAL) contracts. Excluding Much Asphalt, the underlying Chemicals business realised a lower H1 ‘19a operating margin of 6.2% (H1 ‘18a: 9.6%). Schirm has not reached expectations, and the weak underlying German economy magnified Schirm's underperformance.We estimate the counter is trading at a 6.8x rolled forward PE (0.6 PE relative). Our DCF valuation methodology delivers a one-year target price of ZAR 138.4ps (ZAR 130.29ps previously), implying a total return of 54.8%. The total return is 40.1% greater than our estimated market return of 14.7%. Accordingly, we retain an OUTPERFORM rating.
AECI is an explosives and specialty chemicals company focused on providing products and services to customers in the mining, manufacturing and agricultural sectors. Co. has regional and international businesses in Africa, South East Asia and Australia. Other markets of interest are in Latin America. Co.'s segments include: Explosives, which comprised of the manufacture of commercial explosives and initiating systems for use by the mining industry; Specialty chemicals, which comprised of small- to medium-sized businesses manufacturing and marketing specialty chemicals to a range of industries; and Property, which comprised of the realization of the surplus land and property assets of Co.
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