Sephaku Holdings releases provisional results
Sephaku Holdings Limited released its provisional financial results for the year ended 31 March 2019.
1 SepCem has a December year-end as a subsidiary of Dangote Cement PLC.
Sephaku Holdings Limited ("SepHold" or "the company") hereby reports on the group's provisional financial results for the year ended 31 March 2019. SepHold, Metier Mixed Concrete (Pty) Ltd ("Metier" or "the subsidiary") and Dangote Cement SA (Pty) Ltd ("SepCem" or "the associate") are collectively referred to as the group.
Head-office expenses reduction In line with the constrained operating environment, SepHold executive management commenced the implementation of the head office expenses reduction plan. The company did not replace three directors following their resignation from the board and reduced executive management remuneration. The comparative annual expenses were 9% lower at R22,9 million from these initial savings achieved for the six months ended 31 March 2019. The non-cash portion was approximately 21% (R4,8 million) mainly constituting depreciation and option vesting expenses. The executive management has further committed to not increase their remuneration for FY2020. The plan will result in expenses 25% lower than FY2018 (R25,3 million) by the end of FY2020.
The subsidiary's sales volumes increased marginally by 1% due to the declining construction activity and fierce competition. The KwaZulu Natal volumes were 11% lower year on year but Gauteng volumes increased by 15% due to the mobile and thirteenth plants that were operational for 3 months and 6 months respectively. The strategic decision to increase plant footprint in the relatively high demand nodes of Pretoria, supported Metier's volumes. On a like-for-like basis, excluding the new tonnage, the subsidiary's volumes decreased by 2.6%.
etier's gross profit was R320,5 million compared to R341,9 million (FY2018) mainly due to a 6.7% increase in cost of sales as a result of the product mix against flat pricing. To support margins, management optimised production and logistics assets to align to prevailing demand. The subsidiary reduced the outsourced fleet by 16% to maximise the utilisation of owned fleet. Metier's low pricing environment against inflationary input costs and expenses resulted in a 55% decrease in net profit. The subsidiary's EBITDA margin decreased to 6.2% (FY2018: 10.9%), operating margin to 4.7% (FY2018: 9.6%) and net profit to R21,5 million (FY2018: R48,0 million).
Metier's market was characterised by numerous construction projects being suspended or terminated. This resulted in several incidences of business liquidation and rescue. To minimise customer defaults, the subsidiary continued to implement stricter credit terms including suspension of concrete supply for late remittances to ensure customer compliance. All credit limits are reviewed regularly and Metier considers the guidance form the credit vetting institutions.
The subsidiary wrote off R8,95 million in debtors for the year with R4,59 million through the income statement and R4,35 million against the R6 million provision for bad debts. To further mitigate against the incidence of defaults, Metier will increase the proportion of cash sales and expects the debtor profile to improve during CY2020.
Metier's term loan principal was reduced by 49% to R41 million (FY2018: R80,4 million) in line with the group's stated priority of deleveraging the balance sheets. The subsidiary has two loan facilities with the same lender, there is a revolving credit facility for R100 million at a quarterly interest rate of JIBAR plus 400bps. The revolving facility balance as at 31 March 2019 was R81,4 million. The final contractual payment for the term loan is scheduled for 15 April 2020.
The low cement demand was exacerbated by increases in the value added tax and fuel price during Q1 and Q4 CY2018, respectively. These increases seem to have negatively impacted retail customers' purchasing power. Consequently, intense competition between the cement manufacturers, blenders and importers ensued during the year resulting in SpeCem's sales volume decreasing by 6,4% year on year.
Revenue and profitability
Price increases were implemented in February and August 2018 resulting in 3.5% average increase per tonne. This effective increase was lower than targeted because of a higher volume proportion of bulk cement and intense competition in highly contested markets. SepCem's revenue decreased by 3.1% to R2,29 billion (2017: R2,37 billion) and the EBITDA margin was 20.1% (R461,5 million) compared to 21.3% (R504,2 million) for the prior period ended 31 December 2017.
The profit margins were further impacted by above inflation cost increases in inputs such as coal, electricity and fuel. Furthermore, due to the low quality of coal available to the local market, the associate had a higher than planned plant maintenance cost which contributed to the lower than targeted profit margins. SepCem has started various initiatives to eliminate and or mitigate against these challenges.
SepCem's net profit was R128,7 million mainly due to a R81,7 million tax credit that was granted in 2018 for the 2017 tax period. The 12L tax incentive provides for an energy efficiency allowance to be claimed at 98c/kWh for the energy savings achieved against a set baseline. The associate achieved a total energy saving of 307 GWh against a benchmark based on the energy efficiency of a modern plant. Excluding the tax credit, the net profit was R46,9 million compared to R57,8 million in 2017.
SepCem repaid R181,9 million of the project loan capital resulting in a balance of R1,65 billion at the end of December 2018. The total debt service was R379,4 million including interest expense of R197,5 million. The debt covenants continued to be under pressure during the year because of lower than targeted EBITDA margins.
The Dangote Cement PLC shareholder loan increased to R474,0 million from R424,3 million accruing interest at JIBAR plus 400bps. SepCem's cash balance at the beginning of the year was R413 million and the associate generated R483 million from its operations during the year ending with a cash balance of R508 million. This confirms that SepCem can comply with its debt repayment requirements with the potential to enhance its cash generative capacity through higher cement prices.
Following the Dangote Cement PLC results announcement on 29 April 2019 for the first quarter period ended 31 March 2019, SepCem's revenue decreased to R487 million (Q1 2018: R566 million). The quarterly sales volumes to 31 March 2019, were 19% lower year on year mainly due to the anomalously high comparative volumes in the previous year when SepCem recorded a 7% increase. SepCem's estimates for the Q1 2019 industry volume decrease is 10% - 12%. The associate's exceptional volume increase in Q1 2018 was a result of absorbing a competitor's sales volumes challenged by plant breakdowns.
The quarterly volumes were further impacted by the increase in imports which resulted in a decrease in SepCem's KwaZulu Natal volumes. The associate prudently maintained prices to achieve targeted margins at lower volumes. To that end, SepCem increased pricing by 8% - 10% per tonne on both bagged and bulk cement in all its markets during Q1 2019. The effective increases were 5% - 7% per tonne due to pricing competition as demand remains constrained.
These quarterly results will be accounted for in the SepHold interim financial results for the six months ending 30 September 2019.
The government commenced the application of carbon tax on 1 June 2019 based on carbon emissions generated from all manufacturing industries. Inherently, cement manufacturers produce carbon emissions during the clinker production process through the use of coal to burn limestone and other raw materials at extremely high temperatures. Based on SepCem's estimated carbon emissions, the tax payable will be approximately R35 million to R40 million per annum. The associate will apply the tax on its products based on the proportion of clinker per tonne, which translates to between 1.5% and 2.5% price increases on lower strength and high strength cement respectively.
SepCem will increase prices in July 2019 by 4% - 6% in line with the implementation of the carbon tax and standard biannual increases.