Afrimat investor day – Cementing success

Our initial thoughts are that the R1bn consideration for Lafarge is much higher than management’s indications that it would not pay more than R300m for the entire business. On closer inspection, however, it could be a very good deal, especially given the c. R10bn asset replacement value.

With the purchase of Lafarge, Afrimat will be doubling its Construction Materials operations around the country, expanding to provinces not previously covered and bolstering its operations in provinces with high volumes of SANRAL work.

Additionally, the cement business offers Afrimat the opportunity to further diversify, reduce costs for its readymix and other cement-based businesses and potentially fast-track the development of its LC2 product to further capitalise on the cost-sensitive cement market.

The synergies between Construction Materials and Industrial Minerals are strengthened by the purchase of Lafarge and could result in Afrimat further expanding its business across the country in a few years. We are, however, concerned about the cyclicality of the construction sector, and Afrimat’s dependence on a construction market recovery in 18 months might be costly.

The option to sell the cement business does provide Afrimat with a hedge, but until Afrimat completes a full assessment of the Lafarge assets, we will not know with certainty what the state of the assets are and what value it could bring. There are also the potential hurdles it may face with the competition authorities to bring the deal over the line. Until the deal is finalised it may just be a great deal on paper.