Sephaku: outlook is crumbling

Small-cap building and construction materials group Sephaku Holdings says a rebound in building activity helped it more than double profit in its 2022 year, but central bank moves to combat inflation will hit demand unless the state picks up the pace of infrastructure spending.

Small-cap building and construction materials group Sephaku Holdings (SepHold) says a rebound in building activity helped it more than double profit in its 2022 year, but central bank moves to combat inflation will inevitably hit demand unless the state picks up the pace of infrastructure spending.

The initial optimism in the industry at the start of the year has now fizzled in the wake of Russia’s invasion of Ukraine, while surging input costs are setting the stage for more regular price increases.

This will have an uncertain effect on volumes in a competitive industry that has not fully recovered from Covid-19, the group said on Thursday.

Only private enterprise has showed recovery post-Covid-19 in terms of gross capital formation, group CEO Neil CraffordLazarus

said on Thursday, while the government’s debt seems to be hobbling efforts to use infrastructure spending as a prop in SA’s economic recovery.

“We have seen a number of promises regarding infrastructure spending and allocation of large contracts which has just not got off the ground to date,” Crafford-Lazarus said during an investor presentation.

Easing pandemic-related restrictions as well as price increases helped revenue rise 24% to R786m in SepHold’s year to end-March, with profit jumping 125% to R45m, even though competition remains stiff.

The beginning of 2022 had started off well for the industry due to the less-deadly nature of the Omicron variant, and confidence in the industry during the first quarter of the year, as measured by the FNB/BER building confidence index, had reached its highest level since 2018.

The survey showed on

Wednesday that confidence slipped in the second quarter, with building material manufacturers’ confidence plunging to 12 points after reaching 55 points in the first.

SepHold, valued at R356m on the JSE, fully owns concrete supplier Métier, and has a 36% stake in Sephaku Cement (SepCem), the rest of which is owned by Nigerian giant Dangote.

The group said on Thursday that while recent price increases had been sustained, expanding inflation, significant fuel price increases and rising interest rates were expected to cause downward pressure on profitability in its 2023 year.

VOLUME PRESSURE

Acting SepCem CEO Duan Claassen said the group had not been fully passing on surging costs, notably energy costs, to customers, and the industry was likely to see more frequent adjustments to pricing.

“It’s a very delicate balance to get the pricing right without affecting volumes too much. I think it is going to be challenging times lying ahead,” he said.

SepHold, said it was getting used to a tough environment, and was looking to its history of excellent service and deep knowledge of the market to defend its market share, but also looking at alternative fuels, such as waste materials, to offset energy costs.

The group would also be looking for “quality of volumes, not just volumes in general,” said Claasen. Overall, integrated ready-mixed producers continued to close plants in KwaZuluNatal and Gauteng during the 2022 year, but were immediately replaced by highly competitive, independent, ready-mix producers with lower cost bases, the group said.

SepHold had already been struggling with competition before Covid-19 struck, and in its 2020 year, largely free of Covid19, it recorded a net loss of R17m, reporting aggressive pricing tactics from competitors.

By March 2020, SA had experienced more than 70 months of a downturn in the business cycle, the longest on record, it said at the time. In afternoon trade on Thursday, SepHold’s share price was down 3.45% to R1.40.

The price fell almost a quarter so far in 2022, but has risen almost 40% since the beginning of 2020.