AECI Targets Chemicals Acquisitions in 2013 to Fuel Growth

AECI Ltd. (AFE), a South African manufacturer of explosives and chemicals, is seeking acquisitions in the chemical industry to fuel a growth rate that exceeds the domestic economy.

“The only way to grow above South Africa’s gross domestic product is through acquisitions,” Chief Executive Officer- designate Mark Dytor said in a phone interview from Johannesburg today. “We are targeting four acquisitions this year.”

South Africa’s economy slowed to 2.5 percent last year from 3.5 percent in 2011 after rising unemployment and an outbreak of labor unrest hampered growth. In January, the Reserve Bank cut its forecast for economic growth this year to 2.6 percent from 2.9 percent.

AECI will target chemicals companies with annual earnings before interest, taxes, depreciation and amortization of 25 million rand ($3 million) to 150 million rand, Dytor said. He expects to pay four times to eight times Ebitda for each company. The segment is “very diversified,” he added, covering industries such as mining, agriculture and food and beverages. Deals would be financed from existing funds.

AECI’s net income declined 19 percent to 630 million rand ($71.5 million) in 2012 after labor strikes in the mining, agricultural and transport sectors cost more than 100 million rand in earnings, the company said in a statement today. Sales increased 11 percent to 14.9 billion rand, with more than half coming from chemicals.

The 2013 performance “will be better” than last year, Dytor said, adding that 2012 was “the year where we worked the hardest for the littlest results.”

Healthy Recovery

AECI shares were up 5.1 percent at the 5 p.m. close in Johannesburg, their biggest daily gain since November, and reached an 11-month high of 94.05 rand. More than 620,000 shares traded, almost four times the three-month daily average.

“We will see a healthy recovery for the company as South African platinum output is expected to rise,” David Lerche, an analyst at Avior Research Pty Ltd., said in a phone interview. “Fewer strikes in the mining industry will help boost volumes at both AECI’s explosives and chemical divisions.”

Lerche expects earnings to be “significantly higher in 2013 as the company recovers off a low base” then slowing to “more normal levels in 2014 and 2015.”

Dytor, 50, joined AECI almost 30 years ago as a sales representative in the chemical services unit. He will replace Graham Edwards, who is retiring, as CEO as of March 1.

Cost Reductions

AECI plans to cut costs to achieve a 10 percent trading margin in the explosives segment this year, compared with 6.8 percent of sales in 2012, Dytor said. “We are upbeat about Africa, with sales to countries including Zambia, Burkina Faso, Ghana and Zimbabwe with three to four big contracts for the next two years.”

Improved earnings for 2013, excluding acquisitions, will be partly led by growth in the manufacturing industry and a better performance from the group’s property division, which expects an increase in projects, Dytor said.

AECI has a 46 percent weight in the 3-member FTSE/JSE Africa Chemical index, according to data compiled by Bloomberg. The gauge has risen 9.5 percent this year.

To contact the reporter on this story: Kamlesh Bhuckory in Johannesburg at kbhuckory@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net

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