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One of my favourite shares just got even more attractive!

by , 20 October 2015

When Afrimat listed in 2006, it focused only on building materials. Had it remained this way, it would have been in big trouble.

However, early diversification let it supply contractors working on large infrastructure projects. And during the financial crisis and the subsequent recession, it chose to diversify further, with less reliance on government infrastructure spending.

The company did this by acquiring cheap, rock bottom investments. Fixing them up, making them profitable and then smiling all the way to the bank. But before I tell you more about these investments, first allow me to explain how these opportunities presented themselves.

Afrimat is currently one of my favourite shares. It's in the Stock of the Month portfolio and going strong. But I think there's still way more upside to come - thanks to its latest acquisition.

The construction sector’s woes presented this company’s saving grace

Over the last few years number of larger construction companies shed their construction materials divisions to cut costs.

These construction companies were so big they couldn’t survive without multi-billion rand government contracts.

And as the big contracts dried up their materials divisions became less and less profitable.

Eventually reaching the point where they got sold at deep discounts.

But the key to your Afrimat’s fantastic run, was that it didn’t depend on multi-billion rand construction projects to flourish. So, unlike the listed construction giants who need a critical mass to contract before it’s worth their while, this underrated company benefits from small projects as much as from bigger projects.

With all the massive construction companies like Aveng, Group Five, Basil Reed etc, doing so badly in the last five years, how has Afrimat shrugged off the poor market conditions to thrive in a weak construction industry?

Through diversification of course – but with a twist!

Afrimat picked the right acquisitions for cheap to help grow it business and operations. It acquired three small companies that it helped implement a fantastic turnaround to increase its profits.

Afrimat’s diversification strategy pays off handsomely

In 2011, Afrimat bought the Glen Douglas dolomite mine for R35 million from Exxaro resources. This mine produces an annual output of about 1,5 million tonnes of metallurgical dolomite, commercial mining and agricultural lime products.

The mine holds a new order mining licence and enough reserves in hand for the next 30 to 40 years.

And, after a two-year turnaround process, the return on initial capital from Glen Douglas is about 80% a year, that’s exceptional.

Afrimat’s second acquisition was the Clinker Group for R123 million. In 2013, the Clinker group added revenues of R285 million – more than double of what Afrimat paid for it.
After it acquired 100% of Clinker Group, Afrimat’s revenue was 34.3% higher at R1.3 billion in 2014. This proves that this strategic investment paid off well and added to the phenomenal growth of the company.

But the company recently announced another acquisition to add to already thriving growth. 

The newest addition to Afrimat’s already profitable acquisitions

Afrimat is acquiring a 100% of the issued ordinary shares of Cape Lime Proprietary Limited. This company goes back to 1946 and consists of activities relating to the mining and processing of Dolomitic and Calcitic Limestone.

And I’m not the only one who’s excited about this acquisition…

In fact, Francois Joubert had this to say, “Afrimat’s latest acquisition, Cape Lime, which has limestone mines in the Western Cape. At one of these mines the company has a piece of equipment called a pressure hydrator. It’s the only such mine in the country with this equipment, and the machine uniquely positions it to produce a pure hydrated lime without any impurities. This immediately makes its product more valuable and sought after.”

Why I believe Afrimat’s growth is going to continue in the future

Afrimat has a unique advantage. It isn’t directly involved in construction works but rather supplies goods to construction and mining companies as well as private developers. This ensures that it records sales from a variety of construction activity.

Transporting clinker, silica and dolomite over long distances isn’t an option – these materials are too heavy to transport very far. Costs are too high.

And that’s why the company has 23 commercial quarries located throughout South Africa. That means Afrimat produces and delivers at relatively low transport costs. And it can sell to customers at main routes close by to these mines all around the country.

In the short- to medium-term, where larger construction projects are hard to come by, Afrimat’s order book will likely be dominated by smaller projects.

Not to mention by 2017 it’s expected government expenditure on roads will hit R44.8 billion a year. This is also another prime opportunity for Afrimat to take advantage of and grow its operations.

Plenty of upside still to come for Afrimat’s share price

Thanks to its brilliant diversification model, Afrimat has outshone its competitors on the JSE.

When the local construction sector fell drastically, Afrimat made strategic acquisitions – Glen Douglas, The Clinker Group and Infrasors, all mineral mining operations – which have put the company back on an upward trajectory.

And of course its latest acquisition will definitely add plenty of profits to the company. 

Since June, Afrimat is already up 22.8% and I expect more gains to come over the next year or two. It could breach the R30 mark.

One of my favourite shares just got even more attractive!
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