Sephaku Holdings Limited (SEP.JO) Earnings Call Transcript & Summary

Greetings, and welcome to the Sephaku Holdings Unaudited Interim Financial Results for the 6 months ended 30 September 2025. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Kenneth Capes.

Thank you very much. Good morning, and thank you for joining us. I'm Kenneth Capes, CEO of Sephaku Holdings and Métier Mixed Concrete. We are pleased to present our half year results, reflecting a period of disciplined execution and operational resilience across our portfolio. Despite a challenging macroeconomic backdrop, our teams have delivered a solid performance in various aspects of the business. Joining me this morning are Neil Crafford-Lazarus, our Financial Director; and Duan Claassen, our CEO of Sephaku Cement. Let us start our presentation where Neil will give an overview of the financial performance, and we'll then move on to some operational commentary. Neil, if I could hand over to you, starting on page -- sorry, on Slide 3.

Thank you very much, Kenneth, and good morning to everybody. As Kenneth said, we're looking at Page 3, the financial review of the group, salient features of the last 6 months. I'm going to start off with talking to the first 2 columns jointly as the SepHold and Métier results are consolidated with Métier being the wholly owned subsidiary and SepCem only accounted for on an equity line. So the group turnover is also the Métier turnover, saw an increase from ZAR 613 million to ZAR 665 million. EBITDA was ZAR 98 million, up from ZAR 69 million, a 42% increase on that side. EBIT was a 51% increase from ZAR 48.8 million to ZAR 73.8 million and the profit after tax for the group on ZAR 55.5 million, ZAR 36.6 million last year -- sorry, that's the Métier profit after tax. The group -- SepHold and the group, therefore, if you're moving to the left, after inclusion of the SepCem equity loss that we accounted for, which we will speak to just after this. The profit after tax at the bottom of the first column is ZAR 36.7 million, up from ZAR 32.6 million of last year, a 13% increase. The result that basic earnings per share went up to ZAR 0.16, EPS on ZAR 14.5 and the net asset value of the company at ZAR 574.36 per share. Looking at the Sephaku Cement contribution, sales were down 15% from ZAR 1.3 billion in the first half of 2024 to ZAR 1.1 million from January to June of the current year. EBITDA was ZAR 110 million, down from ZAR 146 million, a drop of 25% and EBIT at 4.5 percent -- ZAR 4.5 million down from the ZAR 60.9 million, mainly because of the depreciation. Of course, that's not linked to units of production and that carries forward. And there was also a prior year reduction in depreciation due to a change in estimate of life. So the depreciation was more in the current year comparatively, resulting in EBIT being at ZAR 4.5 million as opposed to the ZAR 60 million of the previous year. That resulted in a loss after tax of ZAR 31.3 million, down from the profit of ZAR 5 million in the previous year. And our equity accounted portion of the ZAR 31.3 million is ZAR 11.3 million as opposed to the ZAR 1.5 million of profit that we showed in the previous year. Moving on to cash flow and debt management. Looking at Slide 5, the results of SepHold and Métier, opening cash of ZAR 30 million, cash generated net of leases, the ZAR 88 million or ZAR 87 million. Interest income, ZAR 1.5 million, taxation paid ZAR 10.183 million. CapEx, net of disposals is ZAR 21 million. Lease liabilities, these are operating leases for the properties on which we operate, ZAR 11.356 million and then installment sales, these are mainly loaded and delivery vehicles, ZAR 29.5 million. Property on the bond, that's the Phoenix property that we bought at the beginning of last year for ZAR 21 million, of which we financed ZAR 14 million, and that's the repayment capital and interest on that transaction. Closing the year off with ZAR 45 million in tax -- in cash. Debt -- net debt equal to 1.1x cash generated net of leases, and we'll have a look at that breakdown now on Page 6 -- Slide 6. The installment sales liabilities increased to ZAR 141 million. It was ZAR 127 million last year -- ZAR 112 million a year ago and then ZAR 127 million at year-end. So you'll see a gradual or a consistent spending on the CapEx and yields of mixers and plant expansion. As reported, the second paragraph basically just refers to activities last year with regards to the capital allocation, where we repurchased ZAR 22.7 million of shares at a price of ZAR 29.3 million. We'll come back to that -- the status of that when we talk about the acquisition of Cross Company management. These shares are currently still held as treasury shares. So just in summary, cash generated during the 6 months was the ZAR 87.5 million as seen on the previous page, cash at the beginning was ZAR 29.8 million and at the end of the period, ZAR 45 million, showing a growth of 50% on that. Metier was able to contribute ZAR 30 million in cash to assets that they purchased during the year to a value of ZAR 70 million and ZAR 40 million then being funded through debt. The increase in the liability, however, as we mentioned above, was only from the 141 -- from ZAR 127 million to ZAR 141 million, so ZAR 14 million increase in the debt due to the fact that we could make substantial cash deposits on the acquisition of these assets. Moving on to SepCem's cash flow. They started the year with ZAR 514 million in cash. Cash generated from operations, a negative ZAR 14 million. Taxation paid ZAR 10.7 million. That is due to -- of course, following from the previous year results, that is the cash outflow during this period. Net outflow for PPE, ZAR 32 million, net finance costs with the bank debt having reduced and the amount of cash available, there was a positive net finance cost. Lease payments of ZAR 9.6 million and loan repayments on the senior debt of ZAR 67 million, leaving SepCem with a final cash balance of ZAR 388 million. As mentioned, there were -- as could have been seen, the bank debt repayment was ZAR 67 million during the year. And the payment up until -- that is, of course, the interim period of June. For the period until September, there was an additional payment of ZAR 106 million, including the interest. And then the DCP loan at the end of September was at ZAR 951 million, and that is bearing an interest rate of 3-month JIBAR plus 4%. Moving on to the debt situation. As we mentioned, ZAR 76 million was paid during the term. The balance was ZAR 67 million, of which another ZAR 34 million was paid before the 30th of September, and the final payment was made at the end of October. So the bank debt has now been paid in full. The result of that is that the DCP shareholders loan is now due and payable. And the first thing that, that will trigger is a withholding tax on interest on the interest portion of that loan. That amounts to ZAR 51 million and is payable before by the end of November, just on the previous commitment that they will be able to meet. The DCP shareholders' loan, as I mentioned, carrying interest at JIBAR plus 4 and a balance of ZAR 851 million (sic) [ ZAR 951 million ] at September. The balance at the 30th at the end of October was ZAR 960 million, and the shareholders have agreed that we would fund the repayment of this by a bank loan of ZAR 850 million plus available cash from SepCem. Then the full shareholder loan would be converted into a bank loan going forward. The debt management update on SepCem, that's just the position as at 30 September. As I've mentioned, the Nedbank loan was ZAR 34 million. The DCP loan, ZAR 951 million. The leases were ZAR 21 million. Therefore, total debt of ZAR 1 billion and cash on hand of ZAR 113 million (sic) [ ZAR 413 million ] leaving with a net debt of just below ZAR 600 million for the company. Then I'm just going to briefly talk about the acquisition of Cross Company Management. Not a substantial transaction at all. We acquired the 100% of the voting equity of Cross Company Management from the trust that hold the shares previously. The company basically had assets to the value of ZAR 6.8 million, and there was a ZAR 7.2 million outstanding to SepHold. All these investments that the company holds was also as a result of its historic debt pre-unbundling and early days of these companies standing on their own SepHold still provided funding. And at some stage, these funds were converted into shares. So there's a shareholding in Cross Company Management with the loan of the funds that SepHold previously advanced. Result, therefore, that we could acquire it at no consideration and recognize a goodwill of ZAR 473,000 being the difference between the assets -- the value of the assets at end of March or 1st of April compared to the loan outstanding to SepHold. The trust was also used to administer our share incentive scheme when we -- while we still had a share option scheme, you will recall that last year, the final award of options expired. So it was no longer necessary for the trust to operate separately with regards to the holding of those shares. With the acquisition of the company, therefore, now as a subsidiary, those shares were taken on board as normal treasury shares as we've done in the case of the shares bought by Metier. The value at which they were taken on and the intercompany share loan reduced by was ZAR 1.90 per share, which was the issue price. So that just brings the movement and the elimination and consolidation in line with how we're treating treasury shares in Metier. The treasury shares held by the 2 subsidiaries jointly are now ZAR 24.116 million, and we are allowed to hold ZAR 25.4 million in it, 10% of the issued shares at the moment. That's basically what I need to say about -- I wanted to say about the transaction and the debt management as well as the salient features. Back to you on the trading environment.

Thank you, Neil. Moving on to Slide 13. Unfortunately, not very good news about the trading environment. We continue to see a slide in fixed investment in South Africa, literally a downhill slide since 2013, which is not good for us. The political environment, the climate, the policymaking, adverse legislation continues to not create an environment for investment in South Africa. If we look at the construction sector itself, as far as GDP goes, it's still one of the worst performing sectors in the economy. And at this point in time, we think that any upturn, no matter how small will be a significant lift for the companies that are involved in the construction sector. We're still cautiously optimistic. We think that in the short term, moving on to Slide 14 -- the trading environment in the short term looks a little bit more positive based off lower interest rates, the favorable commodity cycles and the low inflation. However, in saying that the uplift is not significant, and that's why we say we're still cautiously optimistic about it. As far as the retail sector is concerned, it's showing some resilience, which has recently translated into increased demand for building materials, albeit a marginal increase. And on the retail demand for bagged cement, we saw some improvement in the third quarter of this year, but we're still unsure about the sustainability of that upturn. If I could, I'd like to pass on to Duan just to have a quick chat about the environment for Sephaku Cement on Slide 15. Duan?

Thank you, Kenneth, and good morning, all listeners. If we go to Slide 15, yes, I think we heard a fairly bleak story from Kenneth as far as our views of the environment. Add to that overcapacity and intensifying competition and then it's therefore no surprise that the competitive landscape will be very, very intense. What we are seeing is that some incumbents have adopted, in our view, unsustainable survival strategies. And those are characterized by low pricing, typically to secure critical mass volumes. The supply of bulk cement downstream is not helping our cause. It's exacerbating competition, putting further pressure on pricing. And then on top of that, we're also compromised as far as our position regarding carbon tax and the above inflationary increases that we've been seeing with next year, another year of significant increases in carbon taxes with some of the rebates or allowances, I should say, being reduced, which places a lot of pressure on producers. We are, of course, then also -- we've been talking about this for a very long time, concerned about the increase in cement imports, which at the moment is exempt from carbon tax and which is also further eroding local competitiveness. However, I think we're cautiously optimistic. We mentioned that any uplift would be welcomed. And most recently, the growth acceleration and inclusion strategy of government that's been a long time coming, which, of course, is guided by the National Development Plan and the Medium-Term Development Plan as well as Operation Vulindlela. What we're reading in that document is encouraging, where there seems to be a strategy focusing on structural reforms and private sector collaboration, which, of course, there's been a lot of talk of late, especially in the rail sector, I think, leading the way with some other sectors also following. So that is definitely encouraging. Also, what we're seeing is that as far as infrastructure investment is concerned, that seems to be one of the top, if not the top priority in the strategy. So that certainly is welcomed. And we also know that this past weekend, there was a government lekgotla from of the GNU and then they also seem to be looking at improving matters from a fragmented planning to a more results-based approach, which aligns strategy budgets and accountability, which I think is very good news. So we're cautiously optimistic. It's been a real difficult period over the last couple of years and any improvement, I think we will definitely welcome. If we move over to the next slide, which is Slide 16, just an update again on -- I think one of the elephants in the room is cement imports. What we are seeing as of September is that just over 1 million tonnes again came into the country, which compared to the same period prior year, 850 kilo tonnes is a significant increase, 88% of that still sourced from Vietnam. FOB prices recorded just under $40 a tonne, which is significantly lower than the domestic price in Vietnam. So in our view, clearly dumping of cement, 72% of that coming through the Port of Durban, whilst we're also of late seeing quite a substantial increase through the Port of CapeTown, which is up from 8.7% to 11.3% of total. Namibian imports, similar levels than prior year. And of late, we're also seeing quite an increase from Mozambique. I think overall compound annual growth rate of this 14.1% since 2016 is definitely a concern to us. In contrast to that, certainly, we didn't see the cement market grow by that margin. So to the contrary, that is a problem. Clinker, yes, that's still coming in through mostly Port Elizabeth. A little bit came through to Port of Durban. I think whilst the regional incumbent were upgrading their plants, they imported some clinker. So that is just a once-off in our opinion. But yes, 8% up on last year. Again, a concern to us as an industry. We move over to Slide 18, just a little bit of an update -- an operational update. Historic performance as far as revenue, pricing and volumes, bear in mind, we're talking about our interim period, which is the first half of the year. On a comparative basis, we saw quite a drop in our sales volumes and with pricing being relatively flat, of course, that translated into a revenue drop of 13%. Two factors for that. Overall, I think, subdued conditions. We had excessive rainfall in the first quarter of this year. And bear in mind, our main catchment area is the inland region of our country where the rainfall was severely impacting our sales. The general subdued conditions, I think, also had an impact on our bulk volumes. But as we'll see a little bit later on, we have seen quite a good recovery from the second half of this calendar year, which we'll report on in a minute. I think overall, if one looks at the sales volumes, it's sort of trending at a level that we saw in 2019, where after we had quite a drop. And again, we're sort of hovering around those levels. We've said enough about pricing. I think it's really suffered as a result of low volumes and again, an environment of excess capacity. This year, we did have some kiln outages, which we had 2 kiln outages in the first half, which the second one was just starting before the period in review and then continuing into the third quarter, which, of course, has now been completed. So that definitely affected our inventory movements, which also affected the overall EBITDA levels. As far as austerity measures, we've been saying that we've been applying that, and we'll see in the next slide that, that is paying dividends. And it's really to minimize our cost given the overall adverse market conditions. And we've seen savings in nominal terms on plant fixed and SG&A cost. If we move over to Slide 20. The focus areas is really to continue especially in the technical customer front, customer retention, working together with our customer base engagement, underpinned by our quality products and customer service excellence. Most of our customers, we've retained. So again, that is a testament to the fact that what we're doing and have been doing all along and our products have been performing very well, has paid dividends. It's just the overall market environment, especially the bulk sector has been subdued. We also have been talking about how do we continuously improve. That's mainly underpinned by the use of alternative fuels, which again is being improved and some investments coming during this year and the next year. But also the rollout of AI technology, specifically related to plant process control. We've been adopting this principle in terms of preventive maintenance and using various tools, but now we're also starting to roll it out to assist with process control to get some stability in our operations. Very briefly, just as far as the post period, the 9 months ending September, quite a bit of an improvement as far as our sales from the 13% adverse variance, we're now sitting at 6.7%. And as far as our EBITDA, we are 4% lower than what we had reported the year prior. So some improvements. And hopefully, the short-term environment as far as especially the retail sector, hopefully, that will contribute to leaving us in a better position come our financial year-end, which is also the calendar year-end. And with that, I'll hand back to Kenneth for the Metier update. Thank you.

Thank you, Duan. Moving on to Slide 22. So as far as the sales volumes for Metier go, our volumes have increased by 2%. I must note that, that's been through expansion in plant network and not market. When we've removed the expansion of our plant network, we see that overall, we've had a 15% drop in volumes, which would then speak almost directly to Duan's drop-off in bulk volumes. So certainly some pressure in the general market. With that, we've had an 8% in revenue, supported by a disciplined pricing strategy and focused customer segmentation initiatives, which we focus on every single year. It's not a new strategy. And we've had 6% in pricing, which is slightly over inflation. And again, also based on focusing on margins and not just trying to chase volume. I move on to Slide 23. The implementation of the strategic price adjustments, coupled with the replacement of aging equipment has contributed to an EBITDA of ZAR 98 million, an increase of ZAR 29 million compared to the prior period. Our net profit after tax improved by ZAR 19 million, also underpinned by enhanced margins as well as a ZAR 4.2 million profit on the disposal of assets that were older assets that we no longer acquired. Metier's sustained investment in technical expertise and product innovation continues to support our ability to maintain margins and pursue growth opportunities. Moving on to Slide 24, some focus areas. We mentioned this all the time. We don't increase the Metier plant network just because we look for the right opportunities. We have mentioned the Western Cape, where we have been expanding. We're going to continue doing that because we believe that our footprint needs to be substantial in the area as it has been in the other 3 main areas that we operate. One of the key areas now is maintaining our margins. We've grown it well over the last few years. It's been a focus area. But at the same time, we need to maintain it now as well as keep our market share of each sector that we focus on. Another area is cost control with the asset renewal program in the past 3 years that we adopted. We're now at a position where our overall maintenance costs have come down and cost control measures need to be very stringent to make sure that we get the benefit of those -- that renewal program we've always spoken about. And the key -- another key area for us is our health and safety. We need to improve our LTIFR record. We've seen a drop over the last 2 years. So management are now focused in this area to improve back to where we were 2 years ago. Moving on to the outlook on Slide 26. So we've mentioned it that we're kind of cautiously optimistic because of the short-term demand. We still don't see a significant uptick. Metier will continue to look for expansion opportunities even in a subdued market. If we believe that it's an area where we can offer expertise and our clients are asking us to go, it's certainly something we'll take up. The Western Cape, we do have plans there. We've sometimes taken it a little bit slower than we expected, but with good reason. And we're now seeing that our presence there is contributing to the group. So that's a really good positive for us. We'll continue to focus on cost control and customer retention, as mentioned in the previous slide. As far as Sephaku Cement is concerned, the retail demand is expected to improve modestly, as mentioned by Duan, while the bulk sales remain subdued. Imports continue to pressure the market. So we will be involved with prompting some regulatory engagement with government. We do believe that there needs to be some protection, given the fact that we have other costs that we need to be taking on as far as, for example, carbon taxes are concerned, what Duan mentioned. Unfortunately, carbon taxes will need to be moved on to the consumers, while at the same time, we're going to start looking at further reducing our footprint through cement extensions. And as mentioned by Duan as well, cost-saving initiatives driven by alternative fuels and AI-driven efficiencies will be accelerated amid ongoing austerity measures. As far as our outlook goes, that's all we're going to say with that. I'd like to move on to Neil. I think Neil might have some questions from the floor. Neil, could I pass that on to you?

Thank you, Kenneth. Yes, we have 2 questions from the floor. I will be dealing with the first one, and then Duan will probably talk to the second one to the extent that it's possible to communicate on that at this point. First question is with regarding to the DCP loan. The question is, when is it -- will it be replaced -- repaid and replaced by a bank loan and what is the interest rate on the bank loan? And does the loan have provisions about SepCem paying dividends? The bank's time line at the moment is for drawdown and repayment to take place in the second week of December. Progress is well underway, and that's the timing on that side at the moment. As far as the interest rate is concerned, on average, it is a JIBAR plus 3%. There are 2 elements to the loan. It will be, again -- 50% will be repaid over the next 3 years and the balance will be a bullet. So there are 2 different rates. But on average, it comes down to JIBAR plus 3% for the facility. The facility does make a provision for distributions, but we've not finalized that yet. That is currently in discussion, and we're hoping to finalize that just during this week. There is a second question with regards to the Dangote Cement's regional expansion strategy, a reference to a grinding plant in Botswana and then talk of a plant in Zimbabwe and what -- how that would impact us. Duan, you like to respond on that, maybe specifically Botswana plant?