Sephaku Holdings Limited (SEP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sephaku Holdings Limited Annual Results Presentation. [Operator Instructions] session will follow the formal presentation. [Operator Instructions]. Please note participant is being recorded. I will now hand over to the CEO, Kenneth Capes. Please go ahead.

Thank you. Good morning, and thank you for joining us. We are pleased to present our annual results for the '25, '26 financial year, reflecting a period of focused execution, operational resilience and continued progress across our portfolio. Against the backdrop of ongoing economic uncertainty, infrastructure constraints and a challenging trading environment, our teams have remained committed to delivering sustainable value and maintaining operational discipline. -- the efforts have enabled us to achieve a solid performance and position for the group and position -- sorry, position the group for further growth opportunities. Joining me this morning is Neil Crafford-Lazarus, our Financial Director, and Duan Claassen, CEO of Space Cement. We will begin with Neil, who will take us through the financial performance for the year, after which Duan and I will provide operational commentary, key business highlights and an outlook for the period ahead. Neil, if I could pass on to you to start on Page 4.

Thank you very much, Kenneth, and good morning, everyone. As Kenneth said, we are on Slide #4. FY26 was another challenging year for the South African construction sector. Demand remains subdued prices pressure pricing pressure persisted across several markets and infrastructure expenditure recovered more slowly than anticipated. Against this backdrop, Sephaku Holdings delivered 1 of the stronger operating performances in recent years. The group revenue increased by 9% to ZAR 1.29 billion while net profit after tax increased by 26% to ZAR 93 million. It's something that I mentioned continuously is that the group revenue, of course, is only the mid-tier revenue, which is 100% subsidiary. This meant revenue is reflected in the equity line of report. Basic earnings per share increased by 28% to ZAR 0.405 and headline earnings per share increased by 20% to ZAR 0.379 per share. The primary driver of this performance was made. The business continued to execute exceptionally well, delivering revenue growth of 9%, EBITDA growth of 34% and profit after tax growth -- these results demonstrate the benefits of disciplined pricing, operational excellence and a continued focus on specialized high-margin products. Sephaku continued to operate in an exceptional competitive cement market or revenue and profitability declined year-on-year, trading improved marginally during the second half following operational initiatives implemented during the year. Important successfully repaid a senior bank debt during October '25. Therefore, strengthening their capital structure. Overall, group FY '27 with a stronger balance sheet, improved operational momentum and continued focus on disciplined capital allocation and something that we will come back to in later slides. Moving on to Slide 4 -- Slide 5 -- the financial year revenue trend from ETF for the last 5 years. Revenue increased by 9.2% to ZAR 1.29 billion, as said, despite the broader construction market being the remaining subdued. We also experienced a modest recovery in activity with concrete volumes increasing by 3% after declining 8% in 2025. on volumes increased by 19%, reflecting growth demand for technically complex projects requiring specialized profiting services. This remains an important area of differentiation with Meter and continues to strengthen the quality of our revenue base. Growth was also supported by continued expansion in the Western Cape with inflationary price adjustments and increased service revenue. Importantly, management believes that Mitie maintains market share throughout the year despite intense competition and limited overall industry growth. cone, we expect market conditions to remain challenging. Infrastructure investment remains below historical levels and private sector construction activities remain subdued. Our statutory for remains unchanged protect margins through disciplined pricing, operational excellence and continued focus on specialized products and services. Factoring costs. Nevertheless, the business maintained an EBITDA margin of 11.3%, demonstrating continued operational discipline in a difficult market. Net profit after tax decreased to ZAR 24.5 million, reflecting lower operating earnings, together with higher depreciation associated with the asset base. With regards to the cash scenario, as I've mentioned earlier as well, milestone was reached in successfully repaying the senior bank facility in October '25 and ZAR 200 million revolving working capital facility that remains fully available through the year, providing additional liquidity market conditions required it. Management focus remains on improving margins through logistics optimization, great use of alternative fuels, disciplined pricing and continued cost control while engaging with government regarding imported cement. Moving on to Slide 9, the Sephaku capital structure -- as mentioned, we did repay the refinance loan from 2022 in 2025, the working capital facility remains fully unutilized. And the shareholder funding the DCP loan with a balance of 923 at the segment 2025, ZAR 8 million at 31 March 2025. And interest being capitalized at plus 4% as a noncash bank unit that is fully until there's the noncash debt is fully valid, which we've now mentioned has occurred. We are in the process, in the process of refinancing or refinancing in place in order to repay the shareholder loan or replace a shareholder bank loan going forward, and we anticipate that we will be able to complete that in the existing quarter. Our liquidity position is still strong with ZAR 400 million cash in bank at the 31 December 2026 and the ZAR 200 million working capital facility being unutilized. Moving on to Slide 10. Throughout FY 2026 management continued to apply a disciplined capital allocation framework. Additional borrowings were incurred primarily to find productive assets, including fleet renewal replacement loaders and an additional batching plant. Investments improved mainly efficiency, enhanced customer service capability and position mid-tier for long-term growth. Importantly, debt has not been used to support operating losses or working capital requirements. The group continues to generate healthy operating cash flows while maintaining sufficient liquidity and finance so flexibility. This disciplined approach to capital allocation remains central to management strategy. Moving on to Slide 11. Capital allocation, we stick through the cycle. Although markets remain subdued, management continues to invest selectively, we're -- long-term returns justify the capital allocation. Priority remains preserving operational capability while improving productivity and customer service. Investment during FY '26 focused on maintaining and expanding productive capacity rather than pursuing acquisitions and speculative growth in -- this disciplined approach to ensure that the business remains well positioned to benefit when construction activity eventually recovers. Ladies and gentlemen, that takes care of the financial review. I will now hand back to Kenneth for the discussion on the trading environment.

Thank you, Neil. So South Africa's economic recovery gained some momentum into 2026. supported by improved energy availability, easing interest rates and business confidence improvement. GDP has grown by 1.9% year-on-year in the first quarter, marking a sixth consecutive quarter of expansion. Fixed investment remained subdued overall, although gross fixed capital formation expanded for a second consecutive quarter in late 2025, suggesting a potential inflection point. Government has also committed significant infrastructure expenditure over the medium term with transport, energy, water and sanitation receiving the largest allocations. We have seen some movement of this, but it's in very specified places and not all over the country. Recent geopolitical tensions in the Middle East have introduced a new uncertainty into the outlook with the higher oil prices and associated inflationary pressures which have weakened sentiment and prompted a more cautious interest rate outlook. Inflation increased to 4.5% in May 2026, leading to the South African Reserve Bank's interest rate increase in 3 years. As a result, GDP growth expectations for 2026 have been revised down to approximately 1.2%. We all know that recently, with the Strait opening, the oil prices have come down. We don't think around about $70 per barrel, which is having a significant decrease on our fuel pricing and hopefully, that has an impact in the coming months. Despite improving macroeconomic conditions, the outlook for the construction and cement sectors remains challenging, while infrastructure investment commitments are encouraging, the pipeline of bankable projects continues to lag public sector announcements until projects move from planning to execution, the anticipated benefits for construction activity and cement demand unlikely to fully materialize. In addition, the excess cement capacity continued import pressure and subdued construction pipeline will always place pressure on our industry, on our volumes and our pricing, particularly in the bulk segment, which sits in is a major player. If I can just move on to Slide 15, and Duan will take us through the recent update on cement imports. Thank you, Duan.

Thank you, Kenneth, and good morning, ladies and gentlemen. We always share a slide of imports. We've been doing that for a number of years. For obvious reasons, clearly a big threat to the industry. If we look at the slide itself in the top section of the graphic, one could clearly see the increase -- the year-on-year increase as the trends continue upwards. Just as an update past year-end 2025, the first quarter of this a 3% year-on-year increase. So this trend is clearly continuing. And what we also know is that there was just under 1.5 million tonnes of cement imported into South Africa during 2025, which is, of course, placing enormous pressure on domestic producers, specifically integrated producers. 90% of the first quarter's volumes that we imported came from Vietnam once again. And from these numbers, the FOB reported numbers, it's clearly a case of dumping. Domestically, the prices are significantly higher. Of late, we also have a rising threat from Mozambique, especially encouraging the inland markets, 7% of the volumes came through from Mozambique. And again, as on the slide, at FOB prices substantially below the domestic pricing, which is again demonstrating dumping. On the positive side, I think for the first time in a while, we've got the industry agreeing on taking serious action lobbying government. We've had meetings with the presidency towards the end of 2025. And we've subsequently seen quite a lot of action -- various work streams being established driven by the presidency, which is really encouraging to address this problem. There's been, firstly, an antidumping application that was submitted. It was lodged and it is supported by most of the integrated producers. We've also got parallel work streams looking at other safeguards, quality enforcement as we know that substandard quality cement is also proliferating the market -- so that is something that we are hoping to do something about very quickly with the assistance of DTIC. And we're also engaging treasury on some carbon tax relief as that is another major disadvantage that we have is domestic integrated producers vis-a-vis imports. On the clinker import front, it's something that we always keep on the radar. Again, remaining in fact, what we've seen is some regional producers supplementing local production with imported clinker. Again, clinker is currently exempt from carbon tax, and it's something that we also is engaging government on. As far as our own clinker production and capabilities are concerned, we've got sufficient link of our own -- and when we have periodic surpluses, we are also offering that for external sale as and when the opportunities arise. So that's it on an update on imports. Back to you, Kenneth.

Thanks very much, Duan. Just on feedback on MTA on the past year and some of our focus area. We always talk about plant network expansion. We have targeted the Western Cape. Unfortunately, in the prior year, we didn't get to increase our plant network, which was our intention. However, we're still evaluating particular areas where we want our footprint to be, and we will move forward on that. We're also looking at other expansion in areas like Richards Bay and we believe that it will be positive for the group as well. One of our targets was margin enhancement and cash generation. And I think the results speak for themselves. We had a strong growth in EBITDA. We had a strong growth in our cash, and we're going to continue to drive that narrative. This year, we also looked at our strategic raw material sourcing if the construction industry does start to get an upturn, which we will hope for securing reliable raw materials and quality is a key position for us. It's 67 percent of our cost structure and critical. So this year, we entered into several supply agreements, which we're strengthening the supply, the competitiveness for us and supports our business medium-term growth objectives. Health and safety, Mets continues to have a strong focus on health and safety, and we recorded 0 fertilities during the year. In terms of industry leadership, Meteis is proud once again to maintain our position as the best -- named the best South African ready-mix concrete company. and that was done by PMR Africa, a completely independent magazine that does research in the industry. And this recognition reflects the strength of our brand, the quality of our products and the service offering that we have. and the trust placed in the business by its customers, which we're very, very proud. If I could move on to Slide 18 and hand back to Duan.

Thank you, Kenneth. So referring to the slide, we've got Slide 18 and 19 covering our main objective focus areas for 2025. The first one, delivering quality products, excellent service, customer engagement to drive revenue growth. We've already mentioned the contraction in the sales volumes. And again, the type of 20% contraction in the bulks and for the typo. And that's really, as we had earlier week, civil construction in Turkey particularly in the first half of last year, we saw a turnaround in the second half, which improved our results substantially from mid-year. As far as the bag cement sector is concerned, that was more resilient, and it was supported by retail demand and road construction projects, which we've really seen a noticeable increase in from around the second quarter of last year and continuing into this year. We spoke about cement pricing. For the first time, we did see a nominal contraction or decrease in prices. our assessment is -- that has to do with the rising imports as well as some aggression from a newly acquired producer, which is targeting a market entry. As far as the engagement with government is concerned, it was key in our opinion, to finally get that over the line to get the rest of the producers involved. It was kick started, as mentioned earlier with the meeting with the presidency late last year and some positive results certainly from awareness and action and work streams with all these regulators very encouraging. Maintaining disciplined cost control using technology to optimize supply chain management. Again, given the revenue contraction as far as the fact as I've just explained, steric remain critical. We continued with that. I think we did a good job in terms of the fixed cost containment only increased by 1.9%, nominally year-on-year and our variable cost of production by 0.3%, which is well below the CPI. Again, that demonstrates the effectiveness of disciplined cost management in a capital-intensive business. One of the levers we've always had and always report on external substitution. We're happy to report that this increased from 25% to 40% substitution, replacing our coal with alternative fuels, including tires and ultrafines waste. This, of course, supports our decarbonization goal and also helps in reducing input cost. Subsequent to the year-end, we've also now commissioned the liquid fuel feeding system, which would hopefully give us further benefits in time to come. As far as our on-time delivery, which is a key performance measure amongst competitors. We've achieved a level of 94% on-time delivery. We've deployed artificial intelligence in terms of our Dallas mill control and the embedded condition monitoring system at our main plant continue to give us anticipated failures so that we could react before it affects reliability to the extent that, that becomes a problem. For supply chain and logistics optimization, that continued, and it was especially crucial considering the recent rise in transportation costs. If we move over to Slide 19, the 2 remaining areas of focus, our social license to operate. Here, we're happy to report that we continue engaging extensively with communities. We've implemented a 5-year interim agreement on supplementing feed to the local farmers to deescalate tensions as there's a severe overgrading problem in the areas. So we've assisted and we are assisting those farmers to ensure that they that they have a sustainable cattle farming businesses. We've also partnered with industry peers. There was a diabolic manufacturers Forum established a number of years ago, a directive from Minister of Minerals & Energy. And we continue to contribute to making a difference in the municipal area of. We've also increased our preferential procurement spend for local SMMEs. Last year, as far as maintaining a lean organization, we have embarked on a project cause a number of years ago. It's a high-performance culture program. That continued and this past year, we focused on mentorship programs, and that grew to 11 mentors in 18 mentees for the calendar year 2025. As far as safety, -- it is, in fact, a top priority. It just happens to be in this fourth objective of ours. But we're very proud to report that our life time injury frequency rate improved amount dramatically from 2024 and we're now at 0.7 injuries per million man hours worked, which we're very proud of. As far as our BEE status is concerned, we're also happy to report that we've increased that improved it from Level 5 to Level 4, really contributing on all the elements of the scorecard towards the outcome. Kenneth over to you.

Thank you Duan. I move to Slide 21, which Neil will take us through.

Thank you, Kenneth. Slide 21 just contains the post-balance sheet period for cement, that is not included in our results but coincides with the period that we report on. So the first quarter ending 31st of March 2026, revenue of ZAR 566 million compared to a first quarter of ZAR 526 million in the prior year, up 7.4%. Sales volumes up 6%. weather affected low base last year, we had continuous rain during the first couple of years with period, which has had an impact on that. Prices held following the late January 2026 increase on both bulk and bag products. The Q1 '26 cement imports of 332 kilotonnes, 90% from Vietnam at $3.85 per tonnes clear dumping. Hitech antidumping application was launched industry-wide support, and we're eagerly awaiting some positive developments on that side. With regards to the EBITDA of ZAR 13.4 million against the ZAR 101 million from the previous year. we always -- the fact that we want a single killer producer, there is always the 1 quarter that the kill and shutdown and the refractory takes place is the 1 that is out of line, and this year happened to be Q1. So the comparison with the previous year's quarter is therefore not really comparing apples with apples. Stock depletion of ZAR 81.6 million adversely impacted the quarter's result. That's purely because there's no new production coming out. The ore sales are the done from stock or through stock to prison and the replacement of that, of course, is then only achievable in the quarter after that. Back to you.

Thank you. I think we've mentioned already that about the economy in 2026, having some improved momentum. We've also had the rising geopolitical tensions and the higher energy prices, which have created some uncertainty with outlook for this year. And we're going to see how it weighs on growth and inflation. While the public sector infrastructure investment remains a stated priority, the translation of these projects, as mentioned, into actual projects, tends to lag expectations. Despite the headwinds, we believe the group is well positioned to navigate this current environment, supported by a stronger balance sheet, improved operational momentum and a disciplined approach to our capital allocation. in 20 -- this year, full year 2027. Just a quick summary of what Duan has already said, we're going to continue engaging with government and our stakeholders with regards to import competitions, -- and we're going to look at the advanced decarbonization initiatives. We continue with those year-on-year. We maintain a strong focus on our costs. and evaluate any strategic opportunities that could strengthen Sean's long-term competitiveness. With regards to Meteir, we will continue to, as we have done in the last couple of years, the selective plant expansion opportunities where we believe there's going to be growth, as mentioned, in the Western Cape, but as well as Casual -- we're going to continue strengthening our relationships with the infrastructure and construction participants. And we are playing a major role there, and we also maintain operational excellence and disciplined pricing and superior customer service, which is effectively our key contributors to the business and our sustained performance. And just in closing, we remain cautious on the near-term outlook for the construction sector. I think this has kind of been the same year-on-year. We know that the construction industry has been battling the last few years. So the results that we've seen are exceptional. We think that our staff are doing a fantastic job growing and maintaining our positions. And we believe that we're entering a new year in a position of strength. We remain focused on executing our strategy, growing shareholder value and positioning both Meta and Septen for long-term sustainable growth. That brings us to the end of our presentation, and thank you very much for listening to our annual results. Neil, can I hand over to you, I think you do have some questions that have come through.