JSE listed Insimbi Refractory & Alloy Supplies Ltd has issued a cautionary notice to shareholders that the board of directors of Insimbi is pleased to announce that in terms of a memorandum of understanding concluded between Insimbi and the controlling shareholders of Amalgamated Metals Recycling Proprietary Limited, that Insimbi intends to acquire 100% of the AMR Group, as well as the properties from which the AMR Group operates.
The business conducted by the AMR Group is that of the aggregation, processing, recycling and sale of scrap metal, which business is conducted from three facilities on the properties located at Devland, Roodepoort and Booysens in Gauteng.
Amalgamated Metals Recycling (Pty) Ltd was founded in 2002 with 40 staff members and has since grown to 230 staff members across the three branches.
The rationale for the AMR Transaction is to create a larger, diversified group of companies, and to become a significant player in the metals market. The acquisition will also create a significant Rand hedge benefit to the group. The combined group will have approximately R3 billion in revenue and a profit after tax of R80 million (based on historical Insimbi and AMR Group results) for the year ended 29 February 2016.
It is envisaged that the transaction will also allow for improved share liquidity.
The purchase price for the AMR Group, and the properties, shall be an aggregate amount of R284.1 million, of which R234.1 million will be payable in cash. The cash requirement will be raised via a specific placement of Insimbi shares and term debt facilities to be negotiated. The balance of R50 million will be settled in Insimbi shares, which are to be issued at R1.00 per Insimbi share.
The transaction will be conditional upon the conclusion of, amongst others, the conclusion of definitive sale and purchase agreements and all regulatory approvals, as required in terms of the JSE Limited Listings Requirements, and the applicable competition authorities are met.
Recycling of waste and scrap
The Department of Science and Technology estimates that the South African waste sector is valued at R15 billion, which equates to 0.51% of national GDP. Approximately 540 million tons of waste is generated annually, with 90% of this waste disposed of in landfills, instead of being recycled. It is almost impossible to accurately calculate the number of informal collectors and recyclers, but estimates indicate that there are more than 100 000 people who earn an income from the whole recycling industry that includes recycling of metal waste scrap as well as non-metal waste including plastics, glass and e-waste.
A competitive global market
The domestic scrap collecting and recycling industries operate within a very competitive global market where scrap has become a valuable commodity. In the plastics sector, of the 315 600 tons of plastics diverted from landfill, 31 087 tons or 9.8% was exported for recycling during 2014. In the scrap metal sector where the metal recovery rate is 80%, an estimated 1.5 million tons, more than 50% of the scrap metal recovered, is exported for recycling instead of being used to the advantage of the local economy, according to a Reportlinker report.
Audited results for the year ended 29 February 2016
Insimbi has released a good set of results given the difficult conditions in the steel industry in South Africa. The results were published towards the end of June 2016.
“The year under review was challenging mainly due to the global and particularly, the local steel industry’s continued decline. The slowdown in local steel production, the business rescue and subsequent closure of Evraz Highveld Steel coupled with the downturn in commodity prices all contributed to nominal decline in revenue R2.9 million, from R958 million to R955 million, or 0.3%.
Despite this operating profit increased by 10.4% from R40.2 million to R44.4 million. The weak growth by the steel division was somewhat offset by strong growth in the refractory division and the maiden contribution of the group’s plastics division.
On an operating profit level only the steel division contributed negatively falling 34% with the foundry division growing operating profit 19.9% despite negative revenue growth. The refractory division grew operating profit by 75% for the year.
The operating margin increased from 4.2% to 4.6% largely as a result of strong profit increases in the foundry and refractory divisions despite a decreasing revenue base. The group also executed tight control of overheads.
Insimbi incorporated a new plastics division with the acquisition of Polydrum Ltd on 1 August 2015. The division contributed R19.6 million to revenue in its seven-month inclusion. The drought impacted demand for containers from the agricultural sector and erratic electricity supply caused some production losses. As a result the division did not achieve the expected profitability and operated close to break even.
Market and prospects
“We are especially encouraged by our strong operating cash flow generated during the period under review and are very proud that we have consistently generated cash and profits since listing in March 2008,” says Insimbi.
“The potential threat of an economic downgrade to the South African economy together with political turmoil within various political parties towards the run-up to the local elections will have a negative impact on the future market sentiment. Higher inflation and higher interest rates will further contribute towards a very slow economic outlook.”
“The steel industry will continue to look to Government for assistance in helping revive the steel market. The negative view on potential growth within the steel industry is having a negative impact on all other businesses supplying into this industry.”
“Infrastructure spend is still very slow and with new cement production facilities coming online the pressure is on cost-cutting, which may have an impact on the Refractory segment’s profits in the future. The import tariff introduction on certain cement products from Pakistan introduced late in our previous financial year, has had a positive effect on the demand for locally produced cement but much more needs to be done to lift the industry.”
“The foundry division grew operating profit by 19.9% despite negative revenue growth. We do not expect significant growth in the foundry segment in the immediate future but it seems like the industry has stabilised and we anticipate that we will see a slight increase in demand towards second half of this financial year.”
“Opportunities will continue to present themselves and Insimbi is prepared and equipped to embrace these opportunities in order to further diversify and grow the group revenue streams, cash flows and profitability. We are confident that 2017 will be another prosperous financial year for the group and we will continue to keep our focus on maintaining our cost base as low as possible, growing our market for the higher margin products and increasing revenues by providing the best service and quality products in our industry.”
Management and employee incentives
In March 2016 the Board of Directors of Insimbi introduced management and employee incentives to reward them, whereby eligible management and employees can collectively participate in a repurchase agreement of shares, referred to as The ManCo Transaction and The EmployeeCo Transaction.
Changes to the Board of Directors
Shareholders of Insimbi have been advised that Dr. Gilimamba Mahlati has resigned from the board of directors, effective from 31 March 2016, to pursue other business interests.
Shareholders are also notified that the board of directors of Insimbi announces the appointment of Ms. Pamela Mogotlane and Mr. Nelson Mwale as non-executive directors of the company. Both appointments are effective 8 June 2016.
Broader strategic BBBEE initiative
Insimbi shareholders are advised that the four founding executive directors of Insimbi have, as part of a broader strategic BBBEE initiative, sold equal portions of their shareholding in the Company to New Seasons Investment Holdings Proprietary Limited (“New Seasons”). New Seasons is an established black owned and managed investment holding company with a diverse portfolio of investments and is a level 1 BBBEE contributor.
The sale by the founding executive directors of 52 million shares, equivalent to 20% of the issued share capital of the Company, was concluded at a discount of approximately 40%
to the 30 day VWAP of Insimbi as at 31 May 2016, and supports the founding directors commitment to BBBEE and responsible corporate citizenship.
This sale, combined with the recent EmployeeCo and ManCo Transactions announced on SENS on 1 March 2016 will result in a broad based black ownership in Insimbi, of over 28%.
For more information contact Insimbi Group of Companies on TEL: 011 902 6930 or visit the website www.insimbi-alloys.co.za