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[December 2009]
South African Brickmaker Reports on Latest Situation
The directors of Brikor Ltd (Vorsterskroon, Nigel, South Africa), in presenting the unaudited interim financial results for the six months ended 31 August 2009, commented that the position of suppliers to the residential construction market was the worst in 15 years and not unique to the performance of Brikor’s brickmaking operations.
The review period has been characterised by persisting economic pressures resulting from the global recession’s halting recovery. Extensive job losses, increased food and fuel costs, the dramatic increases in the cost of power and political uncertainty evidenced by ongoing service delivery protests and concern over high crime rates have exerted a negative influence on both the local and international investment sectors.
This in turn has affected consumer and business sentiment. The directors said that market conditions in the building industry remained subdued during the review period, with few new residential developments and a virtual stagnation in speculative investment. The group’s results were affected by reduced consumer spending, tightening of available bank funding as well as increased input costs.
Delays and cancellations in building and construction projects further hampered performance. Although the shrinking residential building market negatively affected the company’s sales, the newly acquired companies have strengthened the Brikor’s traditional business of brick manufacturing. Zululand Quarries Group and Donkerhoek Quartzite have started to contribute to the critical mass required for the group to remain sustainable and profitable going forward.
The performance of Zululand Quarries has been satisfactory to date and its growth prospects indicate that the investment complements the group’s activities and diversification strategy. A delay was, however, experienced in the take-off of new projects from the Donkerhoek operations, hence the current losses experienced in the division. Given the uncertainty pertaining to the timing of economic recovery, the directors have made provision of impairment for goodwill on the Donkerhoek operations of R7.5 million.
In addition to lower volume demand, the continued increased input costs, such as energy, fuel and raw material, diluted the net earnings versus volume output during the interim period. The company was unable to pass these cost increases onto its customers as a result of price pressure and competition for volume. Brikor has implemented a strategy to right-size its business for the current climate by realigning the lower production volumes with reduced operational cost structures and expanding its focus on the commercial building sector and construction segment.
The group’s consolidated revenue decreased by 18% to R155.5 million (2008: R190.3 million), mainly as a result of lower demand and lower selling prices. Gross profit decreased by 19% to R37.1 million (2008: R46.1 million) and gross profit margins decreased to 24% as a result of the continued increased input costs, such as energy, fuel, gas and raw material. The reduction in the group’s gross profit, combined with higher operating expenses, increased depreciation charges for the larger asset base, finance costs and goodwill impairment resulted in a headline loss per share of 0.7 cents for the period (earnings per share 2008: 2.0 cents).
Whilst no meaningful recovery is expected from building-related activities before the start of the new calendar year, the lower interest rate environment should contribute to an improvement in consumer confidence and the general trading environment. With the successful conclusion of the election and settling down and positioning of central and local government decision-making powers, it is anticipated that government spend on infrastructure and housing projects will support increased demand in the building and construction sector over the next financial period. The board expects market conditions to remain under pressure over the short- to medium-term, but is confident that underlying fundamentals will continue to improve as a result of:
- more accessible funding for customers due to the relaxing of lending criteria by financial institutions;
- an improvement in investor confidence from significantly reduced interest rates; and
- increased pressure on government to deliver on infrastructure and housing requirements.
Brikor concludes that the group therefore continues to be well positioned to benefit from gradual improvement in market conditions.
ENDS