Biznews assessment – Buildmax: mining contractor that should be on your radar

As a company that has seen its share price head up into the stratosphere before plunging back down to earth, Buildmax is one that is not often on investors' lists of possible opportunities. But in this interview, Buildmax executive chairman Terry Bantock outlines a case for why it may be worth considering the stock. He is persuasive, overall, although given that Buildmax concentrates on contract mining, along with other construction operations, there is definitely a risk to the rosy future. The platinum strikes have depressed mining in South Africa, and this will surely translate into weakness for Buildmax if the situation doesn't improve. – FD 

ALEC HOGG: Buildmax is an interesting stock. I remember it from years ago when the Malaysians came into South Africa and acquired controlling interest, the share price actually got to R90.00 in the 2007 boom. It's around R2.80 at the moment, a very different company and a company that is worth starting to look at. Last year (2013), they improved dramatically. This year's set of financial results…it's a pleasing growth – 15 percent – more normalised. They do have some interesting operations in other parts of Africa. I think they've recently entered Botswana. Should you be buying the shares? You could do worse. You could do worse. If we do see an uptick in the commodities cycle then certainly, this is a stock that could improve from its current levels. It certainly is not a demanding valuation and all-round it looks as though the management team has gotten themselves together quite nicely. It's not one of those that you're going to find in too many institutional portfolios, but for private clients it's not a bad idea, so put Buildmax onto your list of companies to look at. There's lots of information on the website. I'm very impressed by the professional way they've done their annual report. With people like Bulelane Ngcuka involved there as well, they have the right credentials. Have a look at this one.

TERRY BANTOCK:  The past financial year of Buildmax was reasonably good, taking into account the circumstances of the industry we work in. The sectors that we work in, for example contract mining, contract Civils, and quarries, have been hit quite hard by the general downturn in mining, the challenges in that industry relating to labour and commodity prices. Having said that though, Buildmax came up through the year reasonably well. We had a growth in turnover of round about seven percent, our profits went up by 19 percent, and our headline earnings went up by 15 percent. Coupled with that, we've managed to reduce our debt significantly. Our net debt is down to R271m, which is significantly down from what it was last year. All the signals bode well. Our balance sheet is strong. We had over R90m in cash on the balance sheet, so we're feeling reasonably robust at the end of the financial year.

Our tangible net asset value has gone up by 13 percent and we still trade at a significant discount to that. We feel very strongly that our tangible net asset value is real, in that we have a relatively conservative depreciation policy on our plant assets. This is displayed by the fact that when we sell assets, we generally make a very small profit or break even on those assets on an annual basis. We're feeling very optimistic that with our one-plant fleet, we're going to be well positioned for the future. The prospects, which relate to the forthcoming financial year…it goes without saying that it's going to be tough in the sectors we operate in. There's still ongoing unrest, especially in the platinum belt in terms of labour. The labour challenges emanate right through the industry. Having said that, we enjoy a five-year wage agreement with our chosen union and we have a solid working relationship with them, which we work on every day of our lives.

We treasure it. We believe that relationship is one of our key differentials in the industry, and we continuously strive to make sure that we have a better relationship with all our staff and our other stakeholders. We think that will leverage us into good prospects for the next financial year. Over and above that, going back to our plant assets: we've spent a lot of money in the last three to four years on replacing our plant, and we have a philosophy that says we will replace plants every year and we have a robust replacement strategy in place, coupled with a maintenance strategy. Our plant is in really good shape, to the extent that less than two percent in fact, of our plant assets have over twenty-thousand hours on them. If you couple that to the useful life, we're sitting at 40 percent of the useful life of our plant, on average.

One of the situations our industry faced is that ageing plants have been tried to be extended and we recommend and believe that you need to replace plant assets every year on an annual basis. What we've done to facilitate that is we've made sure we pay down on our assets over three years – in most cases with the banks – , which gives the banks confidence that we always have equity in the assets that they finance. Typically, what we'll do is we'll pay off 50 percent of the value of the asset in the first year, then 30 percent, and then 20 percent in the final year. That's sort of approach really does hit your cash flow to a degree, but it positions you well for getting future bank finance, which we haven't had a problem getting, to enjoy our growth strategy going forward. Part of our strategy has always been to diversify from our reliance on coal assets to other countries in other commodities, and we're very pleased with our successes in that regard. In the past 12 to 18 months, we landed a contract in the Republic of Congo with the DMC and that started off and went well. However, it's been put on suspension for the meantime, but we're still there at very low risk. We also landed a contract in Botswana, which has just started right at the tail end of the last/2014 financial year and we'll get the full benefit of that during the 2015 financial year. That is going particularly well with a new client in the copper industry, which is great.

We're therefore diversifying out of coal into copper and in the Congo; we're diversifying out of coal into iron ore, which is also great. We're also looking at some opportunities in other countries such as Mozambique, and we're feeling very confident in our ability to grow into those countries quite soon. Having said that, we still believe strongly that our core business in coal has legs and that it will continue to prosper in the years to come. Eskom has an inherent demand for coal and we believe that the use of contractors in extracting that coal has the propensity to grow due to the fact that most mining houses need that flexibility by using contractors. They like the fact that we do a good job for them, alongside obviously robust competitors, but the use of contractors has generally been able to outperform the mine owners doing the work themselves, so we feel very confident about that.

One of the big factors facing the industry is the liquidity crunch and the banks being conservative with lending. Having said that, we believe and feel confident in our ability to get back funding to help us grow into the future. We believe in our strategy, that we're going to be able to diversify into other commodities not only in South Africa, but in other countries, too. We have an ambition to get into the coal sector in South Africa. We have an ambition to get into platinum and then I think we are really nicely spread. Currently, our spread is still concentrated in that we have 68 percent of our business in South Africa, about six percent outside of South Africa, the balance of our business is 11 percent on our Civils business, and the balancing number is 15 percent on our quarries. We're feeling very confident about the future, to the extent that we are operating in a very tough environment and that those