Anglo American Platinum: Interpretation of the 2017 Financial Statements

Anglo American Platinum

Interpretation of the 2017 Financial Statements

1. Objective of the Analysis

The objective of the financial analysis is to identify sound entities for long-term investment purposes.

For the purposes of this analysis I will have a look at the following:

• An overview of the operations
• Management
• Strategic drivers and key success factors
• Outlook
• Financial information

2. Background

Amplats with a turnover of R65 670 m (2016 – R61 960 m) and a total asset base of some R80 814 m (R77 697 m) operates six mines in South Africa and one in Zimbabwe. Two of its mines contribute a substantial portion of its sales and turnover.

It focuses mainly on Platinum and Palladium. Asia and Europe accounts for most of its sales.

3. Management

It seems as if the board of directors is capable of meeting the challenges facing the Group.

4. Strategic Drivers

The Group is focussing on elements that management can control and on value rather than volume.

5. Risks

5.1. Management

The risks management identified are as follow:

5.2. Key Audit Matters

The external auditors identified the following matters:

The calculation of the quantity and value of stocks are complex.

6. Outlook

Europe is the biggest client of Amplats and the growth outlook is somewhat reduced, owing to the uncertainties surrounding Brexit.

Asia is the second biggest client with R26 900m (2016 – R24 644), but Amplats is losing sales in that market and this is noteworthy. With positive outlook for India and a sound growth rate in China, although a bit down from the past, Amplats might be concerned.

Although the sales to North America is low at 7,6% (2016 – 4,5%) of total sales, sales increased from R2 769 m to R4 986 m or with 80%. With the sound economic data from the US, this is encouraging.

7. Analysis of financial information

7.1 Segmental information

7.1.1 Mines

Amplats operates a number of mines in South Africa and one in Zimbabwe. Two of the mines, Mogalakwena and Amandelbult accounts for 68% (2016 – 53%) of the total sales while these two mines contribute some 59% (2016 – 46%) of the profits.

7.1.2 Markets

As mentioned before, Europe accounts for most of the sales, some 45% (2016 – 44%) with Asia close one its heels with 38% (2016 – 43%). Amplats is increasing its sales to North America.

7.1.3 Metals

Platinum accounts for 48% (2016 – 57%) of the sales, with Palladium in the second place with 28% (2016 – 22%).

7.1.4 Customers

Some five customers account for 48% (2016 – 57%) of the sales.

The overall impression is that two mines accounts for most of the revenue and profits with approximately five customers taking most of the products. Amplats is losing markets in Asia, while it is expanding its markets in elsewhere.

7.2 Liquidity ratios

The liquidity ratios can improve and is negatively affected by the high stock levels.

7.3 Leverage ratios

Debt levels is high, while the interest cover is low, but it has improved over the last year.

7.4 Activity ratios

The stock levels are very high effecting the activity ratios in general negatively.

7.5 Profitability ratios

The Gross profit improved from 9,5% in 2016 to 13,8% in 2017, while the Net Profit Margin is 5,4%, up from 1.7% the previous year.

These low levels are reason for concern.

The growth in sales amounted to 6% while the expenses only increased substantially. This is also a reason for concern.

7.6 Cash flow

The operating cash flow in relation to total liabilities amounts to 33% (2016 – 30%), noteworthy.

7.7 JSE Statistics

The EPS is 2478c, the P/E ratio is 26, the forward P/E is 21 and the dividend yield is 1%.

During the last 3 years the share price rose by 176%, and over the last 5 years by 45%.

The analysts have a consensus forecast to “Hold” (December 2018 “Buy”) while the 5-year graph in relation to the Top 40 supports a “Buy” forecast.

7.8 2018 Interim results

The interim results recently released indicate the following:

• EBITDA growth of 70%
• Return of capital employed increased from 9% to 22%

8. Conclusion

Amplats is focussed on platinum and palladium mining, concentrates its sales to five customers mainly in Asia and Europe.

The Group invested heavily in inventories and the debt levels reflect this, this might be a function of a positive outlook for sales or it might be a function of over production.

Growth in sales is low, while expenditure is on the increase.

The interim results announced in December 2018 boasts a 70% increase in EBITDA and a substantial increase in return on capital employed. This might be a sign of future growth, but on its own, it will not substantially rectify the high debt levels as the investment in current assets has increased.

This share is expensive at a P/E of 26, a sign that the investment community is expecting solid results in future.

In view of low growth rates in sales, expenses that are on the rise, high stock and debt levels, this is not perhaps the most exciting investment opportunity at a P/E of 26.

Anton Ferreira

1 February 2019