There is still uncertainty about when SA’s growth will return to pre-Covid-19 levels, but the pandemic’s disruption of global supply chains is expected to continue, which will boost local manufacturing and potentially help speed up the country’s economic recovery.
This is the view of Gary Chaplin, CEO of KAP Industrial, the diversified chemical and logistics business.
Chaplin said the trend of localisation is being seen around the world and SA is no different, and if disruption of supply chains “continues for another year or so” it will reinforce local manufacturing and “we will see the economy recovering quicker”.
“I don’t know when we will get back to pre-Covid levels as there are so many moving parts. But what we have seen, which has been very interesting, is that with all these different countries around the world shutting down at different times because of Covid, there has been an enormous disruption in supply chains globally.
“So you would ordinarily have European and American countries buying a lot of product from the East, and with those supply chains being disrupted a lot of those economies are starting to manufacture internally and I think that has happened a lot in South Africa as well, where imports have been disrupted and it has been a boost for local manufacturing,” said Chaplin, who was speaking after the company’s release of results for the year ended June 30 2021.
KAP, considered a bellwether for the economy because of its diversification across the wood-based panelling, chemicals, logistics and automotive sectors, intends to expand local manufacturing capacity with major capital expenditure projects planned across its operations.
At its PG Bison business, for instance, which supplies decorative wood-based panels for kitchen units, among other things, Chaplin said the company is “investing in the expansion of the existing plant and then embarking on a massive greenfields investment into a new plant” to “bring significant additional capacity into the country” to meet local demand.
“With disrupted supply chains and with a lot of product currently imported, we [at KAP] see the opportunity to manufacture more locally and really support the local industry, through both the furniture master plan and the forestry master plan that the government is driving,” said Chaplin.
What will further support local manufacturing in SA is the length of time it will take to restore global supply chains to pre-Covid levels.
“Our view is that these global supply chain disruptions and imbalances in supply and demand are not going to be quickly resolved, and we are fairly optimistic that we will continue to see — especially in the space we operate in — continual improvements” in the company’s various operations.
Chaplin said KAP is “certainly not back at pre-Covid levels”, but the company was “really happy” with its results, which showed a strong recovery from the year before.
KAP grew revenue by 11% to R24bn, increased operating profit before capital items by 48% to R2.1bn, and saw its headline earning per share rise 146% to 43c. It also declared a dividend of 15c for the full year.
Chaplin said because of the nature of its operations, the company was given a boost by “changes in the nature of consumer spend” as people spent more time at home.
We see opportunities to manufacture more in SA and support the local industry.
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Gary Chaplin, CEO of KAP Industrial
“From our perspective we’ve seen some changes in the nature of consumer spend, which has really supported us. Home spending increased with less spend on travel, alcohol and entertainment — and that has obviously helped some of our businesses.
“People are spending more time at home and with that they are wanting to improve their homes. Due to lower spend on other items they have more money to spend on their homes and that plays into our bedding business, where we sell sleep products, and it also plays into our PG Bison business.”
PG Bison reported a sharp increase in operating profit to R615m from R323m last year, while the bedding division, which includes the Restonic and Green Coil brands, delivered operating profit of R254m, compared with R171m previously.
Chaplin said the “ramp up” in health- and hygiene-related spend by consumers in the wake of the pandemic has also given a boost to its Safripol brand, which manufactures polymer products used in health and hygiene products. Safripol delivered operating profit of R428m, from R160m previously.
Chaplin said a reliable indicator of how SA’s economy is doing is the group’s logistics business, as it cuts across a broad spectrum of industries including food, petrochemicals, construction and agriculture.
“In that business we were able to grow revenue — and operating profit there was flattish. That is probably an indication of an economy which is not back to where it should be,” he said.
The rise in KAP Industrial’s revenue.
— IN NUMBERS: 11%
The company’s logistics business in SA reported operating profit of R249m, compared with R222m previously, while its rest-of-Africa logistics operations' operating profit of R211m was slightly down on the R214m last year.
Casparus Treurnicht, research analyst and portfolio manager at Gryphon Asset Management, said it is evident that KAP is not back to pre-Covid levels.
Treurnicht said he is concerned that “there are signs coming to market that the global [economic] recovery is faltering”.
“We are concerned about financial markets and how macroeconomic levers will affect risk assets across the globe and in SA.”
KAP’s reintroduction of dividend payments, however, “should be well received by the market” but the company’s share price which closed at R4.32 seemed to “discount this already”.
Looking forward, Chaplin said KAP had a “strong balance sheet” and had “good operational momentum”, with its strategic plans for the future involving “major internal capital expenditure, reinvesting in our own businesses where we see a lot of potential for growth”.
One of these is a capital expenditure project to increase the size of KAP’s recycling operations.
“We are big recyclers already in the textile sector. We collect all the textiles from all industries and we produce a variety of products that are used in the automotive sector, in the furniture sector and home furnishings. We see a continuing opportunity of investing in that recycling space.”
Chaplin said the group continuously invests in its logistics business through “normal operational replacement”.
At the same time KAP is open to new acquisitions, with Chaplin saying that in the current market “there will be opportunities”.
“We are actively looking but we will be very, very selective in terms of what we look at, both in terms of the strategy alignment perspective and pricing perspective.”
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