Africa-Israel Industries Ltd.'s (TASE: AFID) reported at the end of last week that it had finished the second quarter of 2016 with a NIS 42 million loss, completely attributable to its Negev Ceramics subsidiary. The second quarter loss reduced Africa-Israel Industries Ltd.'s equity to only NIS 102 million, compared with NIS 266 million in June 2015. "Globes" reported 10 days ago that a loss was expected for the second quarter.
Following its continued losses and the liquidity problems of Africa-Israel Industries, the auditor attached a going concern warning to its reports for the first time, noting that there was significant doubt concerning the company's continued existence. According to the accountant, uncertainty exists regarding the company's ability to meet its obligations to the institutional concerns that have financed its investments in the past.
Africa-Israel Industries has two main arms. The first is Packer Steels and Metals (Packer Plada) (TASE: PKER), which processes and markets metals for the construction and industrial sectors. The second, which is the source of Africa-Israel Industries' troubles, is Negev Ceramics, which manufactures and markets porcelain granite tiles in a plant located in Yeruham. Negev Ceramics also imports and markets finished construction products for home design, such as ceramics, bathroom fixtures, and faucets. The marketing is conducted through a chain of stores operated by the company throughout Israel; the number of branches was recently cut to 11 in a cost-cutting measure.
Africa-Israel Industries' steel business is reporting better results this year, with a steep rise in profit resulting from higher sales and sale prices for metal products. The steel business reported net profits of NIS 12 million for the second quarter and NIS 18 million for the first half of 2016, compared with a NIS 1 million net profit in the first half of 2015 and a NIS 14 million loss for all of 2015.
Africa-Israel Industries' main problem was and remains Negev Ceramics, which had losses of NIS 50 million in the second quarter and NIS 65 million in the first half of 2016, following a NIS 130 million loss in 2015.
Negev Ceramics' huge second quarter loss is attributable to a fall in sales volume and a write-off of inventory, which detracted from gross profit. Negev Ceramics posted a NIS 19 million capital loss on a reduction in the value of the machines used to manufacture marble, following the company's decision to discontinue this business and end its contract with the service provider in this sector. In addition, the company posted a NIS 9 million expense item for liquidation of its overseas displays, and NIS 12 million more in expenses related to closing down of branches and a reduction in the value of inventory.
The reason for the ongoing problems at Negev Ceramics lies above all in the historical decision to establish a new plant in Yeruham to manufacture granite porcelain tiles. The plant's production capacity was made double the needs of the domestic market, under the assumption that it could become a leading tile-exporting company. Meanwhile, however, there are no exports, and the plant cost NIS 400 million to build, double the previous estimates.
As a result, veteran CEO Avi Motola was fired in early 2015 and replaced by Omri Lotan, but he also recently announced his resignation, apparently because of disagreements with Africa-Israel Industries CEO Yaki Vadmani about the recovery plan for Negev Ceramics.
Vadmani, who took up his position about six months ago, also assumed the job of Negev Ceramics CEO in an attempt to save the company and prepare it for a possible acquisition, together with thus far unsuccessful efforts to sell Packer Steels or part of its business. The company's financial statements stated that Negev Ceramics management is continuing its implementation of cost-cutting measures, including a reduction in expenses, closing branches, selling activity, discontinuing agreements with suppliers, layoffs at the Yeruham plant, and adapting output to demand in the domestic market. Negev Ceramics is also taking steps to reschedule its debts to the banks, with an emphasis on the debt used to finance construction of the plant. As of now, neither Negev Ceramics nor Africa-Israel Industries are fulfilling the financial conditions for these debts.
In addition, Vadmani must find a solution for Africa-Israel Industries' liquidity problems, mainly the creditors consent to a postponement in repayment of the debt. Africa-Israel Industries owes NIS 155 million to two institutions, against which it has attached all the shares in Negev Ceramics. Africa-Israel Industries is not meeting the financial conditions for the loan, but at the beginning of the year, obtained a waiver from the institutions for the conditions until the end of 2016. Nevertheless, the going concern warning attached to the company's second quarter reports gives the lenders the right to demand immediate repayment of the debt, despite the waiver.
In one month, Africa-Israel Industries is due to pay the two institutions NIS 12 million in principal and interest, while the auditor stated that there was significant doubt concerning its ability to do so. At the end of June, the company (solo) had only NIS 1 million, while the entire group's cash balance amounted to only NIS 23.5 million. Africa-Israel Industries' market cap is NIS 216 million, and parent company Africa-Israel Investments Ltd. (TASE:AFIL), which is negotiating a debt settlement with its bondholders, owns 73% of Africa-Israel Industries' shares.
Published by Globes [online], Israel business news - www.globes-online.com - on August 28, 2016
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