KAP INDUSTRIAL HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1978/000181/06)
JSE alpha code: KAP
LEI code: 3789001F51BC0045FD42
(“KAP” or “the company” or “the group”)


OPERATIONAL UPDATE FOR THE PERIOD 1 JULY 2022 TO 30 NOVEMBER 2022 (“period”)


OPERATING ENVIRONMENT

The operating environment for the period was very challenging, dominated by continued global volatility and
severe political instability, infrastructure failures and rising inflation in South Africa. Within this context, KAP
continued to operate its businesses in accordance with the following key strategies:

•    building resilience in a volatile and increasingly uncertain operating environment;
•    achieving growth in a subdued South African macroeconomic environment; and
•    managing volatility in commodity prices and polymer margins.

PERFORMANCE OVERVIEW

The group’s operational performance for the period was satisfactory and was supported by the diverse nature
of its operations. The expected recoveries in Restonic and Unitrans Africa are however taking somewhat longer
than anticipated, whereas the expected softening in Safripol’s raw material margins has been less severe than
anticipated.

PG Bison had a pleasing performance for the period, supported by robust demand for its products and market
share gains following the 14% increase in total capacity in March 2022. All board plants operated at capacity.
The value-added product ratio was lower than the prior period, due largely to the increased raw board capacity
and lower melamine-faced board (‘MFB’) production during November 2022. The commissioning of the division’s
seventh MFB press, scheduled for September 2022, has been delayed to March 2023 due to global semi-
conductor shortages. The division is making good progress in developing export markets to supplement
domestic sales.

Restonic had a challenging start to the period due to subdued demand from retailers and continued operating
profit margin pressure. Demand improved from September 2022, following increased marketing activities by the
division and higher demand from retailers ahead of the peak trading season and Black Friday promotions. The
division’s sales relating to Black Friday were marginally better than the prior period. While the division was able
to start passing on raw material cost increases from September 2022 onwards, operating profit margins
remained well below the long-term guided range of 13-15%, mainly due to the raw material cost increases,
higher fuel costs and increased marketing expenditure.

Feltex showed an improved performance for the period, supported by higher new vehicle assembly volumes
and light commercial vehicle sales. The variability in OEM offtake however remained a challenge, impacting
negatively on the operating profit margin. The division made good progress in achieving price adjustments to
counter the effects of significant raw material cost escalations and insurance compensation related to lost
production due to the KwaZulu-Natal floods. The operating profit margin therefore improved over the prior period.

Safripol experienced a decline in profitability compared with the prior period, largely due to lower PP raw
material margins, as expected, and lower PET production volumes. PET and HDPE margins remained healthy,
as expected. Customer demand in certain sectors was muted at the start of the period, affected by lower
consumer demand, electricity supply interruptions, high inventory levels and excess global HDPE and PP
supply.
An analysis of Safripol’s sales and production volumes and raw material margin variance is shown below:

                                                     PET                            HDPE                              PP
                                                Period          Period          Period   Period                 Period          Period
                                                 FY23            FY22            FY23     FY22                   FY23            FY22
 Sales volumes (tonnes)                         76 559          92 621          54 447   60 635                 53 006          53 529
 Production volumes (tonnes)                    75 828          81 673          62 892   60 461                 50 963          51 411
 Average USD/R exchange                          17.34           14.85           17.34    14.85                  17.34           14.85
PET – Polyethylene terephthalate | HDPE – High density polyethylene | PP – Polypropylene
Period refers to the five months from 1 July to 30 November.

The actual raw material margin trend for Safripol is analysed as follows:

                                                     Period FY23 vs                  Period FY23 vs
                                                      Period FY22#                           2H22*
 PET                                                           47%                            (22%)
 HDPE                                                          41%                               5%
 PP                                                              (24%)                        (33%)

# - Five months ended 30 November 2022 compared to the five months ended 30 November 2021.
* - Five months ended 30 November 2022 compared to the six months ended 30 June 2022.

Notes:
1. The actual raw material margin trend analysis includes Safripol’s actual selling prices and actual raw material costs in rands.
2. The actual raw material margin trend analysis has been adjusted to account for the R91 million ethylene price adjustment in period FY22.

PET production volumes were lower for the period due to a failure of a major component, which resulted in a
shutdown of the plant for 38 days. The division was able to maintain supply from inventory to all domestic
customers. An investigation into the root cause of the component failure is underway and the financial impact is
in the process of being quantified for insurance purposes.

Unitrans had a stable performance compared to the prior period in spite of the loss of a major food contract
during the period. The anticipated strong recovery in the Rest-of-Africa division’s performance did not materialise
as expected due primarily to the South African government’s moratorium on diesel exports to neighbouring
countries and abnormal weather conditions affecting its agriculture operations. The operating profit margin
therefore remained below the long-term guided range of 8-10% for the period.

DriveRisk was acquired effective 1 December 2021, hence there is no comparative period for review. The
business has compelling growth prospects, however performed below expectations for the period due primarily
to the sudden USD/Rand exchange rate weakness, with related pricing adjustments to customers still to take
place.

BUSINESS RESILIENCE

In view of the escalating political uncertainty and failing state infrastructure and services in South Africa, the
company has embarked on a business resilience strategy to avoid potential business interruption and costs
associated with operating in this environment.

As part of its resilience strategy, the company has initiated an energy strategy aimed at reducing electricity
consumption, mitigating cost escalations, supply interruptions and non-supply through self-generation, co-
generation and storage. While the group has not yet been materially affected by load-shedding, material
secondary effects are starting to emerge, including but not limited to the additional wear-and-tear on equipment
due to electricity instability and unscheduled stoppages following power infrastructure failures.

The construction of a 10 MW photovoltaic (‘PV’) plant at the Safripol Sasolburg site was completed in
November 2022 and is the company’s first material energy investment. A 4 MW PV plant at the PG Bison
Boksburg site was approved during the period. Significant renewable energy investments are being assessed
across the group. These investments will contribute to the sustainability of the group’s operations and will
produce attractive returns in their own right.
Stellenbosch
19 December 2022

Sponsor
Nedbank Corporate and Investment Banking, a division of Nedbank Limited