Negev Ceramics losses take Africa Israel Industries to brink

Company auditors: Management plans for repaying debt are uncertain.

The troubles of Africa-Israel Industries Ltd. (TASE: AFID) are far from over. As reported exclusively by "Globes" last week, the company finished the fourth quarter of 2015 with a huge NIS 71 million loss, attributable mainly to the results of its Negev Ceramics subsidiary. The fourth quarter loss brought Africa-Israel Industries' losses to NIS 159 million (including NIS 130 million by Negev Ceramics) in 2015 and NIS 239 million in 2014-2015, reducing the company's equity to only NIS 156 million, compared with NIS 406 million at the end of 2013.

Africa-Israel Industries' 2015 financial statements did not carry a going concern qualification from its auditors, but they stated that there was "uncertainty about carrying out management's plans for repaying the company's debts."

The company's two main holdings are Packer Plada, which markets steel, and Negev Ceramics, which produces and markets ceramic tiles and construction finishing products. Negev Ceramics is responsible for NIS 168 million of Africa-Industries' loss over the past two years, the result of its plant in Yeruham, which suffers from excessive cost and production capacity. As of now, this plant is not paying back the huge investment in it.

Under previous CEO Avi Motola, Africa-Israel Industries persuaded its board of directors, headed by chairman Avraham Novogrodsky, to build a plant for Negev Ceramics with double the production capacity required for the domestic market, under the assumption that the way to achieve future growth was to launch exports of selected tiles. So far, however, the export plans have not materialized, and the financing, set-up, and operational costs of the new plant are costing Negev Ceramics heavy losses.

These losses, which began to pile up in 2014, led to the dismissal of Motola from his positions as CEO of Negev Ceramics and Africa-Israel Industries in March 2015. After he left, grave financial irregularities in recording revenue, customer credit, and inventory were discovered at Negev Ceramics, requiring the company to revise its financial statements and exposing it to class actions by investors, who saw the company share lose over half of its value in response.

A few months after Motola was fired, a new CEO, Omri Lotan, was appointed to lead the Negev Ceramics to recovery. Negev Ceramics finished 2015 with sales up 3% to NIS 832 million, but also a huge NIS 82 million loss. In order to redress this situation, the financial statements stated that the company had embarked on a comprehensive streamlining program, including cutting expenses, reducing staff, and reducing output and the cost of production. At the same time, Lotan is negotiating with the banks to reschedule the loans taken to finance the new company plant.

Africa-Israel Industries said that it had NIS 20 million at the end of 2015, but NIS 19 million was used two week ago for repayment of the company's loan from institutions (Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) and Meitav DS Holdings Ltd. (TASE:MTDS)) in order to finance its business. This loan, which amounted to NIS 170 million at the end of 2015, was classified in the company financial statements as a short-term loan, because the company had failed to meet the financial covenants attached to the loan.

Africa-Israel Industries' financial statements also said that following negotiations with the lenders, management had received a letter waiving the financial covenants for a year. At the same time, the need to repay NIS 19 million more in September requires the company and its subsidiaries to cut costs and correct failings. In the short term, the company board of directors, led by Novogrodsky, believes that it will receive NIS 14 million in cash flow in the coming months from foreign companies that it owns. The company also has the option of selling its dormant shares (amounting to 9.5% of its issued capital) for NIS 20 million (at the current market price). At the same time, in order to make the payments on its debt in the future, the company states that its management is taking steps to sell medium and long-term assets in both the steel and home design sectors. "Initial negotiations are taking place with potential buyers for some of these activities," the financial statements say.

Meanwhile, Africa-Israel Investments management, headed by new CEO Yaki Vadmani, will also have to deal with the disappointing results of Packer Plada. While the steel division reduced its losses by 39% to NIS 14 million in 2015, revenue also fell 8% to NIS 990 million. Packer Plada is also in violation of a financial condition posed by the banks for a NIS 120 million loan, and negotiations are taking place for waiver for these conditions (some of the banks have already provided a waiver letter). This involves some of the NIS 1.5 billion in credit received by Africa-Israel Industries' subsidiaries.

Published by Globes [online], Israel business news - www.globes-online.com - on March 23, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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