Johannesburg — BUILDING materials retailer Iliad Africa yesterday recorded its worst results since listing on the JSE in 1998, hit largely by a sharp drop in demand in the troubled residential building sector.

CE Eugene Beneke said the company expected the second half to remain as tough as the first, unless the residential building market recovered significantly.

Activity in the building sector has slumped in the past two years due to the economic downturn, dragging down companies exposed to the sector.

Iliad sources and distributes general and specialised building materials through its 112 stores.

Statistics SA data painted a grim picture of the building industry, with plans passed now down about 40%. Analysts forecast recovery to start only sometime next year when the economy improves and the Reserve Bank's aggressive 500-basis interest rate cuts since December start filtering through.

Beneke conceded this was the worst performance in the 11 years the company has been listed, but said it was a wake-up call for the group that had become used to double-digit increases in headline earnings per share.

"Historically, we have been biased towards the residential sector in the metropolitan areas, and we have seen this come under extreme pressure. It is a good thing that this happened though, because it's given us a valuable lesson and it allows us to make adjustments to put the company back on a growth path," Beneke said.

Headline earnings per share tumbled 72,4% to 21,2c from 76,8c in the previous comparable period. Turnover was 13,3% down at R1,94bn, reflecting the turbulent business environment, a significant decline in building plans passed and a slowdown in the finishing end of the industry. Operating margins fell 62% to R60m on the back of lower turnover as well as high operating costs.

Beneke said the poor results were the product of macroeconomic factors and extra stock, especially in metropolitan areas.

"The residential market continued to slow during the period, particularly in the second quarter, evidenced by a decline of 30%-50% in building plans passed and subdued new residential construction activity. Metropolitan areas have been worst affected." Beneke said the non-residential sector and the market for additions and alterations had also been negatively affected by the adverse macro economic circumstances.

However, the group's focus on operating efficiencies, cost controls and group procurement had played a major role in limiting the effects of the downward pressures on demand, thereby protecting gross margins. Beneke said despite the difficult market conditions, Iliad concluded acquisitions during the period, expanding its presence in Gauteng, the North West and the Western Cape and adding at least R230m a year to group turnover from next year.

The acquisitions would broaden the retail presence of the group's general building materials division and increase services in its specialised building materials division.

On the group's prospects, Beneke said the half-year performance provided management with some valuable lessons.

"Our experience during this period has given us a valuable lesson that we should look at areas other than the residential building market for future growth. We will hang on to those things that have worked, but we will have to make some adjustments in our strategy.

"We believe conditions will remain very tough in the second half, until building plans passed improve. We can expect some gains, but these will be slow gains. Our main focus going forward will be to veer towards rolling out new stores to strengthen our national footprint and cutting costs."