Suc­cess­fully putting an end to the wild swings

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

Look­ing at its latest num­bers, one can see that the dif­fi­cult econ­omy has not done diver­si­fied chem­i­cals group Om­nia Hold­ings any favours.

Yes, Om­nia in­creased rev­enue 3% to a record R16,8bn and pushed up op­er­at­ing profit 4,2% to R1,47bn for the 12 months to the end of March. But it is quick to ad­mit that it was not an easy pe­riod for the group.

Though its agri­cul­ture di­vi­sion pushed up rev­enue 9% to R7,28bn and its con­tri­bu­tion to op­er­at­ing profit rose 52% to R656m, its min­ing and chem­i­cal di­vi­sions pro­duced flat rev­enues and ex­pe­ri­enced sharp drops in op­er­at­ing profit.

“This was a chal­leng­ing year with vol­umes un­der pres­sure, mine clo­sures, mar­gin squeeze and com­pet­i­tive pric­ing which af­fected our min­ing and chem­i­cals di­vi­sions,” said Om­nia CE Rod Humphris.

“We were par­tic­u­larly pleased that we in­creased rev­enues and main­tained a sta­ble profit in the min­ing di­vi­sion de­spite the tur­moil in the in­dus­try.”

The macro en­vi­ron­ment has also not been kind. Though the weaker rand, in ef­fect, im­proved net mar­gins, lower com­mod­ity prices and a drop-off in sales vol­umes put it un­der pres­sure.

The group might have gone through a tough pe­riod and its num­bers have taken strain, but even so there are signs it is on the right track. For one, its op­er­at­ing mar­gin in­creased from 8,7% to 8,8%. Bet­ter sup­ply chain man­age­ment and re­duced raw ma­te­rial cost con­trib­uted to im­prov­ing its op­er­at­ing per­for­mance in its agri­cul­tural di­vi­sion. It was also able to in­crease rev­enue from its agri­cul­tural trad­ing and whole­sale busi­ness by 46% year-on-year.

Om­nia’s num­bers are not great but they are con­sis­tent. This is a re­mark­able achieve­ment, given how wildly its re­sults used to swing.

In its half-year re­sults for Septem­ber 2009 for in­stance, its rev­enue dropped 22% to R4,2bn and it in­curred an op­er­at­ing loss of R52m.

The next year rev­enue re­mained flat but the op­er­at­ing loss be­came a R292m profit.

These swings were a re­sult of the group’s oper­a­tions ba­si­cally touch­ing ev­ery part of the econ­omy.

If there were big changes in the agri­cul­ture, man­u­fac­tur­ing and min­ing sec­tors, it would the first to feel it.

Over the past few years Om­nia has man­aged to end these big swings and pro­duce steady but still im­pres­sive growth num­bers. Since it pub­lished its 2011 re­sults, the group has made a habit of pro­duc­ing steady rises in rev­enues and earn­ings.

Its com­pound an­nual rev­enue growth rate was 16% and its com­pound op­er­at­ing profit growth was 21,1% for the past four years.

Over this pe­riod it ac­cel­er­ated its ex­pan­sion across the con­ti­nent and now has oper­a­tions in 16 coun­tries.

The group is look­ing for or­ganic “growth op­por­tu­ni­ties” but it is also keen to ex­pand its hori­zons.

Humphris says: “We have iden­ti­fied and in­ves­ti­gated op­por­tu­ni­ties to cre­ate fur­ther growth for the group out­side Africa. These op­por­tu­ni­ties range from back­ward in­te­gra­tion and mar­ket diver­si­fi­ca­tion to po­ten­tial merg­ers and ac­qui­si­tions in sim­i­lar or re­lated busi­nesses.”

Om­nia is clearly in a bet­ter space than it was five years ago. Share­hold­ers should be happy be­cause the group’s share price has risen 189,26% over this pe­riod to R174,80. Though earn­ings are up and its share price is healthy, the share has come off record high of R247.

Given its murky out­look and its PE of 11,95, it is easy to ar­gue that it is fully priced.

Even so, there is still po­ten­tial for it to rise over the long term be­cause it has put in place share-in­cen­tive schemes for man­agers and pro­fes­sional staff.

The group makes the point that ever since it put in place its five-year long-term in­cen­tive plan two decades ago, man­age­ment has met or ex­ceeded the five-year tar­gets set by the board.

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