Tesla deal shows plenty po­ten­tial but no de­tail

Financial Mail - Investors Monthly - - Analysis - Fifi Peters

Pi­eter­mar­itzburg-based alu­minium man­u­fac­tur­ing spe­cial­ist Hu­lamin caused a stir last year af­ter it bagged an ex­clu­sive con­tract to sup­ply Tesla with a key com­po­nent to power its elec­tric ve­hi­cles.

In­vestors, sens­ing a game-chang­ing de­vel­op­ment, ini­tially had dol­lar signs in their eyes. But the com­pany’s re­luc­tance to dis­close de­tails of the deal with Tesla’s Elon Musk has left some in­vestors fret­ting. Some even ques­tioned whether the con­tract might be an op­er­a­tional bur­den.

Re­cently man­age­ment said it had se­cured a new three-year sup­ply ar­range­ment with Tesla, run­ning from this year. But the deal re­mains shrouded in mys­tery as the com­pany was un­able to dis­close de­tails such as the value of the con­tract or long-term earn­ings that could flow from Tesla. This ret­i­cence is due to Tesla’s re­quest for con­fi­den­tial­ity.

But Hu­lamin did say it ex­pected ex­port vol­umes to at least dou­ble as sales of the elec­tric car ac­cel­er­ated.

“Though the busi­ness is less than 5% of turnover, the prod­uct we de­velop is con­sid­ered to be a high value-added line in our port­fo­lio,” Hu­lamin said.

Last week Tesla an­nounced an am­bi­tious plan to pro­duce 500,000 ve­hi­cles by 2018, two years ear­lier than planned. This is amid strong de­mand for its new Model 3 sedan. The new Tesla pro­duc­tion tar­get is six times this year’s ex­pected out­put, ac­cord­ing to in­ter­na­tional me­dia re­ports.

A bit more dis­clo­sure could not hurt. Hu­lamin’s share has dropped more than 10% over the past year — re­flect­ing a mod­est mar­ket cap­i­tal­i­sa­tion of R1.8bn for a com­pany at the fore­front of the coun­try’s much mooted min­eral ben­e­fi­ci­a­tion thrust.

The good news is chair­man Mafika Mk­wanazi had some pos­i­tive com­ments for the first quar­ter of trad­ing, stress­ing the en­ergy sup­ply and (planned) main­te­nance dis­rup­tions that caused a 7% drop in out­put to 198,000 t in the past fi­nan­cial year had not re­curred in the first quar­ter of 2016.

The com­pany un­der­goes planned main­te­nance ev­ery five years or so, which means a fac­tory shut­down is un­likely for some time. More im­por­tantly, the planned main­te­nance im­proved ef­fi­cien­cies, set­ting a plat­form for vol­umes and sales growth.

Other de­vel­op­ments that should boost net profit, which more than halved to R164m in fi­nan­cial 2015, in­cludes se­cur­ing ad­di­tional ex­port sales to its main mar­kets in the US and Europe.

On the down­side, the is­sue around pro­tec­tion against alu­minium im­ports from larger pro­duc­ers from Brazil and China re­mains un­re­solved.

Re­cently, Hu­lamin said it was dif­fi­cult to un­der­stand why the In­ter­na­tional Trade & Ad­min­is­tra­tive Com­mis­sion had not sup­ported an ap­pli­ca­tion for an im­port tar­iff (as seen in the steel in­dus­try).

Then there is com­mod­ity mar­kets’ volatil­ity. Alu­minium prices have re­cov­ered from re­cent lows, but are still far off their highs of $1,800 a year ago.

In­ter­na­tional alu­minium pro­ducer Al­coa re­cently re­ported a plunge in net profit to $16m in the first quar­ter from $195m in the year ear­lier pe­riod.

“Hu­lamin is a small fish in a global pool,” said an an­a­lyst who could not be named due to com­pany pol­icy.

As a price taker it is dif­fi­cult for Hu­lamin to cre­ate a com­pet­i­tive ad­van­tage, the an­a­lyst said.

Global Mar­kets Re­search an­a­lyst at Rand Mer­chant Bank Isaah Mh­langa says the cur­rent over­sup­ply of alu­minium in China re­mains a risk for the metal’s out­look. He says the Chi­nese mar­kets re­main in over­sup­ply as slower growth in de­mand from the prop­erty and man­u­fac­tur­ing sec­tors weighs on con­sump­tion. “Side­ways growth in the global man­u­fac­tur­ing sec­tor in the year to date, driven by the muted growth in emerg­ing mar­kets and ma­jor coun­tries out­side the US, will keep growth in con­sump­tion rel­a­tively muted.”

Mh­langa ex­pects this will re­sult in a neg­a­tive im­pact on high-cost pro­duc­ers.

The Tesla deal, im­proved pro­duc­tion ef­fi­cien­cies and in­creased ex­port sales may safe­guard against a sig­nif­i­cant de­cline in earn­ings in the 2016 fi­nan­cial year, but some an­a­lysts are not hold­ing their breath.

Per­haps tellingly, one noted: “I have since dropped cover­age of the com­pany as the risk of hold­ing the stock has be­come too high rel­a­tive to the po­ten­tial re­turn.”

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