The chem­istry of care­ful choice

In­vestors look­ing for some alchemy to spruce up their re­turns will need to think hard about which chem­i­cal share to add to port­fo­lios

Financial Mail - Investors Monthly - - Opening Bell - Mzwandile Jacks

OMNIA Share price: R148.12 JSE code: OMN BUY OMNIA, THE DI­VER­SI­FIED

provider of spe­cialised chem­i­cals prod­ucts and ser­vices used in the agri­cul­ture, min­ing and chem­i­cal sec­tors, could be on an up­ward tra­jec­tory if chal­lenges ease up.

In the first half, the com­pany had to deal with ex­tended ef­fects of the drought, the 86-day break­down at Ni­tric Acid 2 com­plex in Sa­sol­burg and stock losses in Aus­tralia, which hit the min­ing and agri­cul­tural di­vi­sions. But Omnia be­lieves all di­vi­sions are set and ready to de­liver an im­proved per­for­mance in the sec­ond half.

The agri­cul­ture di­vi­sion will move into the tra­di­tional sum­mer plant­ing sea­son with the drought hav­ing re­ceded and in­creased through­put and over­head re­cov­ery ex­pected at the Sa­sol­burg fac­tory.

The min­ing di­vi­sion con­tin­ues to im­prove its prod­uct per­for­mance, and ser­vice lev­els and the bed­ding down of the new busi­ness model for the chem­i­cals di­vi­sion present in­ter­est­ing op­por­tu­ni­ties.

This is a stock for in­vestors who like to buy coun­ters that are ac­quis­i­tive. Omnia is eye­ing a pipe­line of ac­qui­si­tions. There’s also a strong global pres­ence. In the first half, group rev­enues rose by 2.5% to R8bn on the back of mixed re­sults. Mod­est growth in vol­ume in the agri­cul­ture and min­ing di­vi­sion was off­set by lower vol­umes and higher av­er­age prices in the chem­i­cals di­vi­sion.

AECI Share price: R103.30 JSE code: AFE HOLD AECI, THE SPE­CIALTY

chem­i­cals and ex­plo­sives com­pany, is well placed to gain from im­prove­ments in the sec­tors where it op­er­ates.

The R12.8bn mar­ket cap com­pany’s busi­nesses are in min­ing, wa­ter treat­ment in Africa, agro­chem­i­cals in south­ern Africa and man­u­fac­tur­ing in SA. AECI will ben­e­fit from pro­vid­ing clean wa­ter in a con­ti­nent were this re­mains a scarce re­source. It clearly views this as a growth area and made a pre­sen­ta­tion in June to in­sti­tu­tional in­vestors about it. In the agro­chem­i­cals field in south­ern Africa the com­pany will ben­e­fit from the nor­mal­is­ing of rain­fall pat­terns in many ar­eas.

Growth con­tin­ues to out­pace that of GDP in the south­ern African food in­dus­try. AECI’s cus­tomer-cen­tric and value-adding spe­cialty chem­i­cals busi­nesses are well po­si­tioned to ben­e­fit from these im­prove­ments.

In­vestors should hope the com­pany’s per­for­mance will be bet­ter than in the year to end-De­cem­ber 2016. In that year, rev­enue rose 1% to R18.5bn, of which 35% was gen­er­ated out­side SA. Profit from op­er­a­tions de­clined by 22% to R1.3bn.

This is a promis­ing counter to hold on to be­cause man­age­ment is work­ing hard to turn the com­pany around.

The share price has been down but moved up slightly this year.

AFROX Share price: R18.99 JSE code: AFX SELL AFROX’S FI­NAN­CIAL

per­for­mance is in­ex­tri­ca­bly linked to SA’s econ­omy; and whether the JSE-listed chem­i­cals firm will do well in the medium term de­pends on this.

At present things do not look good, as the coun­try has slipped into a tech­ni­cal re­ces­sion for the first time since 2009. The econ­omy con­tracted in the first three months of this year. Afrox man­age­ment agrees that the eco­nomic en­vi­ron­ment will not change any time soon, and its fi­nan­cial per­for­mance could be un­der pres­sure.

In the 12 months to De­cem­ber 2016 its rev­enues were “marginally” up 1.2% at R5.5bn, due to the weak­ness of the econ­omy, the com­pany has said. Nev­er­the­less it says it will con­tinue to look at in­vest­ment op­por­tu­ni­ties as and when they be­come avail­able.

Granted, Afrox has a strong bal­ance sheet to pur­sue these in­vest­ments. And it has won many con­tracts in the past cou­ple of years, cul­mi­nat­ing in a R1.1bn deal last year to sup­ply gas in Le­sotho.

The share price has been hov­er­ing be­tween R18.98 and R20.00 since the be­gin­ning of this year.

The com­pany’s per­for­mance will have to shoot the lights out for in­vestors to have con­fi­dence in it and get their money’s worth from it.

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