Volatile ... but bang for your buck
Investors in Omnia are assured of one thing: high share price volatility. After a 45% fall in the price over the past 36 months that changeableness now looks set to work in the company’s favour through a potential strong price recovery.
The group, which has an annual revenue of R16bn, is actively looking for ways to reduce the volatility. A key part of its strategy is diversification.
“We have been seeking an acquisition,” says Adriaan de Lange, a veteran of 14 years with Omnia, who in June succeeded Rod Humphris as CEO.
The quest has met with success in the form of Umongo Petroleum. Subject to competition commission approval, Omnia will acquire a 90% stake for an initial R618.5m, and, subject to a three-year earnout, a maximum of R780m. Umongo will be slotted into Omnia’s chemicals division. It will bring with it the distribution of Chevron oil additives, base oils, oil and lubricant products in SA and sub-Saharan Africa.
Ensuring that Omnia gets the full benefit of consolidating Umongo in its year to May 2018, the effective acquisition date was set as March 1 2017.
Omnia’s chemicals division’s revenue dropped 7% to R3.7bn and operating profit sank 31% to R145m in the past financial year. “Our major clients are in the manufacturing sector, where activity has been flat,” says De Lange.
Warren Jervis, manager of the Old Mutual Mid and Small Cap Fund, sees the acquisition as a positive step for Omnia. “Umongo is a capital-light business and holds huge potential for Omnia to use its African distribution to grow,” says Jervis. “I am amazed the market has not yet given Omnia any credit for the acquisition.”
De Lange is equally upbeat .on Umongo. “We see big growth opportunities in SA and the rest of Africa.” And, he says, “we are working hard to find more acquisitions.”
Strongly in Omnia’s favour is its cash flow of about R900m annually after tax. The group also has significant debt capacity; at the end of the past financial year its balance sheet reflected long-term debt of a mere R153m and cash of R1.3bn. Equity stood at R7.55bn, indicating that at, say, a 30% long-term debt-to-equity ratio, Omnia has debt capacity of about R2.3bn.
Innovation is another key part of Omnia’s growth strategy. Axxis, a unique digital electronic detonator solution that De Lange says can improve mining efficiency by up to 30%, has been developed in its explosives division.
Omnia reported a 43% rise in the volume of Axxis system sales in its past financial year. But it was not enough to counter torrid conditions in SA’s mining sector, where the explosive division’s SA operating profit slumped 40% to R152m owing to mine closures.
Saving the day for the R4.38bn revenue division was a 15% rise in non-SA-derived operating profit to R305m, 67% of the divisional total, which at R438m was down 13%. But De Lange is not in despair. He says: “I am more bullish on our explosives business. We still have opportunities to grow outside SA.”
First prize for Omnia in its quest for growth will be an upturn in its agricultural division’s fortunes, which consists of Omnia Fertiliser and Omnia Specialities. It weighs in with annual revenue of R8.2bn.
The division ended the past financial year with operating profit up 7% at R438m — with no thanks to SA operations, where operating profit fell 31% to R255m. Growth was driven by international operations.
In volume terms the SA conventional fertiliser market is very much ex-growth, with annual consumption of 2.1 Mt on par with the level of almost 50 years ago. But increasing use of more precision farming methods has created good opportunities for Omnia.
“Our speciality products are delivering really good growth and offer solid prospects,” says De Lange. Helping to drive growth are Omnia’s state-ofthe-art soil laboratory and 100 agronomists working closely with farmers. The company is also investing heavily to drive costs of fertiliser production down. Construction has begun of a R670m nitrophosphate plant at its Sasolburg facility.
Omnia is looking to a strong upturn in the fertiliser division’s fortunes; operating margin is predicted to rise from 5.4% to 7% or 9%. Strong improvements in the profitability Omnia expects in its explosives and agricultural divisions indicate a rise of around R350m (34%) in group operating profit in the current financial year, excluding the big kicker that Umongo should deliver.
The improvement appears far from fully discounted in Omnia’s current share price.
Helping to drive growth are Omnia’s stateof-the-art soil laboratory and 100 agronomists