Volatile ... but bang for your buck

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

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

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