Who has the best deal-mak­ing chem­istry?

New ac­qui­si­tions look set to play a key role in Omnia-AECI per­for­mance race

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

AECI and Omnia have been on the ac­qui­si­tion trail of late, clinch­ing two deals each that have an im­por­tant bear­ing on the com­pa­nies’ re­spec­tive in­vest­ment mer­its.

Omnia set the ball rolling last May with the ac­qui­si­tion of a 90% stake in Umongo Pe­tro­leum for an ini­tial R618.5m. The deal val­ued Umongo at an un­de­mand­ing 7.2 p:e based on its net taxed profit of R77m in the 12 months to Fe­bru­ary 2017. Sub­ject to a three-year earnout, the max­i­mum amount payable for Umongo is R780m. The ef­fec­tive date of the deal was De­cem­ber 1 2017.

Umongo, which has been slot­ted into Omnia’s chem­i­cals divi­sion, brought with it the dis­tri­bu­tion of Chevron oil ad­di­tives, base oils, oil and lu­bri­cant prod­ucts in SA and sub-Sa­ha­ran Africa.

At the time of the deal, Omnia group MD Adriaan de Lange said: “We see a lot of growth op­por­tu­ni­ties in SA and the rest of Africa. We have op­er­a­tions in 17 African coun­tries out­side SA and know how to grow busi­nesses in Africa.”

Omnia struck again in March, an­nounc­ing it would buy Oro Agri. The US group spe­cialises in the devel­op­ment and pro­duc­tion of en­vi­ron­men­tally friendly agri­cul­tural prod­ucts in the US, SA, Brazil and Europe, and has prod­uct dis­tri­bu­tion in 75 coun­tries. The deal, which val­ued Oro Agri on a 16.4 p:e, was closed on April 30.

Oro Agri, which con­sti­tutes Omnia’s big­gest deal yet, came with a price tag of US$100m (R1.23bn). Based on re­sults to De­cem­ber 2017, it will add rev­enue of R630m and net taxed profit of R75m. Ac­cord­ing to Oro Agri, which is housed in Omnia’s agri­cul­tural divi­sion, it oper­ates in global mar­kets worth a com­bined $86bn, with growth run­ning at 5.3%/year.

AECI’s first big ac­quis­i­tive move came in Oc­to­ber, when it an­nounced the pro­posed pur­chase of SA group Much As­phalt from pri­vate eq­uity firm Cap­i­tal­works and man­age­ment for R1.99bn. The deal to ac­quire Much, which pro­duces the full gamut of roadsur­fac­ing ma­te­ri­als, was closed on April 4.

Based on Much’s taxed profit of R181m in its year to June 2017, the deal val­ued it on a p:e of 11. Much’s rev­enue in its past year was R2bn.

AECI also moved to grow its reach in the agri­cul­tural chem­i­cals mar­ket with the pur­chase of Ger­man group Schirm from Im­pe­rial Hold­ings for €110.5m (then R1.81bn).

Schirm pro­duces agri­cul­tural chem­i­cal prod­ucts such as her­bi­cides, fungi­cides and in­sec­ti­cides un­der con­tract for clients such as Bayer, BASF and DuPont. It oper­ates four plants in Ger­many, where it is the big­gest com­pany in its field, and one in the US.

The Schirm deal was closed on Jan­uary 30 and will, based on an­nual re­sults to June 30 2017, add about R1.7bn in rev­enue and R76m in taxed profit. The deal val­ued Schirm on a hefty 24.7 p:e.

In an up­beat re­view of Schirm at the time of the deal, AECI noted that the Ger­man group has over the past two years in­vested R371m to add ca­pac­ity needed to achieve “sig­nif­i­cant growth”. The ben­e­fits, said AECI, will first be seen in Schirm’s fi­nan­cial year to June 2018.

Omnia and AECI’s ac­qui­si­tions rep­re­sent siz­able in­creases in the as­set bases of the two com­pa­nies.

In all, Omnia spent R1.85bn on its two ac­qui­si­tions, an amount equal to 13% of its to­tal as­sets, while AECI’s R3.8bn ac­qui­si­tion to­tal is equiv­a­lent to 23.8% of its to­tal as­sets.

Ex­clud­ing ad­di­tional in­ter­est payable on debt, Omnia’s ac­qui­si­tions will add R152m (26.7%) in net profit to its an­nu­alised net profit of R570m in its half-year to Septem­ber. AECI’s deals, ex­clud­ing ad­di­tional in­ter­est payable, will add R257m (26%) in net profit to the R983m net profit recorded in its year to De­cem­ber.

Only time will tell whether Omnia and AECI have allocated cap­i­tal op­ti­mally, but Warren Jervis of Old Mu­tual In­vest­ment Group has some reser­va­tions.

Of AECI’s two deals, Jervis says: “I am luke­warm on Schirm and though Much is a strong busi­ness I be­lieve AECI has over­paid for it.”

For Omnia and AECI, the eco­nomic out­look in SA and in­ter­na­tion­ally across their op­er­a­tions in min­ing ex­plo­sives and chem­i­cal so­lu­tions, and chem­i­cal and agri­cul­tural prod­ucts, is far more pos­i­tive now than it has been in many years.

Choos­ing be­tween the two groups will be a tough call for in­vestors but, based on re­cent per­for­mance, the odds favour Omnia. The mar­ket seems to agree, valu­ing the firm on a 15.2 p:e and AECI on a p:e of 13.7.

Omnia put on a strong show­ing in its six months to Septem­ber, lift­ing head­line EPS (HEPS) 31% and boost­ing the in­terim div­i­dend by 25%. The HEPS rise, by far the com­pany’s best show­ing since 2013, was com­fort­ably ahead of AECI’s 17% HEPS rise in its year to De­cem­ber.

But there is still a long way to go. Omnia’s in­terim re­sult pro­duced a sub­op­ti­mal 7.8% re­turn on eq­uity, well be­low the 19.7% achieved in 2013.

The per­for­mance race be­tween Omnia and AECI will be an in­ter­est­ing one — one in which the com­pa­nies’ re­cent ac­qui­si­tions look set to play an im­por­tant role.

Choos­ing be­tween the two groups will be a tough call for in­vestors but, based on re­cent per­for­mance, the odds favour Omnia. The mar­ket seems to agree

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