Unbundling a unique business
Where will the JSE list Hulamin?
we could get to 3%, and we’re confident we can do that,” Fourie says.
That’s why he believes, as a standalone business separated from the group, Hulamin has the critical mass to keep growing. “If you look at the international rolled products business, five producers supply around 70% of the market in which Hulamin competes. That’s a lot of power in the hands of a few suppliers – and customers become concerned.”
However, Fourie feels Hulamin has at least three distinct advantages over those large international aluminium groups. “We have capacity utilisation. Following our R2,4bn expansion project in 2000 our rolling mills are running 24 hours a day. That redu- THE UPCOMING SEPARATE listing of Hulett Aluminium (Hulamin) on the JSE – after its unbundling from the Tongaat-Hulett Group – already has an implied unlocking of value of at least R2bn. Based on the enterprise value split for the two proposed empowerment transactions, the existing group was divided 71,5% (Tongaat-Hulett) and 28,5% (Hulamin), giving respective enterprise values of R8,3bn and R6,6bn.
The group’s market capitalisation is nudging R12bn and will probably go higher approaching the unbundling as the price – at R112/share – pushes its high for the year.
But the real value story for Hulamin seems to be in its growth strategy and market opportunities, based party on the planned R950m capacity expansion at its Maritzburg plant and a business model that offers the niche aluminium products semi-fabricator some unique competitive advantages against the major global players.
MD Alan Fourie says demand in SA, mainly for aluminium rolled products that make up about 90% of the business, has grown by 50% over the last three years. “In the five years from 1998 to 2003 the SA market grew from 35 000t/year to 38 000t/year. Since then demand has increased to 57 000t/year.”
However, around 70% of Hulamin’s capacity is exported, up from less than 20% in 2000. “Under current capacity we expect to grow output to 210 000t/year without any additional investment. We can squeeze more out of existing facilities,” Fourie says.
The expansion project will increase that by 20% to 250 000t in 2009, though Fourie emphasises additional capacity won’t all come on at once. Demand for Hulamin’s rolled products is strong, with clients in packaging, building and construction, engi- neering, transport and the automotive industries. The emphasis is to continually move up what Fourie calls the product profitability curve, making higher margin products that require larger capital investment and higher technology and where there are fewer competitors and less competition from substitutes.
“We see potential for the company. For example, in the global market, where we currently have around 1,5%. Assuming the global market stood still and we doubled output, ces unit costs and gives us better returns.”
But why don’t the large producers overseas, which run on an average 70% capacity, also push up to 100%? “If they did, who would buy the additional product? They have to carefully match capacity with market demand,” Fourie says.
As a niche producer with an advanced technology base, Hulamin’s products are made according to the specific requirements of clients. So everything is sold – it doesn’t make products and then have to worry about sales.
Fourie says a second advantage is Hulamin’s sales mix – a wide range of high margin products. These include light gauge foil, can end stock, clad products, heat-treated plate and complex extrusions. It even supplies heat-treated plate to Silicon Valley, where it’s used in the chambers that produce microchips.
Another example of increased high margin sales is can end stock. That product comprises about 7% of the global rolled products market but it constitutes around 25% of Hula- min’s total output.
“Finally, our cost structure compares very favourably with the major producers. Most are based in Europe or the US – very high cost regions,” Fourie says.
It’s not certain which sector of the JSE Hulamin will list under when it’s unbundled. Separated from the group, where it has lacked even the at times vague synergies with other Tongaat-Hulett divisions, such as sugar, maize, starch and property, it’s quite a unique company.
Final results as a group will be published soon. That should indicate the possible rating the share would attract. It’s likely to be high.
Demand in SA has grown 50%. Alan Fourie