Un­bundling a unique busi­ness

Where will the JSE list Hu­lamin?

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS

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

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