Wrap it in foil and put it away
Falling sales force a long-term share view
LIKE MANY OTHER companies undertaking large capital spending projects, Hulamin has become the victim of poor timing, thanks to the largely unforeseen severity of the global economic downturn. Expansion of its rolled products plant at Maritzburg, at a cost of R970m, has provided additional capacity it won’t be using over the short term. Declining sales of its aluminium products in second half 2008 have continued into 2009, with CE Alan Fourie saying he expects lower sales volumes to continue this year.
But the volatile aluminium price is making forecasting difficult. “Customers are ordering minimum quantities on the shortest possible lead times as they run down inventories. That means I don’t have a clear view on orders going forward,” Fourie says.
Sales volumes dropped by 6% last year, most of the decline coming in the second half of the year as customers exposed to the slowing economy cut orders or ran down inventories. But Hulamin’s profits remained healthy, thanks largely to a product mix that feeds into niche, higher margin markets. That, says Fourie, together with cost-saving projects, is what will underpin earnings over the longer term.
That’s the view investors also need to take. Hulamin’s share price suffered when results for the year to end-December 2008 were released last Tuesday, losing more than 11% on the day. That was despite decent financial numbers: turnover up 8% and operating profit by 22%. What the market didn’t seem to like was the forecast of lower sales volumes and possibly the dividend that was cut to 41c/ share from 48c/share in the previous period.
Shareholders are probably also not too comfortable with its high debt. It has increased to R1,75bn, close to half of equity, mainly due to its rolled products expansion and additional working capital. But Fourie says debt will be sharply reduced this year. “Our investment in working capital will reduce in line with decreased output. The rand price we pay for aluminium should also help, and there will be cash generation from earnings.”
The price of aluminium doesn’t really affect Hulamin’s business model – it buys the primary metal it then converts into various products – but it does affect customer behaviour.
“After the sharp reduction in the price of aluminium last year, many customers are holding off buying decisions, thinking if they wait they might get the product cheaper next month.” But despite that Fourie says there are some signs of customers starting to rebuild inventories.
Hulamin is probably more sensitive to the US dollar/rand exchange rate than the price of aluminium. Around 70% of volumes are exported and earn foreign currency. The current weakening rand therefore plays in Hulamin’s favour.
No clear view of orders. Alan Fourie