Wrap it in foil and put it away

Fall­ing sales force a long-term share view

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS shaunh@fin­week.co.za

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

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.