The resource sector in South Africa has come under increasing pressure in recent months on the back of concerns around a number of issues, including weak global economic activity and hence f lagging demand. In addition, structural issues in the mining industry surrounding strike action and the resultant inf lationary pressures that this will bring, only add to the burden of increasing power costs and having to mine deeper into the earth. However, this sector is not restricted to mining f irms, but also extends to agriculture and chemicals. Omnia is a stock that has exposure to the broader resources industry and has a commendable track record for investors. Certainly, this business is highly exposed to mining activities, with half of operating profit coming from this segment, but agriculture contributes almost 40% and chemicals the remaining 10%.
Two years ago the company raised R1bn to build a second nitric acid plant that would not only add significantly to its production capacity, but would also contribute to improved economies of scale and in turn, better margins. Although this deal was a large one for the f irm at the time, it has been implemented effectively, evidenced in part by the 52% rise in earnings for the recent f inancial year, while the dividend was increased by a similar amount. However, t he y i eld i s only a “satisfactory” 2%. Omnia’s balance sheet is sound, with a debt to equity ratio of 19% following the capital raising of 2010, and f inancial quality metrics point to a well-run f irm.
Omnia remains South Africa-centric, but is increasingly doing business outside of our borders, with a quarter of revenue being generated in Africa. The company’s agricultural expertise f its neatly with Africa’s growing need to produce more soft commodities (food), and Africa certainly is a key market for mining production. At the last set of results, it was pleasing to see mining volume increased, despite the broader slow-down in mining activity. This infers that Omnia is gaining market share, which will further support earnings going forward.
Omnia has not e x perienced t he large sell-offs witnessed by some of the other mining stocks, hence it could be argued that there is better value to be found elsewhere in the sector. However, Omnia still displays sound value multiples, which we expect to be supported by the diverse earnings base and growing market share. In addition, the key operating areas generally perform well in a counter-cyclical fashion, and we expect the chemicals business to contribute strongly when the manufacturing environment improves.
SOURCE: McGregor BFA
Andrew Newell, Head of Business Development, Cannon Asset Managers