Who has the best deal-making chemistry?
New acquisitions look set to play a key role in Omnia-AECI performance race
AECI and Omnia have been on the acquisition trail of late, clinching two deals each that have an important bearing on the companies’ respective investment merits.
Omnia set the ball rolling last May with the acquisition of a 90% stake in Umongo Petroleum for an initial R618.5m. The deal valued Umongo at an undemanding 7.2 p:e based on its net taxed profit of R77m in the 12 months to February 2017. Subject to a three-year earnout, the maximum amount payable for Umongo is R780m. The effective date of the deal was December 1 2017.
Umongo, which has been slotted into Omnia’s chemicals division, brought with it the distribution of Chevron oil additives, base oils, oil and lubricant products in SA and sub-Saharan Africa.
At the time of the deal, Omnia group MD Adriaan de Lange said: “We see a lot of growth opportunities in SA and the rest of Africa. We have operations in 17 African countries outside SA and know how to grow businesses in Africa.”
Omnia struck again in March, announcing it would buy Oro Agri. The US group specialises in the development and production of environmentally friendly agricultural products in the US, SA, Brazil and Europe, and has product distribution in 75 countries. The deal, which valued Oro Agri on a 16.4 p:e, was closed on April 30.
Oro Agri, which constitutes Omnia’s biggest deal yet, came with a price tag of US$100m (R1.23bn). Based on results to December 2017, it will add revenue of R630m and net taxed profit of R75m. According to Oro Agri, which is housed in Omnia’s agricultural division, it operates in global markets worth a combined $86bn, with growth running at 5.3%/year.
AECI’s first big acquisitive move came in October, when it announced the proposed purchase of SA group Much Asphalt from private equity firm Capitalworks and management for R1.99bn. The deal to acquire Much, which produces the full gamut of roadsurfacing materials, was closed on April 4.
Based on Much’s taxed profit of R181m in its year to June 2017, the deal valued it on a p:e of 11. Much’s revenue in its past year was R2bn.
AECI also moved to grow its reach in the agricultural chemicals market with the purchase of German group Schirm from Imperial Holdings for €110.5m (then R1.81bn).
Schirm produces agricultural chemical products such as herbicides, fungicides and insecticides under contract for clients such as Bayer, BASF and DuPont. It operates four plants in Germany, where it is the biggest company in its field, and one in the US.
The Schirm deal was closed on January 30 and will, based on annual results to June 30 2017, add about R1.7bn in revenue and R76m in taxed profit. The deal valued Schirm on a hefty 24.7 p:e.
In an upbeat review of Schirm at the time of the deal, AECI noted that the German group has over the past two years invested R371m to add capacity needed to achieve “significant growth”. The benefits, said AECI, will first be seen in Schirm’s financial year to June 2018.
Omnia and AECI’s acquisitions represent sizable increases in the asset bases of the two companies.
In all, Omnia spent R1.85bn on its two acquisitions, an amount equal to 13% of its total assets, while AECI’s R3.8bn acquisition total is equivalent to 23.8% of its total assets.
Excluding additional interest payable on debt, Omnia’s acquisitions will add R152m (26.7%) in net profit to its annualised net profit of R570m in its half-year to September. AECI’s deals, excluding additional interest payable, will add R257m (26%) in net profit to the R983m net profit recorded in its year to December.
Only time will tell whether Omnia and AECI have allocated capital optimally, but Warren Jervis of Old Mutual Investment Group has some reservations.
Of AECI’s two deals, Jervis says: “I am lukewarm on Schirm and though Much is a strong business I believe AECI has overpaid for it.”
For Omnia and AECI, the economic outlook in SA and internationally across their operations in mining explosives and chemical solutions, and chemical and agricultural products, is far more positive now than it has been in many years.
Choosing between the two groups will be a tough call for investors but, based on recent performance, the odds favour Omnia. The market seems to agree, valuing the firm on a 15.2 p:e and AECI on a p:e of 13.7.
Omnia put on a strong showing in its six months to September, lifting headline EPS (HEPS) 31% and boosting the interim dividend by 25%. The HEPS rise, by far the company’s best showing since 2013, was comfortably ahead of AECI’s 17% HEPS rise in its year to December.
But there is still a long way to go. Omnia’s interim result produced a suboptimal 7.8% return on equity, well below the 19.7% achieved in 2013.
The performance race between Omnia and AECI will be an interesting one — one in which the companies’ recent acquisitions look set to play an important role.
Choosing between the two groups will be a tough call for investors but, based on recent performance, the odds favour Omnia. The market seems to agree