Hoping those dark clouds bring rain

At the interim stage Omnia’s agriculture segment was the largest in terms of revenue at 46% of top line, while mining and chemicals accounted for 26% and 28% respectively.

But it was a different story at the operating profit level, where agriculture posted a loss of R37m and mining and chemicals turned profits of R105m and R65m respectively. Net finance charges of R218m turned an operating profit into a loss of R93m (R285m last year).

Despite revenues increasing 35% (with the inclusion of Oro Agri for the first time), the agriculture division reversed from a profit of R111m a year earlier mainly because drought led to delays in sowing (and therefore fertiliser orders). Margins were hit by, among other things, discounts given to struggling farmers.

Inventory levels were also higher, affecting working cap- ital and debt — gearing rose to 59% (34%).

Mining was disappointing too. Revenue was flat and operating profits were down by more than two-thirds (R337m last year), partly because of contract-pricing mechanisms linked to a lower ammonia price. Profitability was further impacted by obsolete stock being written off, and a provision was raised against a debtor in Angola that had defaulted.

Revenue grew 28% in the chemical division (with the inclusion of recently acquired Umongo Petroleum). But operating profit remained flat — a direct consequence of the weak economy.

Omnia is not for the fainthearted. It is in the grip of forces it has no control over, such as the exchange rate, commodity prices and the weather. Earnings, over the longer term, have been cyclical.

So can investors look forward to better days?

Delayed planting and rand weakness resulted in a foreign exchange swing of R88m in the agriculture division. Some of this loss will be offset in the current reporting period as the unrecognised profit in the unsold inventory reverses on sale. Recent estimates show the local 2018/2019 maize crop down 16% from the previous year at 11Mt.

This could have an effect on margins, inventory levels, working capital and debt; there might be less de-gearing than hoped. Expropriation without compensation has been another headwind for the division, albeit more of a breeze than a gale. On balance, the second half should be a lot better.

The mining division expected a better second half at the interim stage thanks in part to the weaker rand and increased volumes. Management declined to comment on volumes.

There should be no repeat of the provision raised against the Angolan debtor in the second half, and no writedowns of obsolete stock.

Historically the second half is stronger for the chemicals division due to stronger manufacturing activity in October and November — though that might not hold true in the

current economy — and to increased wine production activity in January and February.

Debt levels are concerning at R4.6bn (R2.5bn) with the debt-to-equity ratio at 59% (34%) from an ungeared position two years ago. Of further concern, net debt now marginally exceeds the market capitalisation of the share — R4.6bn versus R4.4bn. Net financing costs at the interim stage were R218m compared with operating profit of R124m. But working capital is expected to improve in the second half off the back of lower inventory levels — particularly in the agriculture division.

Omnia is materially exposed to many factors it has no control over, and may find itself coming under increasing pressure from lenders. To have invested R2bn in Oro Agri, Umongo Petroleum and a new nitrophosphate plant was bold. It may turn out to have been inspired — or the opposite.