BUY, HOLD, SELL

This month we look at three alchemists of the JSE’s industrial mid-caps which will need to concoct the chemistry necessary for earnings growth in a moribund economy

OMNIA

Share price: R35.21 JSE code: OMN

BUY IM HAS FAVOURED THIS COUNTER since July, when we rated it a buy at R27.30. The company is a diversified chemicals business with material interest in agricultural fertilisers and related chemicals, and has an explosives and detonator division. It operates domestically in southern Africa and, through the mining unit, in many international markets.

After a R2bn rights issue in mid-2019 resuscitated the debt-blown balance sheet, management implemented swift changes to improve lacklustre nitric acid plant utilisation, cut costs and strengthen weak operating margins. To date much improvement has been made.

The core divisions of agriculture and explosives have challenges but Omnia’s international interests performed well. Its star performer is Oro Agri, its organic fertiliser business. As this copy was being written Omnia decided to sell Oro for $165m (R2.7bn). This was 127% more than was paid in rands in March 2018. This deal will clear debt and provide an estimated cash war chest of R1bn.

Domestically, restructuring is under way to improve margins. The explosives business has won a material new client that will add 20% to revenue. The Oro sale has powered the stock and speculation on share buy-backs and special dividends will now bubble. IM maintains its positive stance on Omnia. ●

AECI

Share price: R77.30 JSE code: AFE

HOLD AECI HAS AN ARSENAL OF products operating under five key pillars: mining products and solutions, water treatments, plant and animal health solutions, products in the food and beverage industry and a general chemicals business. In 2017 there was a move to augment heavy chemicals by buying Much, an asphalt business, for R2.3bn.

After years of restructuring and asset disposals, the chemicals and explosives company now has a far more cohesive divisional structure, with products that should enhance its growth despite a weak domestic GDP forecast. Interim results were that revenue dropped 6% to R11.2bn, profit declined 49% to R260m and headline earnings sank 34% to 240c a share. But AECI sits on a healthy R2.7bn of cash.

The firm’s biggest division is explosives. Domestic operations were muted due to Covid-19, but prospects internationally remain sound. Plant and animal products have resilient prospects. The Much asphalt business should gain traction on any rise in government infrastructure spend.

AECI has been the weakest performer of the three stocks in this report, falling 22% in the year to date. Omnia is ahead 1.8% and Afrox down 15.8%.

We rate AECI a hold, despite its weaker share price, as IM believes its divisional mix should outperform Afrox in the current economic climate. ●

AFROX

Share price: R17.79 JSE code: AFX

SELL AFROX HAS LONG BEEN considered the industrial economic bellwether of the domestic economy. It and SA’s GDP are joined at the hip. But right now that hip looks gammy.

Afrox operates across Africa, supplying welding and gas products, including those used in health care, mining and hospitality.

For many years the company lumbered on despite well-established key categories in atmospheric industrial gases, LPG and industrial consumables, as well as a profitable hospital gases business. The weak domestic economy and effects of the lockdown has not aided the firm.

Much of the recent gains from Afrox has been from cost cutting and restructuring rather than due to underlying growth from increased revenue. Recent results showed the effect of Covid-19 on revenue, which declined 10%. Headline earnings fell 31%. But with a strong balance sheet and R1.2bn of cash on hand, the dividend was maintained.

At time of writing the German gas business Linde, which owns 51% of Afrox, made a buy-out offer at R25 a share. A delisting was always on the cards since Linde bought British Oxygen Company in 2006 which was the parent of Afrox. The buyout, given the dull prospects for Afrox, was the best shareholder scenario. Sell and take the offer. ●