A EC I / O M N I A Damp squib and dynamite
Investors who put their faith in the listed fertiliser and chemicals industry over the past four years may have done well for themselves, but the next year or two may require more careful portfolio planning.
Omnia has nearly trebled in value since the beginning of 2009 while AECI has doubled its market capitalisation over the same period.
Earnings growth has been equally impressive, starting from a 2009 postrecession low of 47c/share for Omnia and 191c/share for AECI. In their last fullyear reporting periods to March and December respectively the companies earned 1 138c/share and 558c/share. That means Omnia’s investors have been rewarded with a cumulative R25,95/share while AECI earned R18,28/share for its investors over the past two years or so.
But the fat years could be over for AECI shareholders. It will report its fullyear results in February and revealed in an October trading statement that EPS would “be more than 20% lower than” the 558c/share it earned in December last year. It attributed the poor performance expectations to transportation and mining strikes during the year, as well as its BEE deal announced in 2011, which it accounted for during this financial year.
The deal will shave R163m off headline earnings, which, together with the dilutionary effect of the 4,7m new shares issued to the BEE partners, will cost AECI investors an estimated headline EPS of 146c. AECI might have to revise its trading update closer to the February results publication.
Omnia’s interim results to September, however, could be indicative of even better things to come.
EPS increased 58% to 546,3c while the dividend was hiked 50% to 150c/share. According to Omnia, the current six months to March will be even better.
“The macro environment for the second half appears promising, but it will be strongly influenced by the direction of the global economy and the rand,” says CEO Rod Humphris.
A weaker rand benefits the group through higher revenue from exported mining explosives, while local mining customers will enjoy the same benefit for their commodities. The mining division serves the industry through BME and Protea Mining Chemicals. BME has a strong presence in southern and western Africa.
Humphris says the mining division expects to maintain the level of firsthalf volumes in the second half of the financial year and that prices for ammonia-based products will remain high.
Omnia further expects favourable planting conditions as agriculture produce prices are expected to remain at high levels after good rainfall. Its R488m new nitric acid plant also helps margins.
In contrast, AECI is less optimistic. It only expects mining volumes “to be stable, supported by AECI’s extensive geographic footprint” and the outlook for explosives and mining chemicals “remains promising” for the remainder of this financial year.
Mark Dytor, who will take over from Graham Edwards as CEO in March, will have to deal with ammonia supply shortages and ramp up the ISAP plant to full production in order to return earnings to their former glory.
The analyst community, as surveyed by I-Net Bridge, believes Omnia will continue to dominate the chemical earnings war. Four analysts rate it as a buy at the current price of R133, betting that it will earn 1 215c/share in the year to March, rising to 1 595,6c a year later.
For AECI, six analysts are only prepared to give the share a “hold+” rating at the current price of R77,37, and they expect EPS to be 683c in the year to December, rising to 1 034,6c by 2014.