Omnia: Missing the scenario

IM has written consistently on chemicals, explosives and fertiliser business Omnia Holdings.

In July 2020, at R27.30, we believed it offered exceptional recovery value after the support of a rights issue to repay debt and a plan to restructure the company and improve operational margin.

Under the leadership of CEO Seelan Gobalsamy and his executive team, Omnia has had a series of excellent results that have caused the stock to boom. Its peak was in May 2022, when it hit nearly R88.

IM has consistently recommended the stock since 2020, with all three price targets — R50, R65 and R80 — met and exceeded. IM has thus been puzzled as to why the share price has been lacklustre, despite expectations of strong FY2023 results ahead and reasonable prospects into FY2024.

We try to analyse current market optics, which IM believes are myopic. Results of the last financial year-end to March 2022 led to the stock rallying hard as the company detailed a 30% rise in revenue to R20.4bn, an

80% rise in profit after tax to R1.1bn and headline earnings per share (HEPS) of 672c (+86%). A fat dividend was also paid; an ordinary dividend of 275c with a special dividend of 525c a share. This makes R14 of dividend paid in the past two results seasons. IM sees further dividend on the horizon as management repays the R20 given by investors in the July 2020 rights issue.

Interim results to

September 2022 were also upbeat. Revenue rose 23% to R12.1bn, profit after tax rose by 14% to R532m and adjusted HEPS increased 32% (taking out the volatility of hyperinflationary Zimbabwe) to 401c. On both sets of results, the market was surprised at their quality and Omnia’s share rallied. After the results, lethargy set in and Omnia slipped. Puzzling.

As IM writes this updated opinion, Omnia is trading at R62.20 or a p:e of 9.3 and, in the past 12 months despite volatile moves, is ahead a meagre 1.9%. Investors, after boom results, clearly expect a bust; IM believes they are misguided.

In first-half 2022 results, management was confident of ongoing H2 growth, saying that normalisation in earnings would see a 40% H1 vs a 60% H2 earnings split. That is unchanged.

The fertiliser market had challenges in the underlying market; however, Omnia had stock and was able to supply farmers, unlike many. It made good margin and, importantly, strong cash generation. It’s not all about volumes but the margin mix. Volumes were not clipped as sector demand late into the season saw strong throughput, though prices have slipped marginally

but not to the extent the market may believe.

If you relate Omnia’s fertiliser division only to what is seen in global conditions, you will be doing your forecast an injustice. IM sees a strong H2 ahead for agriculture and into FY2024, despite expectations for a drier season. Omnia’s results timing, a March year-end, means it will gain sales into late H1 and early H2, despite any weather-related factors.

Within explosives, Bulk Mining Explosives (BME) had a robust period with offshore growth proving pleasing especially in Canada and Indonesia. IM expects a move to bolster the Australian business. The BME margin, long a market bugbear, is creeping up and should now meet Omnia’s internal goals.

Protea Mining Chemicals will continue its interim recovery trend and IM still expects a sale in due course that could unlock 800c a share in value.

IM is certainly no Omnia zealot. We believe the 2024 period, especially in agriculture, will be slower than the post-Covid boom. However, domestic supply chain challenges remain and Omnia agri international, where profit rose 76% in H1 2022, continues to have an expansionary trajectory to offset any domestic softness in granular fertiliser.

Load-shedding has not had a material impact on Omnia due to its own power production, but it does have one problem cash. As inventory is converted into cash alongside a tighter working capital management, it piles up.

That cash will either be used for strategic bolt-on deals or simply returned to shareholders, again supporting Omnia’s dividend credentials.

IM believes Omnia will once again have a marketbeating trading update and results period. The market will again be caught short and needs to understand that there are underlying strengths within the company that make it far more resilient in earnings flow than the Omnia of the past, as it moves into a “future farming” dynamic.

The Omnia of 2023 and 2024 continues to evolve, improve margin, tighten working capital and expand cash generation especially from its non-South African assets. IM believes the market is missing this scenario and will be pleasantly surprised at impending results and

FY2024 prospects.

At R62.20, IM continues to rate Omnia a buy with a target of R80 alongside a robust dividend expectation.