Rolling into the black
Hulamin believers have been bitten (many times) before, but the aluminium group may finally be on the right path
When it comes to South Africa Inc companies on the JSE, there are plenty of plays that could be considered dirt cheap with prospects rendered even dimmer by our prevailing energy crisis.
Then there’s Hulamin. This once mighty industrial icon is now treated with the disdain that might be reserved for a mismanaged and highly geared asbestos roofing company operating in an eco-village.
On Monday, Hulamin posted normalised earnings up 28% to 105c a share. Yet basic earnings came in at 97c a share and 91c a share on a diluted basis roughly half the previous financial year’s earnings.
Two sets of earnings? Sceptical investors might say par for the course. Time and time again they’ve watched Hulamin disappoint on delivery. Dare we argue that this time it could be different?
Major factors were the net interest charge increasing 40% to R91m, thanks to higher interest rates and increased average debt levels during the year. That was driven mainly by a higher average rand aluminium price.
The tax bill also increased significantly to a R140m expense after Hulamin took a R111m credit in the previous financial year when it scored from a deferred tax asset (equivalent to 37c a share).
Hulamin diehards will know that the big difference between headline earnings and normalised headline earnings is the pesky metal price lag. Essentially this is the profit or loss stemming from the timing difference between the purchase and selling price of metal.
Obviously, the metal price lag can be volatile, but Hulamin reckons that over time it smooths out. For the record, the metal price lag in financial 2022 was a loss of R26m (2021: profit of R426m). Whatever earnings measure investors regard as the best gauge, it puts Hulamin’s shares on a trailing earnings multiple of roughly three times.
That’s really cheap if one can assume that Hulamin notwithstanding the fall in basic earnings is finally finding that elusive sustainable traction it has missed in the past few years.
Put another way, contrarian investors who were brave enough to snap up Hulamin in mid-2022 would have seen the then market value of about R700m almost fully returned in normalised earnings before interest, tax, depreciation and amortisation
which topped R667m in the just released results for the year to end-December.
Hulamin shares have been anything but consistent. Year to date they’re down 7%; over three years they’ve returned almost 71%; on a five-year basis that shifts to a negative 35%.
Yet things hardly look brittle for Hulamin, and there was a distinctly upbeat mood at the investment presentation. Some might find it ironic that this comes
courtesy of a 70-year-old, the interim CEO Geoff Watson, a metals industry veteran who has grasped the operational nettles the previous CEO seemed reluctant to touch.
One might imagine Watson not being the most popular executive among senior management, but he has executed on longoverdue strategic shifts that some shareholders have been clamouring for over the past few years.
Watson was appointed a nonexecutive director at Hulamin in 2011, and has metal pumping through his veins. He previously served as director of Asian Sales and China business development of United Company Rusal (the world’s largest producer of aluminium). He was also an executive associate of Seema International in 2010 and CEO of Steelforce Australia in 2009, and held numerous positions at Alcoa Rolled Products from 1976 to 2008 (including vice-president: China).
He might have been expected to take a caretaking role after the retirement of long-serving Hulamin CEO Richard Jacob. Watson says the search for a new CEO is well under way. After the release of the 2022 financial numbers, more than a few shareholders might be hoping Watson’s tenure is extended.
His comments on recent developments at Hulamin are rather telling. “The focus in the second half has been to improve the product sales mix and capitalise on the continued structural growth in demand for aluminium beverage cans.”
Local sales volumes increased 7% to 94,651t and the next six months look good too, thanks to “solid customer demand, particularly in the local and export beverage can markets, stable product margins and a weaker exchange rate,” says Watson.
He has also moved to simplify Hulamin. He says the group has exited from three product lines, which will release capacity to boost beverage can production. The plan is to ramp up can volumes 10%, and then also push scrap metal consumption by 15%. These efforts should reinforce margins.
At the moment, group operating margin sits at 3.3%. A key challenge for Hulamin is whether it has enough wiggle room in price negotiations with customers to compensate for commodity price increases. Watson says engagements have been “very successful”.
Hulamin is also still investing heavily in its facilities with R300m slated in capital expenditure for the year ahead, another
R450m for 2024 and R350m pencilled in for 2025.
“This should give confidence that we are reinvesting in the business to sustain it and improve it.”
Perhaps the most significant point at the investment presentation came during question time when Volker Schütte, a local industrialist and outspoken critic of Hulamin in recent years, offered a “well done” to the assembled executives. Not too long ago Schütte, frustrated at Hulamin’s underperformance in a boom time for aluminium producers, described the group as “the worst-run rolling mill in the world”.
He says Watson is doing a good job of looking at lower-hanging fruits. “I am surprised by how quickly he has achieved these results.”
Schütte is most encouraged by the emphasis placed on increasing scrap metal yields which, in the past, have been very low compared with other global aluminium players. “It’s the easiest way to bring up the profit line. The consumption of electricity is markedly lower when compared to processing new metal.”
Schütte reckons the reduction in product lines and the focus on the local market are also key developments. “Hulamin needs to focus on profitable lines with higher margins. There is now more focus on the local market. This is where the good money is made ... not from exports.”
But it won’t be all plain sailing. Hulamin’s inventory levels might worry investors even if Watson offered a reasonable explanation that the group needs longer production stretches to manufacture higher-margin products. Net cash flow for the year was down markedly at R60m (R244m). This will have to be watched in the new financial year, though Watson indicated positive net free cash flow of R387m in the second half.
Schütte believes Hulamin should also look at selling the extrusion business which, he says, is of little value.
Hulamin is at an interesting juncture for deep-value investors who can still hold an optimistic longer-term gaze for local industry.
A new CEO should be appointed by midyear, or at the latest by the third quarter.
Hopefully the new boss does not fall back into old Hulamin habits.