Omnia reports earnings up 86%

What drove the special dividend was the good earnings growth across all of our businesses and our disinvestment from the Umongo Petroleum business: Seelan Gobalsamy – CEO, Omnia.


FIFI PETERS: Shares [in] Omnia rose over 2% today, extending a more than 15% jump in the stock price so far this year. The fertiliser, chemicals and explosives business released its annual results today, recording a 30% rise in revenue, a 40% jump in operating profit and the payment of a further special dividend following the one paid last year.

We have the CEO of Omnia, Seelan Gobalsamy, for more on the results. Seelan, thanks so much for your time. It does look like it’s been a good year for the group. You’ve even rewarded your investors with a special dividend that’s higher than the one last year. What would you say was the biggest kicker to your earnings growth, and how sustainable is it?

SEELAN GOBALSAMY: Thanks Fifi, and thanks for having me. I guess if we look at last year, last year we paid a dividend of R1 billion. This year we are paying a dividend of R1.4 billion – R2.75 an ordinary and R5.25 special [share].

What drove that was really the increase in our earnings. We had good earnings growth across all of our businesses and, on top of that, we disinvested from the Umongo Petroleum business that we said was less core and not in line with our strategic intent.

That was the big driving force of cash, a strong cash position at year-end – R2.4 billion – and an ungeared position.

FIFI PETERS: Would you say that the group was also quite a big benefactor of the upsurge in commodity prices that we have seen? And what would you say the split is in terms of profits that are being driven by commodity prices and profits also being driven by other operational efficiencies that you have referred to within the group?

SEELAN GOBALSAMY: We’ve had a few years now of very low commodity prices and during that time what we saw was low revenue growth and good profit growth. Now what we are seeing in the current financial period is higher commodity prices, and higher commodity prices do drive revenue.

So we showed our shareholders that, even though commodity prices have been up, our volumes have been up and the underlying core business has also been up. So commodity prices have driven our revenues up.

Read: Omnia sees Africa increasing farm input support amid food security fears

However, commodity prices also increase your costs, your working capital. You’ll see we put another billion rand into stock, into inventories. And even with the higher commodity prices, that provides a tailwind on the revenue side, it provides a headwind on the cash side. Our business overall has performed well.

I guess if we do see a softening of commodity prices going forward, we are absolutely convinced that the business is in a solid position to adapt to that, and to continue to perform well into the future.

FIFI PETERS: It’s quite interesting. You are essentially saying that commodity prices have increased and that has in part increased the price of your product, yet volumes haven’t declined, signalling that your customers are still buying your product, or still demanding your product despite the fact that it’s costing them a little bit more. Is that the case? Have I understood it correctly? And, if so, how long do you think that will be the case for? When do you see breaking point for your customers?

SEELAN GOBALSAMY: I think it’s actually better than that.

Our volumes have actually increased, so what you’re seeing is prices have increased and volumes have increased across our mining and our agriculture business, and we’ve secured more customers in this time.

Let me just unpeel that a bit and tell you why. That happened because of the significant supply-chain disruptions we’ve seen in the last few years.

Omnia has been able to demonstrate to its customers and to new customers that we are able to supply product in these difficult times, and that’s resulted in our volumes increasing. We’ve secured new customers in the current financial year. I guess where you’re going is how sustainable that is, where you get to a point where customers just stop buying because input prices are too high.

FIFI PETERS: And stop buying as much.

SEELAN GOBALSAMY: Yes, stop buying as much or buy differently. I think what you want to watch is if there is a strong demand and need for food security, so let’s start there. Yes, there is.

Countries across the world are focused on ensuring that there’s adequate food supply and security.

So there’s a high demand for food. There are very supportive, soft commodity prices in the agriculture space – and that without our farmers continuing to buy and continuing to plant. We haven’t seen any demand destruction due to the higher input price costs as yet.

Similarly on the mining side countries are very, very committed to employment, to GDP growth – and mining drives that heavily. So from that perspective as well, even though we’ve seen an increase in input costs, there’s still a high demand for explosive security to make sure that it’s available and that mines, with the mineral prices where they are, continue to grow and expand.

FIFI PETERS: Where are the new customers coming from? I’m interested in where this new wave of volumes that you’re experiencing in your business is coming from.

SEELAN GOBALSAMY: It’s coming from customers that unfortunately have not had their demands met due to supply-chain disruption that exists with some of our competitors, and some global companies that are unable to utilise their global supply chain. We’ve seen blockages at the Suez Canal.

We all talk at business schools that you’ve got a global supply chain, that it’s a global village – buy just in time; it will arrive just in time. [But] I think the last few years have taught us that that is not sustainable.

You’ve got to have agility of local and global supply. You’ve got to stock up in case things go wrong. If there’s a port disruption, you want to have feed stock on site, close to your production facilities.

So I think the world, the macros in the world have turned on its head what we’ve been taught, what we’ve learned over the years in business schools, and what you are seeing is that the Omnia team has been able, on an agile basis, to respond to this market.

FIFI PETERS: So that’s local new customers as well as global new customers is essentially what you’re saying.

SEELAN GOBALSAMY: Yes. I would say local, as in South Africa and Africa, but we also have a lot of interest from global customers on the explosives and the agriculture side. It’s a lot more complicated to take bulk product all around the world. That is a little bit more tricky because you’ve got distances to travel and expensive logistics costs.

But what we do know is, if customers need to plant, they need fertiliser; and if mines need to blast they need explosives.

You can’t be out of stock on those things because then it stops your operation completely.

FIFI PETERS: Just on that – planting and food security – we have seen the prices of fertilisers, for instance, skyrocket since the start of the Ukraine war, and your numbers don’t really fully reflect what has happened since then. I stand to be corrected, but we’re looking at the picture as of the year ended March, so can you tell us what has happened to fertiliser prices, what they’re looking like today as you and I speak, compared to a year ago?

SEELAN GOBALSAMY: Fertiliser prices, if I were to take the start of our financial year to the end of our financial year, have gone up in multiples – three, four times, depending on the grade and the product you’re using. That’s happened during the course of our financial year and it’s persisted post that.

Omnia has a very long lead time, so we buy in advance. We optimise between fertiliser and explosives, and we change product mix to allow us to manage the volatility and the changes in the commodity prices.

So what you are seeing is support from the revenue side due to the higher commodity prices. You’re seeing the higher commodity prices cause us to use more cash in our business – and even with that we’ve performed well. And you also see that when the commodity prices come down, like they did a few years ago, Omnia has demonstrated the ability to continue to perform well. So I think if we look forward commodity prices might come down a bit.

However, you’ve had three years of performance, where we’ve performed well with low commodity prices; and now with higher commodity prices we are also performing well, which is supportive and it’s showing that our strong balance sheet is well prepared to deal with the cash that higher commodity prices need in a deep working capital cycle.

FIFI PETERS: Sure. A story was on Reuters today about the fact that with the fertiliser prices and the concerns around food security that they have brought, particularly for farmers who are finding it a lot more difficult to farm, a lot more expensive to farm, the Reuters story was saying that you are having a whole lot of discussions with a few governments on the continent about how to solve that. Can you tell us about those conversations? What is being asked of you in support of some of these smallholder farmers and in support of food security?

SEELAN GOBALSAMY: I think governments across the world are focusing on ensuring that they have security of supply of fertiliser.

I guess what governments are doing is they’re working hand-in-glove with the farmers and with producers of fertiliser like ourselves to see how they can bed down long-term contracts and ensure sustainability of supply. So broadly, those are the discussions that are happening where governments are trying to bed down the security of the fertiliser supply for upcoming seasons. That’s normal.

I think what you are seeing is more urgency in those discussions because last year we saw that the disruptions were fairly significant and in some instances there were fertiliser shortages and countries were not able to plant as much as they would’ve liked to.

FIFI PETERS: Seelan, does the fact that the group has paid a higher special dividend this time around also signal that perhaps there’s no better use for your cash right now than to reward your shareholders? And by ‘better uses’ I’m saying, is it a vote of no confidence in the South African economy, where perhaps you could have taken the extra money to invest in the real economy, as opposed to investing in your shareholders? Or is it not that clear-cut?

SEELAN GOBALSAMY: No, it’s not that clear-cut. I think the first thing to state is we are not just a South African business.

We have set capital aside for our business in Canada, we have set capital aside for our business in Indonesia, and we’ve set capital aside for our business in Australia. We had R2.4 billion of cash on our balance sheet at year-end with no debt, and we’ve chosen to pay out roughly R1.4 [billion] of that.

So we’ve held back a billion rand for investment in stock, investment in expansion, investment in a number of projects across the world. So I don’t think it’s as simplistic as saying there are no growth opportunities across the world for our business.

We talk to the plants that we’ve expanded in Australia.

We’ve got a detonator plant being shipped to Canada, and we are expanding our operation in the Netherlands and in the US.

So there is capital set aside for expansion.

I think what we did say is we will not hoard cash and if, once we’ve set aside capital for that and there’s still a surplus, we will return that to shareholders. But I guess if shareholders would like to return the dividend back to us, we’d happily take it. [Chuckling]

FIFI PETERS: Cheeky answer. You know they won’t. We’ll leave it there. Thanks so much for your time. That was the CEO of Omnia, Seelan Gobalsamy.

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