Omnia management raised the prospects of a sizeable dividend and the possibility of a special dividend when it announced its interim results six months ago. It delivered on the promise, with the compliments of the continued recovery in operations, good profitability and asset sales.
The ordinary dividend of R2 per share and the special dividend of R4 per share, as well as the recovery in the share price since 2019, resulted in a decent return for shareholders who opted to participate in the rights issue of the then-struggling Omnia.
Omnia elected to raise R2 billion in the middle of 2019, offering new shares at R20. The share price was R33 when it announced the rights issue, quickly falling to R22.50 at the effective date of the rights issue.
Shareholders were offered close to 145 new shares for every 100 held, meaning that the average price for investors that followed their rights in September 2019 was around R22 per share.
Less than two years later, the share price has recovered to R54, plus R6 in dividends.
This equals a return of more than 170% (assuming that the share price does not drop R6 as soon as the dividends are paid.)
“It is encouraging to be able to acknowledge and reward the shareholders that were there when we needed them,” Seelan Gobalsamy, CEO of Omnia, told Moneyweb in an interview after the announcement of the results for the year to March 2021.
“It feels good to return R1 billion to shareholders,” says Gobalsamy.
He notes that management had to endure criticism at the time when it decided to go ahead with the rights issue. “Some people did not agree that a rights issue was necessary, others complained it was too big, or too small. But it was the right decision – we couldn’t continue trading with R6 billion in debt.”
Omnia’s success in using the new capital to reduce debt and take corrective action is interesting when comparing it with other struggling companies that seem to loath to raise new capital and go to lengths to avoid a rights issue. Sasol and PPC immediately come to mind.
The latest results show that Omnia seems to have done everything the way clever professors advocate in business school.
Every line item in the balance sheet showed improvement. Overall debt, stock levels, debtors and fixed assets all decreased, while cash increased.
Noticeable is that current liabilities fell by more than R1 billion and total liabilities by more than R3 billion compared to a year ago.
Net working capital dropped by R1 billion and fixed assets by more than R2 billion. Gobalsamy says there was particular focus on trimming the balance sheet and reducing debt.
The sale of Oro Agri was finalised during the period, yielding R2.2 billion. The cash flow statement shows strong operation cash flow and repayment of debt.
“A profound feature of the results is that our debt is gone, we have a very strong balance sheet,” says Gobalsamy.
The strong financial management is evident from the income statement too. Despite unchanged revenue from continuing operations, strict financial management resulted in a hefty increase in after-tax profits – R658 million compared to R79 million in the 2020 financial year.
Headline earnings, including the few months that Oro Agri was still part of Omnia, nearly doubled from R1.89 per share to R3.76 per share. Headline earnings per share from continued operations improved even more, from R1.54 to R3.91 per share.
Luister na Ryk van Niekerk se onderhoud met Omnia se Stephan Serfontein:
Management points out that agriculture is performing very well, boosted by good weather, good crops and higher prices worldwide. The mining division is benefiting from higher production volumes and higher commodity prices.
“While most sectors contracted during the current financial year due to the spread of Covid-19, general economic downturn and political turmoil, southern African food production expanded strongly with good early rains, higher crop prices and increased export sales supporting demand for fertilisers, speciality products, biostimulants and support services,” says management.
It also noted that commodity prices started to increase last year, with strong demand for gold as a safe haven amid the pandemic and global trade tensions. A presentation of Omnia’s results includes a list of metals and minerals that have increased sharply of late, with management predicting that the trend is not over yet.
This is good news for Omnia as mining companies are bound to buy more explosives to increase production, while their higher profitability might make them willing to try newer technology.
However, unreliable power supply in SA is noted as a risk “with load shedding anticipated to continue for the foreseeable future”.
Omnia still expects mining production to recover to pre-Covid levels.
The less rosy part
The outlook for the chemical division seems less rosy.
The manufacturing and general industrial sectors in SA have borne the brunt of electricity supply problems over the years, warns management, while the coronavirus pandemic has exacerbated the situation.
Omnia has benefitted from new business opportunities arising in the chemical space, from growth in cleaning and hygiene products. It is also pursuing changes in consumer behaviour towards more environmentally friendly chemicals which is expected to grow strongly over the coming years
While talk of a supercycle for commodities is bound to raise expectations, the next boom for Omnia is bound come from a weakening currency.
Gobalsamy noted that the rand was quite strong during the past year. “We do better when the rand is weaker,” he says.
The market seems to agree that Omnia’s prospects are still good.
The current share price of just below R55 represents a price-earnings ratio of 13.9 times, somewhat higher than its historic average and evidently pricing in further earnings growth.