Following a decade of intensive investment with meagre returns and a bloated, debt-laden balance sheet, I was one of the sceptics in 2019 who saw Omnia’s R2 billion rights issue as confirmation that it had lost its way as a diversified chemicals group.
Normally, issuing equity to pay off debt is a very expensive way of making temporary gearing into permanent dilution.
Similarly, low returning assets rarely become high returning assets once degeared (one of the reasons you should use return on assets as a quality measure for analysing companies and not just return on equity).
Add to this the jaundiced commodities outlook of three years ago (yes, hard to imagine, but there was a period not so long ago when commodities were untouchable) and the slow-motion crash that is industrial South Africa (thanks, government!), and one starts to understand why Omnia had such a bleak outlook back then.
Yet three years later, with a share price that has basically tripled, I’ve been proven wrong about Omnia. Quite wrong indeed.
With its FY22 results, Omnia reported revenue that has risen by 30% year on year, margins that have expanded, and profits from continuing operations that have almost doubled – while headline earnings per share has grown by 86% year on year, putting the stock on a price-earnings multiple of 11.2 times.
The group’s balance sheet is not just ungeared but has surplus cash.
Despite Omnia strategically investing more into key raw material inputs (a good move in a world struggling with supply chain disruptions and shortages), the group’s cash generation has allowed management to declare both an ordinary dividend of 275 cents per share (FY21: 200cps) and a special dividend of 525cps (FY21: 400cps).
This puts the stock on a total dividend yield of around 10% (this is a dividend yield of 3.7% when only considering the ordinary dividend).
While Omnia owns a chemicals business, which is increasingly looking non-core, the bulk of margin and bottom-line comes out of its agricultural (fertiliser) and mining (explosives) businesses.
These core businesses use related raw inputs (which it can source either domestically through a pipeline or import through rail sidings at Richard’s Bay) to create fertiliser for farming and explosives for mining.
Omnia’s agriculture segment saw strong domestic growth (revenue up 60%) with production efficiencies and the operating leverage of its fixed manufacturing cost-base pushing operating profits up 185%. Internationally, though, a fixed price contract in Zambia hurt the group and, excluding Zimbabwe, revenue and profits were flat.
Mining segment flying
The group’s mining segment performed similarly, with the domestic operations flying (revenue up 43% and operating profit up 164%) and international operations supplementing this (revenue up 17% and operating profit up 30%). Prospects here are looking great for the coming year.
Both these segments benefitted from the tailwinds created by the conflict in Ukraine as soft and hard commodity spot markets boomed, and farmers and miners sought alternative suppliers in key inputs into their processes.
In their results presentation, Omnia’s management reiterated their bullish view on the group’s prospects. Not just are there further efficiencies that can be exploited and spare plant capacity that can be used, but the group’s net cash balance sheet offers them huge capital allocation optionality (both organically and acquisitively).
Interestingly, management reiterated their view that they see Omnia’s optimal capital structure as having a net debt of circa 1 to 1.5x Ebitda (earnings before interest, tax, depreciation and amortisation).
Assuming the current dividends are paid and net debt of 1.5x Ebitda, this implies that Omnia currently has surplus cash of R2.15 billion (R2.3 billion Ebitda x 1.5 = R3.45 billion; R3.45 billion less R1.3 billion in current dividends = R2.15 billion ‘spare’ balance sheet capacity) or around 1 271cps per Omnia share.
If Omnia paid this surplus capital out immediately, this (alone) would be a further dividend yield of around 16%.
Management teases at potential acquisitions too as they talk about a “potential new vertical”.
One thing is certain, Omnia is a case study in unlocking value from its 2019 rights issue and subsequent turnaround.
Well done to those who followed their rights and have held onto the share since then!
With the tailwinds in the agricultural and mining sectors, Omnia really does look to be made of the right chemicals.
Listen to Fifi Peters’s interview with Omnia CEO Seelan Gobalsamy (or read the transcript here):
Keith McLachlan is investment officer at Integral Asset Management.
* McLachlan and some of Integral Asset Management’s portfolios may hold shares in Omnia.