Following a decade of intensive investment with meager returns and a bloated, debt-laden balance sheet, I was one of the skeptics in 2019 who saw Omnia’s R2bn rights issue as confirmation that they had lost their 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, and I’ve been proven wrong about Omnia. Quite wrong, indeed.
With its FY 22 results, Omnia reported revenue that has risen by 30% y/y, margins that have expanded, Profits from Continuing Operations that has almost doubled, and Headline Earnings per Share has grown by 86% y/y (putting the stock on a Price Earnings of 11.2x).
The Group’s balance sheet is not just ungeared but has surplus cash. Despite the Group 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 275cps (FY 21: 200cps) and a special dividend of 525cps (FY 21: 400cps).
This puts the stock on a total Dividend Yield of c.10% (this is a Dividend Yield of 3.7% when only considering the ordinary dividend).
While the Omnia also owns (what is increasingly looking non-core) Chemicals business, the bulk of margin and bottom-line comes out of the Group’s agricultural (i.e. fertilizer) and mining (i.e. explosives) businesses. These core businesses use related raw inputs (which they can either source domestically through a pipeline or imported through rail sidings at Richard’s Bay) to create fertilizer for farming and/or explosives for mining.
Omnia’s Agriculture Segment saw strong domestic growth (revenue +60% y/y) with production efficiencies and the operating leverage of its fixed manufacturing cost-base pushing operating profits up +185% y/y. Internationally, though, a fixed price contract in Zambia hurt them and—excluding Zimbabwe—revenue and profits were flat elsewhere.
The Group’s Mining Segment performed similarly with the domestic operations flying (revenue +43% and operating profit +164%) and international supplementing it (revenue +17% and operating profit +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 c.1~1.5 EBITDA. Assuming the current dividends are paid and net debt of 1.5x EBITDA, this implies that Omnia currently has surplus cash of R2.15bn (= R2.3bn EBITDA x 1.5 = R3.45bn; R3.45bn less R1.3bn in current dividends = R2.15bn “spare” balance sheet capacity) or c.1271cps per Omnia share.
If the Omnia paid this surplus capital out immediately, this (alone) would be further c.16% Dividend Yield. But management tease 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 that 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.
THIS ARTICLE WAS ORIGINALLY PUBLISHED ON MONEYWEB.CO.ZA