Hulamin, based in Pietermaritzburg, produces semi-finished aluminium products — including components for beverage cans and vehicle body sheets.
Despite the positive fundamentals of aluminium — such as its high strength-to-weight ratio, recyclability, corrosion resistance and excellent thermal and electrical conductivity — the company has struggled in recent years to capitalise on these advantages. Plant instability, challenging market conditions for commoditised items and onerous working capital requirements have all contributed to the company’s woes.
The key question now is whether new management, appointed in December 2023, can deliver on its promises to turn the company’s fortunes around through the implementation of a revamped strategy. The stock, trading at a significant discount to book value and net working capital, and at a forward earnings multiple of just over three, shows clear potential for a strong rebound if the execution is successful.
Hulamin’s new strategy is built on two pillars. First, the company is shifting its focus towards higher-margin products by cutting low-profit items and increasing capacity in high-growth areas like beverage cans. This move is particularly timely for the South African market, where demand for beverage cans — especially wide-body cans, which are currently imported — is expected to rise in the coming years. The plan is for local sales to eventually constitute 60% of turnover vs 50% now.
By simplifying its product mix and focusing on a smaller, more profitable portfolio, the company can also streamline operations, minimise waste and simplify its supply chain. This should lower operational costs, result in more predictable earnings and enhance financial stability. A leaner, more focused product line is likely to increase investor confidence in Hulamin’s future earnings potential.
The second pillar of the strategy focuses on Hulamin’s increased use of recycled scrap metal in production, which is more cost-effective than primary metal. This shift also aligns with sustainability trends, as using recycled aluminium reduces the carbon intensity of Hulamin’s products. This is particularly relevant given the EU’s carbon border adjustment mechanism, which imposes tariffs on goods imported from regions with higher carbon emissions. By reducing its carbon footprint, Hulamin can avoid these tariffs and stay competitive in markets such as the EU.
Other external factors that influence Hulamin’s performance include aluminium pricing and the rand-dollar exchange rate
However, investors should be mindful that Hulamin’s new strategy comes with risk. Increased capital expenditure to expand its can body and recycling capabilities will require significant investment and could strain cash flow in the short term. These investments, while potentially beneficial for long-term growth, will increase the company’s debt load and could affect profitability if market conditions do not improve as expected.
Additionally, the move towards more South African sales comes with its own challenges, as local customers such as Nampak are pushing for longer payment terms and more just-in-time deliveries. These demands heighten Hulamin’s working capital requirements and place additional pressure on the company to maintain sufficient stock levels. Though these challenges are manageable, they constrain Hulamin’s operational flexibility and add complexity to its supply chain.
Energy costs are another significant risk to Hulamin’s profitability, as the company depends on a combination of gas and electricity to meet its energy requirements. Gas supply is under threat from the impending “gas cliff”, driven by reduced imports from Sasol in Mozambique. Meanwhile, the instability in South Africa’s power sector, coupled with electricity tariff hikes, adds further pressure. These challenges could drive up Hulamin’s operational costs, potentially eroding the benefits of its focus on higher-margin products.
Other external factors that influence Hulamin’s performance include aluminium pricing and the rand-dollar exchange rate. For Hulamin, as a midstream producer, aluminium serves as both a cost input and an element of sales pricing. While the absolute price of aluminium can affect working capital requirements — higher prices demand greater investment and vice versa — it’s the volatility in aluminium pricing that poses a more significant threat to the company. Since profitability is heavily dependent on international rolling margins, a weak rand provides a substantial advantage.
With a strained balance sheet and tight cash flows, investors will be watching Hulamin’s 2024 financial results closely for signs of progress, particularly on inventory reduction efforts. The integrated shutdown in June/July 2024 resulted in a temporary build-up of buffer stock, but management has guided for a 10% inventory reduction, which could strengthen the company’s cash position by an estimated R400m.
Cautious investors might prefer to wait for more clarity on these and other matters before making an investment decision. However, for those willing to embrace the risks, Hulamin’s current valuation offers substantial upside potential if management can successfully execute its strategy.
Furthermore, it’s worth noting that Hulamin was the target of a takeover offer from an offshore party in 2022, a deal ultimately blocked by stringent South African regulatory demands. Given the company’s attractive valuation, another takeover attempt remains a possibility.
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