Hulamin: Be wary while there is still work in progress

Aluminium semi-fabricator Hulamin sold a record amount of rolled products to the local market in 2024, with domestic sales reaching 55% of the total.

This strategic shift towards the local market will continue as the KwaZulu-Natal company finalises its investment in a wide-body can production line, set for completion in 2025. The move should push local sales beyond 60%, reducing reliance on more volatile export markets and securing a larger share of a steadily growing domestic market.

The local market offers Hulamin key advantages: long-term relationships with customers ensure stability, while proximity to buyers provides cost and logistical benefits. Compared with offshore suppliers, which must contend with shipping costs and extended lead times, Hulamin can provide just-in-time deliveries.

Offshore markets are inherently more unpredictable. The fluidity of global supply and demand introduces price volatility, making medium- to long-term planning more challenging. Hulamin’s increasing local focus reflects a deliberate strategy to align itself with more predictable revenue streams at higher margins.

The most stable segment of Hulamin’s rolled products is beverage can components, which account for 57% of its rolled product sales, a figure that is expected to climb to 60% with the wide-body can expansion. This segment benefits from steady consumption, with  an expected compound annual growth rate of 5% over the next few years. The wide-body can expansion will reduce clients’ reliance on imported can stock, further entrenching Hulamin in the local supply chain, and taking its market share to 85%.

By contrast, aluminium plate products, which make up 17% of rolled product sales, cater to industrial applications with far greater demand variability. The remainder of Hulamin’s rolled products portfolio consists of foil and automotive applications, both of which contribute to a diversified but still relatively volatile product mix.

Not all segments of the business are faring well. Hulamin’s extrusions division, which accounts for about 7% of total production, recorded a loss of R34m in 2024 and has been placed under strategic review. The company is considering shutting the unit down, with a final decision expected by June 30 2025.

As a semi-fabricator, Hulamin does not produce aluminium itself but rather processes it into semi-finished goods used in downstream manufacturing. The can components, for example, are supplied to can manufacturers such as Bevcan, a division of Nampak, which then transforms them into finished beverage cans. This positioning in the value chain means Hulamin is both dependent on the pricing of aluminium as an input and exposed to the end-market dynamics of its customers.

Despite facing operational challenges in 2024, Hulamin delivered satisfactory financial results. A fire in June disrupted nearly 5% of its rolled-product production and the damage took three months to fully repair, adding to an already complex operational environment. At the time of writing, Hulamin trades at an earnings multiple of 5.5. However, if the net impact of the fire (after insurance recoveries) and the extrusions loss is excluded, its adjusted earnings multiple drops to about 3.5.

The biggest concern for investors, however, lies in the disparity between Hulamin’s reported depreciation charge and its actual capital expenditure requirements. Depreciation in the income statement was about R165m in 2024, but the company estimates that maintaining current operations requires closer to R350m in stay-in-business capex.

If this shortfall is treated as an additional cost, the normalised headline earnings per share figure, adjusted for the fire and the extrusions loss, plummets from 42c to just 9c.

On this basis, Hulamin is effectively trading at a much higher historic p:e of 25, making its valuation far less attractive than it initially appears.

The wide-body can production line investment is a crucial part of Hulamin’s long-term growth strategy, but it introduces near-term liquidity pressures. The project is expected to be completed in July 2025, with commercial production starting towards the end of the year. However, full ramp-up to optimal production levels could take as long as eight months. This means that while the capital expenditure burden will be felt immediately, the associated revenue uplift will only materialise gradually.

In 2024, Hulamin’s cash flow drawdown was R523m, leaving it with access to only R670m in unutilised credit facilities. This represents a narrow margin of safety, especially with finance costs set to rise due to increased debt levels. Operational disruptions in 2025 could put significant strain on liquidity, hence perfect execution is required.

Another potential risk lies in aluminium price volatility. While Hulamin generally passes aluminium costs through to customers, it is currently unhedged on purchases, which means a sharp increase in aluminium prices could create a timing mismatch. A spike in input costs would necessitate an additional working capital outlay, further straining liquidity.

In 2024, Hulamin’s cash flow drawdown was R523m, leaving it with access to only R670m in unutilised credit facilities. This represents a narrow margin of safety

To bolster its competitive position, Hulamin is investing in expanding its scrap metal utilisation capacity. At the moment, 25% of its aluminium input comes from recycled material, and the company aims to push this to 29% by 2027. While this requires upfront capital investment, it provides a cost advantage over primary aluminium and is crucial for maintaining access to European markets. More than half of Hulamin’s exports go to these markets, whose carbon border adjustment mechanism tariffs will progressively penalise carbon-intensive aluminium production. Increased scrap usage reduces the carbon footprint of Hulamin’s products, helping it remain competitive.

However, CEO Mark Gounder has warned that a more protectionist Europe poses a broader threat, as shifting trade policies could jeopardise Hulamin’s ability to sell into the region.

In the US, another key export market, the introduction of 25% tariffs on aluminium imports is not expected to have a material impact. Hulamin was already subject to a 10% tariff, while many competitors that previously had tariff-free access now face the full 25% levy. This levels the playing field rather than putting Hulamin at a direct disadvantage. US sales account for about 11% of Hulamin’s total turnover, so while the higher tariff environment is not ideal, it does not pose an existential threat to the business.

For investors, Hulamin requires a long-term perspective. Free cash flows are unlikely to see meaningful improvement for at least 18 months, and it will take even longer to deleverage before any thought of dividends can be entertained.

The company’s ability to maintain operational plant stability will be critical. While the 2024 fire might be dismissed as an isolated event, fire prevention is a fundamental precaution in any industrial operation. Ensuring consistent plant performance, coupled with predictable local demand, could help shift Hulamin from a high-risk, cyclical investment to a more stable and reliable player.

Gounder has set an ambitious target: delivering financial returns by 2027 that exceed the company’s cost of capital, currently estimated at about 17%. This will require flawless execution, particularly given the need for high capital reinvestment. Investors must be wary of headline earnings multiples that do not fully account for Hulamin’s capex demands. For those willing to stomach short-term volatility and near-term liquidity constraints, Hulamin offers potential upside. But for more conservative investors, the numbers suggest caution.