In a recent analysis of the top-performing shares on the JSE over the past five years, fertiliser and explosives business Omnia was ranked 15, with a total return of 387% and an annual compound growth rate of 32.7%.
At the time of writing, it was trading at R76.57 after the release of interim results to September. Readers may recall the dark days of August 2019 when the company had to go cap in hand to investors for a R2bn rights issue at R20 a share to save itself from excessive debt.
Seelan Gobalsamy became CEO in September 2019 as the incumbent left with immediate effect. Gobalsamy, who takes no salary but is remunerated in Omnia shares, vowed that investor faith and trust in Omnia would be repaid. Over the past five years, Omnia has been restructured and vast dividends have been paid — recouping, and more, the original R20 rights issue price.
Progress has not been without speed bumps. The pandemic and then Russia’s invasion of Ukraine in 2022 distorted global input and fertiliser prices, which rallied hard, then slumped. In Southern Africa, dry weather hit the agricultural sector into the 2023/2024 crop season. Challenges in Omnia’s chemicals division resulted in the unit sliding into losses.
However, a relentless focus on capital allocation and cash generation alongside an upswing in hard commodity markets (copper, gold and uranium) resulted in improved demand for explosives used in Omnia’s BME division, which showed booming growth, widening margins and strong global growth prospects.
Fertiliser was once the core business in Omnia but is now overshadowed by BME’s profit contribution of more than 60%. However, due to the agricultural cycle, Omnia’s second half means strong cash collection as spending by farmers — on what is expected to be another 20Mt field crops this year — will pad Omnia’s already ample cash balance. IM expects more chunky dividends.
The star of the show was domestic mining, where there was increased demand and new contracts were won
In the half-year there was a modest 3% increase in revenue to R11.2m, with restructuring costs in chemicals leading to a 2% trim in gross profit to R2.4m. However, the cost-saving benefits from housekeeping — aided by agricultural profits, up 8.5% to R458m, and mining, up 6.5% to R570m — led to operating profit rising 12% to R900m, with margin creeping from 7.3% to 8%. Omnia traditionally has a better second half due to the nature of the agricultural growing season.
The star of the show was domestic mining, where there was increased demand and new contracts were won. Profitability rose 11.2%, with overall divisional margin continuing to rise.
Into the second half, management is confident of growth in domestic, African and international agriculture alongside new ventures in mining territories globally. The troublesome (but now smaller) chemicals unit lost R22m in the first half but is expected to swing back to profit with some assets held for resale.
IM has been positive on Omnia for some years. In February 2023 this analyst stated the market was “missing the scenario” and issued a buy at R62.20 with a target of R80. That target was attained and Omnia paid out ordinary dividends totalling R11.50 and special dividends of 600c, a fat payout boosting total returns.
IM sees a materially better period ahead for agriculture as better plantings and favourable weather bolster fertiliser demand. Globally, the commodity surge in key metals is undeniable, fostering new mining ventures and expansionary demand.
The perceived trapped value of BME is intriguing. Omnia has a market value of R12.4bn, and should the group decide to sell a stake in the business to a global partner or separately list BME, there will be considerable share price upside. Something worth watching …
Year to date, including dividends, the share price is up a modest 7.2%. But the underlying prospects and positioning of the company into its cash-accretive second half are sound. Yet the market continues to be cautious. IM believes this is unjustified. In IM’s view, there is some boom yet to come from Omnia, and the market will eventually re-rate the counter.
IM maintains a buy on Omnia and sets a target price of R92.50 (up 21%).
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