All Posts from June 28, 2019

South Africa’s Omnia Swings to Loss; Company Sees Global Growth via Specialties

As warned in a trading statement earlier this month, South African chemicals, mining, and fertilizer group Omnia Holdings Ltd. reported a R414 million loss before tax and an after-tax loss of R407 million for the 12 months to March 31, 2019 (GM June 14, p. 31). The result compares with a fiscal 2018 after-tax profit of R644 million.

Headline earnings per share was 112 cents loss, down from FY2018’s 991 cents profit per share.

The group blamed the adverse impact of droughts, late rains, a volatile South African rand, a material slowdown in the local and international mining industry, and overall difficult trading conditions for taking their toll on FY2019 earnings.

In addition to the operational challenges, Omnia impaired a problematic debtor in Angola by a further R44 million and impaired goodwill at its Protea Chemicals business by R324 million, on top of R35 million of restructuring costs, which it said would ultimately result in annual cost savings of R75 million. It made an increased provision for non-cash share-based payment charges of R54 million related to its Sakhile 1 empowerment scheme. It additionally provided for expected losses at its Emerging Farmers program.

Omnia’s financial results also were reduced by R95 million to around one-quarter of their nominal value following the introduction of the real-time gross settlement (RTGS) dollar as an alternative currency.

Revenues were up 7 percent, at R18.63 billion from the prior-year’s R17.37 billion. The group cited the first-time inclusion of Brazil-headquartered Oro Agri SEZC Ltd., which provided net revenue of R711 million in FY 2019 since its consolidation into Omnia in May 2018, and a full year revenue contribution from Umongo Petroleum of R1.19 billion.

Omnia completed the acquisition of Oro Agri on May 1, 2018, paying a total consideration of $96 million. Oro Agri is a manufacturer of agricultural adjuvants, pesticides, and foliar nutrients for agricultural, greenhouse, nursery, and turf applications, with sales in over 80 countries.

Excluding the acquisitions, revenue was down by 2 percent year-on-year, the majority of which Omnia said was related to Agriculture International and Agriculture Trading. The downturn in these Agriculture Divisions segments was attributed to market and price pressures, economic challenges in Zimbabwe (which led to a decision to curtail trade to mitigate risk), global drought, a poor political climate, and overall depressed market conditions.

Omnia’s Agricultural division reported an overall 63 percent fall in profit before tax to R158 million on net revenue of R8.24 billion, down from FY2018’s R419 million and R8.08 billion, respectively.

The division’s net revenue increased by 2 percent, or, excluding Agriculture Biological’s revenue of R711 million, by 7 percent. Operating profit decreased by 36 percent to R370 million, down from FY2018’s R574 million, or by 54 percent excluding Agriculture Biological, predominantly due to challenges in economic activity, regulation, currency fluctuations, cost pressures, and weather patterns.

 Agriculture RSA’s performance in FY2019 was adversely impacted by lower margins for Omnia’s value-added products due to the financial pressure on farmers, as well as the competitive pressure by importers and blenders. Agriculture RSA was further negatively impacted by a slowdown in the Mining segment, resulting in lower sales and therefore production recoveries into that area.

Omnia highlighted that “inflated prices” for phosphoric acid continue to be paid, which puts further pressure on margins, however, with its new nitrophosphate plant in the process of ramping up, it said it will have a competitive advantage in the future.

Additionally, a focus on reducing inventory levels, after achieving lower than planned sales volumes in season, resulted in low production recoveries during the post season period.

Omnia commissioned the nitrophosphate plant at Sasolburg on March 24, and said this new production facility will reduce the cost of phosphates by substituting in part “expensive” phosphoric acid and MAP with “less expensive” phosphate rock.

It earlier reported the investment in the new plant would cost R695 million to complete, rather than the R630million initially budgeted, but said the new facility will “materially improve” the group’s overall competitiveness in the production of fertilizers.

Since 2014, Omnia has been doing battle with Foskor (Pty) Ltd., South Africa’s dominant supplier of phosphoric acid, over its pricing policies (GM Nov. 10, 2017;  Dec. 15, 2017).

In addition, the new plant will produce calcium nitrate liquid (CN), which will reduce the production cost of calcium nitrate by eliminating the cost of lime, a key input into the products produced for the Mining division, as well as speciality fertilizer. Omnia expects the investment into nitrophosphate production to result in a saving of circa R110 million in FY2020 at 50 percent capacity operation and a circa R170 million annual saving thereafter at 85 percent capacity (on the basis of conditions remaining the same).

“The reduction of input costs attributable to the nitrophosphate plant will provide the group with a competitive advantage over imported products from a price, market differentiation, and working capital perspective,” said Omnia, adding that the tax allowance benefit on the plant is calculated at R55 million for FY2019 and R14 million for FY2020.

The decline in the Agriculture International business in FY 019 was a result of Omnia’s management’s decision to limit exposure in Zimbabwe following a further deterioration in the liquidity in that country.

Omnia said global market growth will be achieved through expanding Oro Agri’s patented biological control and adjuvants to targeted new markets, launching newly patented products from the Oro Agri product development pipeline, and leveraging the combined Oro Agri and existing distribution channels to sell new microbial bio-stimulant and biocontrol products.

The group already has invested in a production and research facility in Europe, which it said will assist this future growth. The business will also aggressively grow K-humate and related bio-stimulant sales from Omnia Australia through Oro Agri’s marketing channels.

Omnia plans to realign its Agriculture trading business with the intention of integrating back offices, leveraging economies of scale with the group’s existing businesses, and providing a separate channel to market to ensure production throughput for the Sasolburg plant. It said the strategy is to avoid taking major stock positions and to trade on a cash positive basis.  Volume targets have been reduced and the focus is on achieving improved margins.

Opportunities for expanding the trading footprint into West Africa are being investigated, with a prime focus on high-margin products such as specialties and the Oro Agri range, by leveraging the Mining division’s existing infrastructure and experience in the region.

Omnia revealed that it plans to conclude a R2 billion (approximately $140 million) rights issue within the next two months as part of the restructuring of the group’s debt.

It has been struggling to service debt in recent months after raising funds for two acquisitions and financing the construction of the nitrophosphate plant, but this week it was able to secure a 12-month R6.8 billion bridge facility from four banks. Proceeds from the rights issue will be used to pay back part of the bridge facility. The group expects the remainder of the bridge facility after reduction by proceeds of the right issue to be refinanced into a structured term loan and working capital debt package.

Omnia’s interest-bearing borrowings, net of cash and cash equivalents, escalated by some 73 percent to R4.403 billion from R2.54 billion over the past financial year, after the group funded increased working capital requirements following the recent acquisition through a combination of borrowings and overdraft facilities.

In addition to the debt restructure, Omnia continues to look at cost cutting, including eliminating excess jobs, and is evaluating the returns from its business units. However, it said it has no immediate plans to sell assets.