Johannesburg - Prices, volume, margins... what joy it must be for a company's management when all three these key determinants of profits move up at the same time.
That's the happy situation Omnia found itself in for the six months to September, when all three divisions - agriculture, mining and chemicals - matched the profits of the preceding full 12 months.
Not surprisingly, though, it was agriculture that led the way. Booming fertilizer sales sent six-month profits of this division up 311%, to R312m. Profit from chemicals was up 160%, at R156m, and from mining up 125%, at R126m.
CEO Rod Humphris does warn, though, that farmers anticipated rising prices and brought forward purchases that would normally have accrued in the second half, to the extent of maybe 20% of annual demand.
This not only boosted profits but, as the purchases were also paid for, mitigated the normal seasonal increase in working capital.
Omnia owes its success to adding value to its products. As Humphris says, you don't get rich selling commodities. And given the skills shortage, it also interacts with its customers in many ways to overcome problems.
However, it's clear that markets were exceptional in many ways in the past six months. Normally, Omnia's two halves are on a par, but Humphris warns that it won't be the case this year.
Prices of many raw materials have slumped, and some margins may be squeezed in the second half. Humphris also expects national fertilizer sales to fall by 10% this season.
Coupled with the timing shift, and there has to be a sharp deterioration in fertilizer profits in the second half, though Humphris stoutly resisted attempts by analysts to quantify the impact, saying that forecasting is "very difficult" in current conditions.
Upbeat on long-term prospects
There may be slowdowns in the other divisions too, though Humphris says continuing strong demand from coal and uranium will help offset any decline in demand from the platinum sector. A weaker rand will, however, moderate any decline in profitability, and normal seasonal factors will see a stronger year-end balance sheet.
In the longer term, he remains optimistic about the outlook for all three divisions.
In particular, he points out that global arable land per capita has fallen from 0.5 hectares in 1950 to just over 0.2 ha, as a result of population growth and the loss of arable land to urbanisation and mining. This can only be met, he says, by more intensive agricultural methods, which must entail more use of fertilizers.
Basic headline earnings per share (Heps) for the six months rose 281% to 839c, well ahead of the 718c for the whole of financial 2008. Even if the second half only matches last year, 1 330c could be in target for the full year. Humphris says the 20% hike in interim dividend to 100c was deliberately conservative, suggesting that there should be a bigger rise in the final.
Last year that was 117c; 150c, say, this year, would make a total of 250c (200c). Given the uncertain outlook, analysts will be watching up for trading updates to firm up their forecasts.
Greater than usual uncertainty may account for the muted response to the results. By late Wednesday morning the share was up 2%, at 5 000c, but this was substantial underperformance to a buoyant market. On these projections, it offers a prospective multiple of 3.8 and yield of 5%. That does seem to factor in a considerable risk element.
- Fin24.com