Omnia: Future looks good

While all three divisions of the chemical services company showed revenue growth in the year to March, it was agriculture that drove profits, with a 98% increase in operating profit from fertilisers to R311m, 53% of the total, against a depressed 37% in the 2007 financial year.

And, as expected at half-time, the tempo accelerated in the second half: after a 22% gain in six-month basic EPS, the figure for the full year is 28% up, at 718c (560c). A final dividend of 117c (90c) takes the total to a well-covered 200c (160c).

With the operating profit from chemicals up 17%, at R148m, a good recovery after a depressed first half, it was mining explosives that held Omnia back.

Pressures on margin noted at halftime continued, as higher raw material costs couldn't be passed on, so operating profit here fell 9%, to R125m. As the first-half profit from this division was R56m, not much recovery was apparent in the rest of the year.

Group operating margins improved, and 38% growth at operating level outstripped the 33% rise in turnover in spite of a quadrupling in the cost of share-based payments, to R26m, as a result of the BEE deal announced in April 2007.

Omnia is continuing to expand. Capital spending absorbed R284m, the most notable item being the greenhouse gas reduction facility at Sasolburg.

Omnia says that at current price levels and output of 500 000 certified emission reduction units this should generate annual revenue of R60m for the next five years.

However, Humphris says that while this is already in full production, a full R60m won't accrue in this year's accounts as there will be the first year-end stocks awaiting sale.

In addition, R213m was spent on the acquisition of Zetachem, which makes water treatment chemicals, and R30m on a 10% interest in ETC Bio Energy, an agricultural estate in Zambia which grows wheat, maize and other grains, with a view to learning about bio-fuel technology. Humphris says both organic and acquisition growth will continue.

Like many stocks, Omnia took a knock over the turn of the year, from a November peak of 8 400c down to 6 255c, but it's since rallied strongly to 7 800c, which is actually almost 10% higher than a year ago.

The historic basic earnings multiple is 8.7 and yield 2.6%. Maybe the yield is why analysts overwhelmingly rate the share as only a hold; but Omnia's current five-year target is real earnings growth of 10% a year.

It's exceeded this in recent years, and looks set to do so again - though possibly not by much, if inflation remains in the low double digits. Still, nominal growth of 25% would take basic earnings to around 900c, for a forward multiple around seven, which surely doesn't suggest there's much downside risk.

- Fin24.com