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Tough year for Omnia but encouraging future



Rod Humphris, Managing Director, released the Omnia Group’s annual results today, indicating that “the unprecedented market conditions that prevailed in the 2009 financial year, together with a 23% stronger rand in this financial year, led to depressed earnings in the year ended 31 March 2010. Although prices were significantly lower, volumes were maintained and cash generation was extremely strong, giving us a robust balance sheet going forward.”

Humphris emphasised, “Our recently announced R1bn rights offer to build a new nitric acid complex is a significant investment in South Africa and the first of its kind since 1984. It will catapult the Omnia Group into a new larger playing field. We are extremely pleased by the overwhelming vote of confidence by our shareholders.”

KEY FEATURES

  • Revenue for the Group for the year was down 21% to R8, 8 billion.

  • Profit reduced to R58 million (2009: Profit R491m).

  • Basic earnings per share were 122 cents (2009: 1097.1 cps)

  • Strong cash generation of R1 billion by operations (2009: R143 million utilised).

  • R1,4 billion investment in the second nitric acid complex, through a rights offer and debt

The key drivers affecting the Group’s results were the downward valuation of inventory, negative market impacts, and a 23% strengthening of the rand since March 2009.

MARKET CONDITIONS

Commodity prices continued their downward spiral into the second half of the year, a period when the peak fertilizer season normally occurs, while the rand also continued to strengthen. This, combined with lower levels of economic activity led to all three divisions facing challenges from a combination of softer volumes, pricing pressures and weaker export prices. The subsequent reduction in earnings is amplified by the comparison with the unprecedented buoyant market conditions that had prevailed in the 2009 financial year.

The continuing strong rand remains one of the major contributors to the weaker financial performance of the Group in the short term, impacting negatively on each of the three business divisions - chemicals, mining and agriculture. All three divisions faced challenges from a combination of softer volumes, pricing pressures and weaker export prices. This also had a negative impact on the Group’s customers, particularly those in the Chemical division, who find themselves uncompetitive in export markets and having to compete with cheap imported finished goods in the domestic market.

There has been an improvement in the second half of the financial year, but the persistent strength of the rand, the stock write-downs and a once-off share based payment charge has resulted in the earnings for the Omnia Group for the year reaching a modest R58 million (2009: R491million). Revenue fell by 21% to R8,8 billion (2009: R11,1billion).

With the reduction in commodity prices and the relatively high carryover inventory from the previous year, net working capital reduced considerably by 67% to R514m (2009: R1 542m) contributing significantly to the cash generation of R 1 043m (2009: R 143m). Accordingly interest bearing debt has reduced to R404m (2009: R952m) resulting in a debt: equity ratio of 20% compared to the 45% that prevailed at the end of the prior year.

NEW INVESTMENT

The board has approved a R1,4bn investment in a second nitric acid complex which will alleviate the growing shortage of raw materials, particularly in the mining division. This important investment for the Group, given an overwhelming vote of confidence by the shareholders, will enhance South Africa’s capacity to produce nitric acid and ammonium nitrate by bringing world class technology to local shores.

The plant is Omnia’s biggest investment to date in South Africa and demonstrates the Group’s commitment to South Africa’s mining and agricultural sectors. The investment not only creates a critical growth path for the Group but is also a major step in ensuring security and continuity of supply for the Group’s explosives and fertilizer businesses.

It is estimated that the plant will generate internal cost savings of approximately R280m per annum (operating at 60% capacity level).

PROSPECTS

Humphris is cautiously optimistic about the year ahead. After the turmoil in commodity markets, prices have settled back to a steady pattern, increasing in the light of continued supply and demand dynamics. A prolonged 14 month period of negative manufacturing output came to an end in July 2009 with positive output statistics evident since then. “This”, notes Humphris, “augurs well for the Chemicals division in particular, although a persistently strong rand will negate much of the benefit that might flow from the uptick in manufacturing”.

The Mining division has steadily improved in the last months of the current financial year – platinum, copper, iron ore and other commodities have improved while coal will continue to be in high demand and, although the start has been slow, uranium mining is set to increase. According to Humphris, management is confident of achieving growth in this division in the forthcoming year.

The current agricultural environment, with a focus on biofuels, should continue to favour the fertilizer business and the Group. However, the impact of the current season’s excellent yields is likely to result in a reduced planting in the coming season. Raw material prices for fertilizer are likely to remain flat.

Humphris concludes, “Long term opportunities for the Group in the mining, water, food and renewable energy sectors remain attractive and Omnia is well positioned to focus on these areas”.