In 2019, chemical and fertiliser company Omnia raised R2-billion – or R20/share – from shareholders to fortify the balance sheet and buy the time management needed to execute their turnaround plan. Debt threatened to overwhelm the company and shareholders were justifiably disgruntled.

But careful capital allocation over the past three years has seen the company make strategic divestments and cut costs where necessary, with the result that the debt has been paid down and profitability was restored in the previous financial year. 

With the balance sheet in a less precarious position, management has turned its attention to rewarding shareholders for their support. 

Over the past two financial years, Omnia has returned R14 of that R20 through dividends and special dividends, with the latest being the 275c dividend and 525c special dividend announced with the publication of the group’s annual results for the year to 31 March 2022.

“Management is adamant that the R20/share that shareholders gave them a few years ago to bail them out of what was their darkest hour will be fully repaid,” says Small Talk Daily’s Anthony Clark. 

“The rise in the share price [R36 June 2019 – R75 June 2022] and the return of capital has justified management’s faith in the underlying business,” he says. 

CEO Seelan Gobalsamy sees the return of R1.4-billion to shareholders as a milestone. 

“This is due to management’s clear strategy and operating model,” he says. 

“Ongoing delivery against our strategic objectives saw us strengthening our financial position, enhancing operating asset performance, improving returns on capital and investing for the future. 

Corn being harvested. (Photo: Daniel Acker/Bloomberg via Getty Images)

“If our cash generation continues like this, our shareholders will continue to be rewarded.” 

Group revenue from continuing operations for the period increased 30% to R21.4-billion, and operating profit from continuing operations, excluding Zimbabwe, increased by 123% to R1.7-billion. 

Earnings from continuing operations also increased significantly to R2.5-billion, which is an increase of 57%, while headline earnings per share from continuing operations rose 86% to 672 cents.

In keeping with its disciplined approach to capital allocation, Omnia divested from Umongo Petroleum for about R1.1-billion. The proceeds from the disposal, together with improved operating cash generation across the company, resulted in a strong cash position of R2.4-billion at year-end. 

Despite much higher commodity prices – which pushed up the cost of inputs like ammonia, potash, potassium and ammonium nitrate used in the manufacture of explosives – net working capital from continuing operations increased by 18% to R3.3-billion. This was supported by focused efforts to manage the working capital cycle and the introduction of supply chain finance.

Reducing Omnia’s environmental footprint remains an important focus for management. 

The company is investing in alternative energy – steam and solar – and is building a reverse water treatment project to increase water recycling. 

“Reducing our environmental footprint is an ongoing process,” Gobalsamy says. However, there is a healthy dose of self preservation in that investment. 

“Declining municipal services – from water to electricity, infrastructure and road challenges – all impact on your cost base and your ability to deliver. While it is important to speak out about it, we also have to deal with it,” he says.

While some investors are concerned that Omnia’s party is over, Clark has no such concerns. 

“Despite the fact that fertiliser prices are at record highs, and are starting to roll over, underlying demand for agricultural commodities and elevated soft commodity prices means there will be good growth in the underlying business in the next 12 months.”

The fly in the agricultural ointment, he says, is the hyperinflationary environment in Zimbabwe, which causes big, volatile swings in the earnings of the agriculture business which – with revenues of R11.2-billion – dwarfs the mining business (R6.7-billion) and chemicals business (R3-billion). 

For example, he says, “the total agriculture profits were up 17%, but the South African agri business was up 120% at R1-billion … illustrating the huge swings that come as a result of the Zimbabwean operation”. 

He believes that in future Omnia may exit or curtail its involvement in Zimbabwe, purely because the volatility is not worth the drama. 

On the upside, there is further margin optimisation and uplift to come from Omnia. 

“They have not reached the end of the road,” he says. 

“They are seeing benefits across every value chain they operate in – agriculture, mining, humates (organic fertiliser) in Australia, and Protea Chemicals.”

A business to keep an eye on, he says, is organic fertiliser.

“The world is becoming cleaner and greener and people care about what nutrients are put into the soil. There is growing demand for more ethically produced, natural plant nutrients.”

Despite its sale of Oro Agri in 2020 for R2.4-billion, Omnia is still very involved in this sector through its Australian humates business. 

This is a small business which produces just 5% to 10% of agricultural revenue but at double the margins. 

“Management intends to grow this business aggressively. If they do, it will have huge operational leverage to the underlying profits of the agricultural division.” BM/DM