Omnia: a special year

Omnia Holdings has bucked the trend this year in a big way. The share price is up over 15% at a time when the market has burned bright red. In a bear market, picking your stocks is important.

For the year ended March 2022, revenue increased by a juicy 30% and operating profit (excluding Zimbabwe) shot up by 123%. Headline earnings per share (HEPS) was 86% higher at 672 cents.

By all accounts, this was a strong year.

Omnia has made a song and dance about its cash and capital management and hasn’t been shy to pay large special dividends. This year, the ordinary dividend of 275 cents is 37.5% higher than the prior year’s ordinary dividend of 200 cents. The special dividend of 525 cents is 31.25% higher than the 400 cents special dividend in the prior year.

It’s not often that a company pays special dividends in consecutive years. Omnia has been rationalising its investment portfolio and has sold off certain parts of the group in both years. Some say there is more to come.

The cash position is 31% higher year-on-year, which is a growth rate that is similar to the increase in the overall dividend.

Agriculture segment

This segment contributed just over half of group revenue and operating profit.

Revenue was 41% higher and operating profit from continuing operations (the right way to view it vs. revenue) was 17% higher, so there has been a margin squeeze here. Omnia attributes this to higher operating costs (obviously) and a fixed-price contract in Zambia.

The company reminds us that results from Zimbabwe are subject to hyperinflationary earnings volatility. The group also operates in Australia and Brazil, both of which posted solid results.

Investors should remember that the drivers of this great revenue result (like a good crop harvest and higher commodity prices) are volatile by nature. Primary agriculture is a tough place to play and Omnia is directly exposed to this industry.

Mining

The mining segment contributed nearly a third of group revenue from continuing operations and just over a quarter of group operating profit. Revenue was up 29% and operating profit jumped by 79%, so margins went in the right direction here.

Revenue was driven by increased sales volumes and a higher ammonia price. Margins improved thanks to a focus on operational efficiencies, market expansion and larger contracts, which simply tells me that economies of scale are coming through in this segment.

There are important structural underpins to the result, like demand for specialist chemicals and services in the battery metals and PGM markets, both of which are really important going forward as the world focuses on emissions.

Still, Omnia is once again exposed to a cyclical industry here, so investors must be cautious when forecasting growth.

Chemicals

The chemicals segment contributed almost 15% of group revenue from continuing operations and nearly 9% of group operating profit. Revenue was up only 2% and operating profit jumped by 41%, so the revenue mix made all the difference here in improving margins and driving profit growth.

The balancing numbers

Those of you with a strong feel for the numbers might be thinking that these segments don’t add up to the group total. The balancing numbers relate to head office costs and discontinued operations, like Umongo Petroleum which Omnia sold during the financial year.

SARS audit

In case you thought everything was perfect at Omnia, think again. The group is dealing with a SARS audit related to its transfer pricing practices between 2014 and 2016. SARS has raised an additional assessment of R415 million and understatement penalties of R165 million. If that isn’t bad enough, there’s also an interest amount of R365 million.

So, that’s a fight with the tax authorities worth R945 million, which is a huge number. Operating profit for this financial year excluding Zimbabwe was R1,726 million, so this is a critical battle.

Omnia has raised an objection with SARS and the receiver has until 30 September 2022 to respond. In the meantime, a payment of R207 million was made to SARS in December 2021 and interest continues to accrue on the rest.

Omnia believes that the most probable outcome is an Alternative Dispute Resolution process.

Outlook

Omnia has been working hard to simplify the group and optimise supply chains and manufacturing capabilities. It’s great to enjoy the benefits of being at the right point in the cycle (e.g. in mining) but experienced hands are well aware that these conditions are usually here for a good time rather than a long time.

The group has done well in its core operations but it needs to resolve the SARS issue to give investors certainty around that matter.

My major irritation is that the short-form SENS announcement doesn’t mention the SARS problem and this isn’t the first time that Omnia has buried it deeper in the presentations and reports. You have to read the full results booklet to find information on it. This really isn’t good enough from a disclosure perspective and it gives a poor impression of the company’s attitude towards shareholders.

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