Hulamin - Another year of dashed hopes

Far from an expected recovery, the aluminium product producer limped in with headline earnings per share (HEPS ) down from 27c in 2010 to 25c for the financial year to December. That was way off the consensus forecast of 59c by analysts polled by I-Net Bridge.

In themselves Hulamin’s HEPS numbers don’t tell the full story. “Our underlying performance and profitability improved last year,” says Hulamin CEO Richard Jacobs. “Our figures include a lot of one-offs .”

In 2011, headline earnings of R81m were boosted in the first half of the year by inclusion of an insurance claim of R26m (14c/share) after tax. In the second half of the year HEPS were hit by a R34m (10,6c/share) loss on an aluminium hedging position.

Complicating matters further, in 2010 Hulamin made a hedging profit of R46m, or an estimated 11c/share after tax. Excluding this, and 2011’s insurance claim and hedging loss, puts Hulamin’s core results in a different light with adjusted HEPS in 2010 at about 16c/share and at almost 22c/share in 2011.

Hedging losses were not the only earnings dampener in 2011. Closure of the Cape Town plant cost R7m; more serious was the disruption in the supply of liquid petroleum gas (LPG). “We had to scramble for LPG supplies,” says Jacobs. “It cost us an extra R13m.”

But in the context of Hulamin’s potential these are minor irritations. “Whether its earnings per share are 20c or 30c is immaterial,” says Dirk Kotze, a portfolio manager at Coronation Fund Managers (CFM). “It’s a company that has had earnings of over 100c [124c in 2008], and has since grown its asset base significantly.” CFM has an 8,4% stake in Hulamin, second only to the Industrial Development Corp’s 29,9% .

Whether Hulamin will reach its potential, which Kotze feels could be HEPS as high as R2/share, is fraught with uncertainty. In Hulamin’s favour is rising production flowing from a R1bn capacity expansion completed in 2009. “This will see production rise steadily from 208000 t in 2011 to 250000t by the end of 2014,” says Jacobs.

The increase will bring economies of scale. Jacobs says Hulamin has a high fixed-cost base and, as production rises towards maximum capacity, cost per ton of production will fall sharply.

Hulamin is also waging a war on costs, and recorded annualised cost savings of R142m in 2011. What its HEPS would have been without this can only be imagined. Notably, Jacobs cautions: “We will make more improvements but the bulk of cost savings is behind us.” Hulamin’s efficiency levels, he adds, already exceed world benchmarks.

To a large extent this leaves Hulamin, which exports 75% of its production, heavily at the mercy of the rand-dollar exchange rate. “A lot depends on the rand,” Jacobs concedes, adding that a major problem is labour costs rising in dollar terms. “We have already cut our labour force by 400 [15%] since mid- 2010. This is not what SA needs.”

On a positive note, Jacobs says demand for aluminium products globally is solid. “Aluminium is a good story,” he says. In SA it could be an even better one if SA Breweries goes ahead with a mooted change from steel to aluminium cans. Jacobs says only that discussions are under way .

Kotze says margins on aluminium cans would be low but devoting a big portion of capacity to a single product should boost Hulamin’s profitability. “It would bring a lot more simplicity to our business,” says Jacobs.

Can production could also absorb Hulamin’s surplus capacity before 2014. But this is conjecture. For now Hulamin is a share best left to bears on the rand with a strong speculative bent.