A few years back, my good friend David Shapiro picked Hulamin as the share that would do best of all that year. It went the other way – and I ribbed him mercilessly through the next 12 months. David wasn’t the only one to prematurely call the turnaround. Hulamin’s shares have been on a steady slide since 2008, having lost three quarters of their value since then. There are still risks, but the turnaround looks to finally be at hand. Heading the bull points is a transformative deal with packaging Nampak relating to South Africa’s soft drink switch from steel to aluminium cans. Value investors – or anyone with patience – could be well rewarded by now investing in the stock. That’s certainly the feeling I got after going through the transcript of my interview on CNBC Africa’s Power Lunch with CEO Richard Jacob. He came to the studio after the release of the group’s interims to end June.
ALEC HOGG: I’m from KZN. There’s not many major listed companies in that province of South Africa, but the big one in the capital of KZN is Hulamin and the Chief Executive Richard Jacob is with us in the studio. Richard, your numbers are a bit confusing. If you look at the bottom line it says headline earnings were down 32%. Then you look at what the market is telling us about normalised headline earnings in fact being up, like for like, about 17%. I guess the real thing to look at is: how did investors react to financial results you released today? Very positively.
RICHARD JACOB: Yes. Thanks, Alec. The thing to look at I think in this set of results is to scrape away all the exceptional items/the abnormal items and look at the operating profit before all those items. We actually had the best level of profitability since 2006 so we’re very pleased about the results. Obviously it’s a long slog and the turnaround continues. This is not the destination. This is just an interim place that we are in. Certainly we’re all quite pleased about the first half of this year.
ALEC HOGG: The best in seven years but you needed to turn it around at some point.
RICHARD JACOB: Definitely.
ALEC HOGG: If I look back on where you came from; in 2008 the share price was over R20.00. It’s done well this morning – up 5% but you’re still below R5.00 a share (so only a quarter of the level of five years back).
RICHARD JACOB: No, we’re certainly on a journey now. You know there’s a number of issues we’ve still got to get right in the business. But the prospects are looking better. What is quite exciting is that we start commercial supply or commercial qualification of Nampak on beverage can stock next week.
ALEC HOGG: What does that mean?
RICHARD JACOB: Hulamin as we all know has been a major exporter for many years and therefore particularly
vulnerable to the ebbs and flows of international market. Just the same as we (in SA) give preference to our local suppliers, so our customers internationally give preference to their local suppliers. So in developing the beverage can market (locally) it really does underpin a turnaround in terms of the balance of our sales, be they export or local. We’re probably going to be at least 50:50 from 75/25 export:local within the next two to three years.
ALEC HOGG: Okay. Let’s just understand that. Nampak produces a lot of aluminium cans for cold drinks – for soft drinks.
RICHARD JACOB: Yes.
ALEC HOGG: And you haven’t been supplying them with product?
RICHARD JACOB: In fact the market to date has been tin plate or steel cans. So Nampak is in the process of converting the market from tin plate to aluminium cans. As that conversion takes place so we will be growing our supply to them.
ALEC HOGG: So that’s a massive potential market opportunity for you.
RICHARD JACOB: Yes. Look, we have a contract in place with them for just about 50% of their business in the start-up phase (2013 – 2015). We obviously will be looking to secure additional business post-2015, but even the volumes between now and 2015 are quite substantial.
ALEC HOGG: So it will make you less vulnerable to movements in the exchange rate?
RICHARD JACOB: Yes and no. I would say more protected against international markets. So for example when Europe, as it has been in the last couple of years, comes under pressure we then have to run around globally and try and get additional sales in other markets. Now we’ve got a contracted local supplier it does form a really solid base for the business. I think the other thing that’s really quite critical…
ALEC HOGG: Let’s just go back there. With Nampak, you’re going to supply them with 50% of their needs. If all goes well, presumably thereafter they might come to you as a sole supplier?
RICHARD JACOB: That’s obviously up to them.
We certainly aspire to be at least a 90% supplier to Nampak for aluminium can stock. It really makes sense from a recycling point of view.
You know, with the 50/50 between us and imports it means that we can’t actually use all the metal units initially to recycle back into can stock.
ALEC HOGG: That’s an interesting development and I think one that perhaps people haven’t taken fully into their calculations yet because at the moment Hulamin (the share) is a bet on the Rand. Once you get your plant sorted out and if the Rand falls as has happened in this past financial period, then your profits go up from a big loss to a significant profit. Are you saying that into the future its (your share) going to be less of a Rand bet?
RICHARD JACOB: I think the Rand exposure of the business will remain because remember that our selling prices are globally determined. While we may have a contract in the local market these contracts are competitive – our competition is international competition. We price on the Dollar so prices are less volatile in the local market but they are impacted by global exchange rates.
ALEC HOGG: You’ve done some downsizing in this period (six months to end June) – about R35 million that you are going to have to take into account for it. Is that (expense) in these numbers?
RICHARD JACOB: Yes. So what we’ve brought to book;
we’ve made a provision for R35 million which is a once-off cost taken in the first half of the year. The annual profit improvement – the annual savings and cost will be around R50 million.
It’s one of those unfortunate things that you have to do in this business climate.
ALEC HOGG: In Pietermaritzburg; to lay off 140 people is severe.
RICHARD JACOB: It’s very severe. It’s been one of those things that we’ve tried to avoid for as long as possible. You’ll notice from our reduction in head count since 2010 that we’ve tried to do it by natural attrition. Unfortunately it’s got to a point in the first half of this year when that was just not fast enough.
ALEC HOGG: The problem or if you like, the Sword of Damocles that hangs over Hulamin is your relationship with BHP Billiton and the smelter at Hillside. Do you have an update for us on that?
RICHARD JACOB: Yes. We continue to engage with them and I must say we’ve had very constructive discussions with them in the last period. I’m pleased to say that we’ve got another extension while the more substantive discussions continue.
ALEC HOGG: The concerns of course are much broader. The country as a whole is worried it’s being ripped off by BHP Billiton. I suppose that those negotiations (between Eskom and BHP Billiton), whichever way the break, are going to affect you.
RICHARD JACOB: Yes. Look, you know we are kind of the pig with the bacon at stake here. BHP is our lifeline. I must say you know the new management team is in place; we’ve had very constructive discussions with them and it really involves the beneficiation not only of aluminium but of electricity as well which really needs to flow through the South African economy and unlock the growth and the potential. And there is so much potential in the aluminium industry here in South Africa we’re really looking forward to a long-term sustainable arrangement on aluminium supply.
ALEC HOGG: The problem I guess, Richard, is that if the aluminium has been subsidised by excessively low electricity prices and the rest of the country is now having to pay more normalised electricity prices, then does the aluminium industry… Will it survive? You must have looked at these scenarios.
RICHARD JACOB: We certainly have looked at those scenarios. I think it’s not really fair to say that these are subsidised electricity prices, you know. At face…
ALEC HOGG: What do they (BHP Billiton) pay? Do you know?
RICHARD JACOB: There’s a formula that I don’t know. It has been made available to some of the media houses. It’s related to the aluminium price.
So in years gone by BHP has paid way over the market for electricity. It happens that at the moment the price is undercut. But if you actually look at Eskom’s results: Eskom is struggling to sell electricity and these… Eskom’s problem as I understand it is not baseline business. It’s the peak hour.
There’s not enough electricity generation and that’s why you keep hearing these adverts on the radio and on TV to cut your usage in the evening and in the morning. And that’s when the aluminium smelters can actually give an advantage to Eskom because they can cut back during those peak periods.
ALEC HOGG: Let’s hope that there’s a rational solution to this because the point that you are making…you don’t
want to destroy another industry. We do know that Rob Davies, the South African Trade and Industry Minister has been working aggressively to build the manufacturing base. Have you had conversations with him given that this is such a critical opportunity?
RICHARD JACOB: We certainly are very engaged with DTI at all levels as well as a number of other government stakeholders and we’re working very cooperatively with government. There are a number of programs. You’ll see also in this some of our results and some of the work that we’re working on is unlocking a pipe gas supply into Pietermaritzburg. That’s more of a Department of Energy equation, but Pietermaritzburg sits off the gas pipeline and Hulamin is the biggest consumer of LP Gas in the country. So there’s engagement and cooperation with government at multiple levels.
ALEC HOGG: Richard, just to close off with: these numbers, as you say, are the best in seven years, since 2006. Are they sustainable for the second half of the financial year? Is a brighter dawn awaiting Hulamin shareholders?
RICHARD JACOB: Ja. Look, I’d much rather be known as the CEO that under-promises and over-delivers so I’m not going to issue a hugely positive forecast.
Certainly, if things stay as they are we would like to, we’ll at least repeat the first half performance in the second half.
* Alec Hogg is a Business Keynote speaker, online publisher, writer and broadcaster.
