Hulamin CFO expands on 96% increase in FY HEPS – has it peaked?

Aluminium business, Hulamin reported a 96 percent increase in full year headline earnings per share.  That follows on 128 percent in the previous financial year.  David Austin, Chief Financial Officer, and Acting CEO of Hulamin joined Alec Hogg and Gugulethu Cele in the CNBC Africa studios. 

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David, where is Richard Jacob, and where’s his predecessor?  We seem to have had a succession of changes at Hulamin in the management team.

Going back to Richard’s predecessor, he retired.  Richard had an unfortunate medical problem and he’s been on eight months of medical leave, but he is back and he will be taking over the helm from the 1^st March.  In fact, he was at the results presentation we did an hour or so earlier ago.

All right, so we haven’t got an SABMiller story in the brewing here.  What we do have though is something where there’s a lot of confusion.  When you had your BEE transaction, with Bay Side, there was a bit of detail that was left out, primarily for outsiders, is what do you need to have a BEE company in between, where you are buying, you are guaranteeing an off-take, and BHP are on the other side, putting it all together.  Just explain to us what value the BEE Company is adding.  Or was it part of the BHP requirement? 

No, what it is is that it is part of the greater vision.  I think that’s what’s key to this is we see the aluminium hub, as exactly that.  It’s a hub.  It’s a rallying point for downstream beneficiations, so to have Hulamin controlling that and dominating that metal because remember, the value of the hub is really in the liquid metal.  That flows from the smelter at BHP Hillside, so we needed a structure that would unlock the growth of not just Hulamin’s business, but perhaps other businesses.  Interested business would be interested in product coming out of that.  There is the potential for wire rod, which goes into transmission lines.  When I say ‘wire rod’, aluminium wire rod, so it has a massive potential to unlock industry and to have that locked into a, let’s call it a ‘closed shop’ between Hulamin and BHP.  I think it would have done nothing to advance the cause.

Let’s be honest, aluminium in South Africa does need electricity.  Electricity is not something we are over endowed with right now, so it needs to be a key strategic industry, so it was a very deliberate and careful construction, to arrive at something, that made sense for everyone.

Including Eskom.

Including Eskom, quite.

They’re happier to give it to a BEE Company than they would perhaps to Hulamin. 

I also think what one can’t get away from is South African electricity is South African electricity, and to use it on beneficiation, as opposed to exporting primary metal, it just has to be better for everyone.

Let’s touch on your exports.  You have a relationship with Tesla Motors, no doubt.

We do, yes.  We supply heat treatable plate into the U.S. market.  In fact, we’ve just done a new contract with them.  It’s an exciting product.  We’ve been dealing with them for a while.

Do you deal with Elon Musk there?

Not personally, of course there’s always been a few jokes around the office ‘can we get one of their cars now’ on a demo purpose, and so far we couldn’t but we deal with their supply chain.  They were actually out earlier this year, visiting the plant in Pietermaritzburg and yes, it’s a nice prestigious contract to have, and obviously, it requires very high standards and high quality.

You’ve done fantastically well over the last two years.  2013 – I remember Richard telling us that that was the turnaround year.  2014 – He was hopeful that you could grow on it.  Well, you’ve certainly done that, 96 percent headline earnings per share, but what about going ahead.  You had record earnings this past financial year.  Are you at kind of maximum? 

No, I think one also needs to understand we come off a low base, so to keep growing at, let’s call it upwards, or Northwards, of 70 percent is, clearly not realistic but the recovery certainly has started.  We will do everything we can to sustain it.  The target I’ve shared with a lot of analysts is to get to a 12 percent return on equity, which was our first target.  That would allow us to trade at around NAV, which is R12.00 a share.  This year we produced a return on equity in the region of 11 percent, so a bit of work to do there still but we are closing in.  That in itself, Alec, we would see it as middle ground.  That is where we need to be to then, start normal growth.

A good dividend as well.  It has managed to come up to 25 cents.  Is this sustainable going forward?

We believe so, absolutely, 25 cents for us is, roughly, 320m shares in issue, so it’s about an R18m cash flow item.  Yes, the cash flows; you may or may not have seen the results.  The operating cash flow was R513m and then we spent a lot of that on Capex.  We have both been enhancing the strategic capabilities of business and the spares, so the cash flows were very strong.

The share price is down today.  Any thoughts on why?

You can’t get guess the market.  My job is to do what I can for the organisation.  I leave the share price to the…

We had Mike Brown here a moment ago and he said that his estimate before coming out was 11 percent HEPS growth.  It came out at 13 percent.  Nedbank is firmer.  From your perspective, were you analysts perhaps expecting more? 

I don’t believe so.  I would have thought that our figures would have, on balance, beaten market expectations.

Well, Gugu, this is a share that has had a fantastic run in the last, as we saw from our graph a little bit earlier, so I suppose sometimes you can have ‘buying on the rumour’ and ‘selling on the fact’.  The numbers are in the market now.  You are nine Rand, and about three Rand, not even two years ago.  You’ve certainly had a big improvement and you think you can still get further from there.

Absolutely, as I said earlier, the NAV of the company is about R12.00 a share, so even at nine Rand we’re trading at a discount to NAV, so we certainly believe that R12.00 is a very achievable medium termed target.  From there on it will depend on the earnings we deliver.

That was David Austin, the Chief Financial Officer, and Acting CEO of Hulamin.