I know better than to get too excited about earnings spurts from aluminium products specialist Hulamin. The group has a bad habit of getting shareholder hopes up, then getting snagged in unforeseen setbacks that cause a frustrating break in stride.
Me? I appreciate consistency. I already have to deal with a mercurial padel partner, who goes off the boil when members of the radiant morning yoga class traipse past the back of the court. We tend to win regularly in winter, when the back glass is opaque from the morning frost. In summer, we can get distracted by the passing parade at the moment critique.
The market, though, enthused over Hulamin’s half-year showing. Following the release of an upbeat trading statement and the interim earnings to end-June last week, the share is already up by more than a quarter. At a glance, the market is justified in its ebullience. Interim headline earnings came in at 79c a share and even if it’s not prudent to annualise this performance, a considerably softer second half or even a minor setback will still surely see full-year earnings well over the 100c a share mark.
A forward earnings multiple of under three times should give pause for thought. For the record, Hulamin was trading at just 170c before the release of the trading statement — a sliver of its last stated net asset value (NAV) of around R12 a share. CEO Mark Gounder gave a suitably bullish investor presentation, highlighting the group’s “substantial progress” in aluminium production to an ambitious run rate of 550t a day.
The group, he said, had already achieved an annualised production rate of 527t a day in the month of June. Reassuringly, Gounder indicated that core operations had stabilised and were ramping up to the upgraded plant design run rate. Sustained efficiency and elevated production should, technically speaking, ensure Hulamin can build that all-important trading margin.
Significantly, specialist (read: technically skilled) managers — including a COO set to start in September — have been appointed to, in Gounder’s words, “address a critical skills gap and support the sustainable improvement of operational capabilities”. This will be music to the ears of minority shareholder and metals industry expert Volker Schütte, who has been persistently calling for a skills upgrade at Hulamin.
Of course, the dastardly second half in the 2025 financial year, where quality issues snagged production (and profits), would no doubt have hastened the long overdue decision on a skills upgrade. In short, there are more than a few positives to take away from the interims.
Let’s recognise, though, that the large earnings number was boosted by metal lag. Some may argue that metal lag is part and parcel of Hulamin’s operating profile. It is the financial impact triggered by the delay between when Hulamin procures its raw aluminium and when the finished product is sold to customers in South Africa, Europe and North America.
The metal lag can swing in both directions in terms of profitability — and sometimes violently, if the aluminium price and exchange rates conspire wickedly. In the six months to the end of March the metal lag was rather pronounced, accounting for R300m of the R395m in operating profits.
The aluminium price has been on a bit of a tear of late. But strip out the metal lag and Hulamin was marginally profitable, with normalised interim earnings at 10c a share. Still, let’s agree that on the production side, Hulamin is steadily shifting towards becoming a manufacturer that can sustain increased production of high-quality aluminium products.
The question is : will this performance appeal to investors beyond the JSE? Here I refer to Hulamin’s ongoing quest to find a strategic (and deep-pocketed) equity partner. A handful of years ago Hulamin seemed close to bringing aboard a new equity partner, rumoured to have been a Taiwanese aluminium player listed in the US. That potential deal dragged on and then floundered.
But I wonder if the renewed efforts to bring a strategic partner on board are moving towards talks around the table? For one thing, Hulamin seemed quite hasty in bringing out the interim numbers — which, in the last while, have been published in the latter half of August.
Is there an investment entity that the Hulamin board is anxious to impress? Speculation has centred mainly on a Chinese aluminium operation that would be able to use South Africa as an export base. This would circumvent that restrictive ABC (anything but China) trade tag that might apply in certain large markets (where Hulamin currently operates).
Securing a strategic equity partner would give considerable comfort to Hulamin, remembering ever-changing client needs (especially on the can bodies segment) might require another big capital expenditure programme to upgrade the Pietermaritzburg production facility in the medium to long term. Any keen strategic partner would get a package with some expansive promises: a South Africa-based business with access to reliable local supply, a sizeable production capacity, well located near a large port … and with a vibrant local pitch to the beverage canning industry as well as ready markets in the US and Europe (the latter on a duty-free basis).
Interestingly, what Gounder tagged in our interview was how a strategic partner could possibly open new markets in Africa, enhancing the group’s “capability to deliver value for the continent as a whole”. For now, the second-half trading is the short-term focus. Another smooth production run will go a long way to further reinforcing investor sentiment. But a stumble … well, that will turn investors all frosty again.
