With a “much improved” outlook for JSE-listed diversified and specialist chemical services group Omnia Holdings, MD Rod Humphris expects the group to return to profitability in the second half of the 2010 financial year.

Profit for the six months ended September 30, 2009, fell 127% to a net loss of R99-million, compared with a net profit of R373-million in the first half of the 2009 financial year.

Revenues were down 22% to R4,2-billion in the first half of the year, compared with R5,5-billion the year before, while the group recorded a diluted loss a share of 217c a share, compared with earnings a share of 803c a share the year before.

Amid the global economic downturn, Omnia’s economic performance was negatively impacted on by a strong rand, which strengthened by about 21% in the interim period, a downward valuation of inventory, at a one-off cost of about R350-million, and softening volumes.

Commodity prices had dropped significantly in the second half of the 2008 calendar year and throughout the first half of the 2009 calendar year, affecting the key raw materials used by Omnia and resulting in a downward valuation of the group’s inventories.

Further, unusual buying patterns from the agricultural sector had also led to a substantial stockholding of fertiliser at a higher cost than the market prices.

Humphris said that most of the commodity prices had completed their downward adjustment by the end of Omnia’s 2009 financial year-end, in March, and that there has since been increases for quite a lot of commodities.

However, the strength of the rand was concerning, he noted, saying that on a rand basis, it had seen price deflation of about 10%.

Nevertheless, demand levels for most of its businesses were improving.

Demand from the mining sector had “held quite nicely” during the first half of the year and had seen some growth since.

Despite a reduction in demand for the chemicals division in the first half of the year, some interest was coming into the market, albeit at lower levels than the year before.

The outlook for demand in the agricultural sector was looking especially promising, with an expected increase in maize planting during this season, while buyers in the sector were expected to stock up on fertiliser again during the second half.

Humphris explained that the agricultural sector generally purchased most of its fertilisers in the second half of any year, but had, unusually, purchased the majority of fertilisers during the first half of the 2009 financial year.

This would likely result in a “serious tick up” in demand in the second half of this year.

Humphris noted that the underlying businesses in the group were sound and that, as it had already written off its excessive stock levels at a higher cost, the group’s outlook was much better than the first half, as well as that of the second half of the previous financial year, when the global economic slowdown started to impact on its business.

COMPETITION COMMISSION

Meanwhile, the Competition Commission investigation into alleged collusion by Omnia in the fertiliser industry remained unresolved.

Humphris on Monday said that a hearing into the matter, which had been under investigation for about six years, was scheduled for December, but had been postponed to an undetermined date.

The group has previously stated that it would defend its position, saying that the case was complex and that some issues had not been dealt with when Sasol agreed to pay a R250-million fine to the Competition Commission for contravening South Africa’s competition legislation by fixing prices in the fertiliser sector, in May.

The group believed that these issues had to be heard in order for the group to gain clarity on certain matters.

For example, the group was unclear about the use of tolling arrangements, which Humphris said was common in many industries, but which was also regarded as a contravention of the Competition Act by the Competition Commission.

CAPEX AND ACQUISITIONS

Omnia was planning to further grow its businesses through acquisitions and increased capital expenditure (capex).

Humphris noted that the group typically spent about R250-million a year on capex, and that this would likely increase, especially if it decided to proceed with the construction of a second nitric acid plant.

Omnia was experiencing an increasing shortage of a critical raw material, ammonium nitrate, which was a major component required for the production of fertiliser and explosives,  prompting it to start assessing the feasibility of building the second nitric acid plant.

The proposed project was still under study to determine the capital cost of the plant and to allow the group to understand the economics of the project better, he stated.

He expected to studies into the project to be finalised by the second half of the year, after which Omnia would release more details of the project to the market.

The group would, meanwhile, also continue to be on the lookout for further acquisitions, particularly in the speciality fertiliser and chemicals sectors.

Omnia has acquired KwaZulu-Natal-based petroleum jelly and white oils manufacturer Petroleum Fine Product (PFP) for an undisclosed amount, in August, to further enhance the product and growth opportunities available to the group.

The acquisition of PFP would allow Omnia to have access to bulk base ingredients and would strengthen its existing consumer care portfolio.

Humphris expected the revenue streams from the acquired business to start coming through in the second half of the financial year.

CARBON TRADING

Meanwhile, Humphris noted that the group would definitely start selling its carbon credits during the second half of the year.

The group had waited for confirmation on the tax status of carbon credits, which would now effectively be tax free.

It had already amassed about 700 000 carbon credits, which were generated through its EnviNox Clean Air plant.

Omnia expected to produce about 550 000 carbon credits a year, depending on the performance of the plant.