Adrian Saville: Omnia’s communication with the market should have been clear and unambiguous upfront. Picture: SUPPLIED
Adrian Saville: Omnia’s communication with the market should have been clear and unambiguous upfront. Picture: SUPPLIED

Scarcely six months ago, at the release of half-year results to end-September, Omnia Holdings believed its balance sheet was "geared as planned to improve overall performance".

Omnia shareholders are a hardy bunch, having endured some volatile share price rides through the cycles. But the collapse in the share price from around R130 in August to current levels under R45 has understandably shredded more than a few nerves.

Those same shareholders — some possibly lulled into a sense of security by the payment of an interim dividend despite half-year losses of R93m — are now presumably petrified of what really has transpired at this specialist in chemicals, explosives and fertilisers in the second half of the financial year.

Final results are scheduled for June 25, and there will be some anxiety to read the updated trading statement that should be released shortly before.

The fact that Omnia has proposed a R2bn rights issue — a mere week after firmly reassuring investors that there was no need to fret about a recapitalisation exercise — suggests strongly that the updated trading statement might reflect a more dire picture.

One longtime Omnia shareholder, Cannon Asset Managers, sold out of its position after the sudden about-turn.

Cannon CEO Adrian Saville says their decision was informed by the company’s handling of the rights issue.

"Even after the Sens announcement about not requiring a recapitalisation, some investors were taken on a site visit where the position was reinforced around not needing a rights issue.

"It really is difficult to see how things can shift so quickly so as to force the company to make a 180° turn … Either they misunderstood their circumstances or they misrepresented it."

Saville says it was disappointing to sell out of the long-held Omnia position, but argues that a continued investment would be irresponsible: "We are a very patient investor, and are never flirtatious in our investments. But Omnia’s communication with the market should have been clear and unambiguous upfront."

Omnia’s about-turn on its capital needs may explain why long-term MD and latterly chair, Rod Humphris, has decided to retire after the September AGM. Humphris joined Omnia in 1982 and has spent 20 years on the board. He is also one of Omnia’s bigger individual shareholders, with 1.31% of the company’s stock.

In the wake of developments at agribusiness giant Tongaat Hulett — where the reality of the past financial performance appears to have been masked by some questionable accounting practices — there is heightened tension around conglomerate-type counters carrying burdensome debt loads.

To compound shareholder jitters, Omnia’s shock rights offer announcement at the end of May was disturbingly short on detail. When a company is trading strongly and the share price is buoyant it might be acceptable to fling out a reference to a huge rights issue. But when trading is brittle and investor sentiment rattled, it’s not the most prudent approach to leave the market speculating about the possible pitch price.

The irony is that Omnia was traditionally not a highly indebted entity.

As recently as 2017 the company was ungeared. But the next year, net debt increased to over R2.5bn, and then was increased markedly following the acquisition of Umongo Petroleum for R625m and Oro Agri for $85m, and construction of the first phase of a nitrophosphate plant at a cost of R670m. At the interim stage, interest-bearing net debt was close to R4.7bn, with the interest bill at R218m.

Since the end of the interim period the "geared as planned" scenario has clearly changed.

More detail will be released with the final results.

Meanwhile, one imagines Omnia is engaging with key shareholders to garner support for a rights issue that is hopefully not destructively dilutive, and perhaps, considering the circumstances, even to secure an underwriter for the new share placement.

The other big question is whether the market still shares the Omnia executives’ belief that the acquisitions of Umongo and Oro — punted as a means to remove some of that pesky cyclicality from Omnia’s earnings — are still key to future strategy or even smart.

Oro, in particular, will be key to generating future cash flows that will reduce gearing even further after the envisaged rights offer. On paper, Oro, which specialises in green biological solutions globally, is harnessing a growing niche.

The nitrophosphate plant should also help reinforce margins in Omnia’s agricultural division over the longer term.

Unfortunately, Omnia’s initial trading statement, which pencilled in a loss of R400m or 591c a share, did not provide much detail on Oro or Umongo. Omnia said Oro’s bio-friendly product range "performed well", as did Umongo, even though its growth into other parts of Africa has been delayed.

Aside from the smack from the inflated interest bill, there will also be a number of one-off dents to the income statement in the second half.

These include the further impairment of a problematic debtor in Angola of R44m and, more significantly, the potential impairment of R324m of all the goodwill on Protea Chemicals due to poor historical performance.

Protea’s restructuring, which also cost Omnia R35m, will result in a new strategy that will remove a chunky R75m of annual costs on an ongoing basis.

But this benefit — along with further tinkering to take out more costs and improve the quality of the business — will only flow through fully in the 2020 financial year.

The key for investors will be to gauge from the financial results whether the rights issue is a panicked shoring up of the balance sheet, or a pre-emptive measure, in case trading conditions stutter along for a prolonged period.

Omnia has in the past recovered convincingly from cyclical slumps. However, with the debt issue still looming large and the jury out on the diversification effort, it feels ominously different this time.