Can Omnia — once a popular cyclical stock for the JSE’s more stoic investors — drag itself out of the deep crater caused by its recent debt explosion?

The embattled explosives, chemicals and fertiliser conglomerate hardly helped its cause with its less than convincing engagement with jittery investors last week.

The eagerly awaited results presentation for the year to end-March probably left investors with more questions than answers, which is not helpful in a firm that is pressing shareholders for R2bn in a rights issue. In addition, management was not exactly contrite about the setbacks that have befallen Omnia.

Aside from dealing with the usual cyclical challenges, especially in the agricultural division, Omnia geared up heavily to diversify its operating base by acquiring "game-changing" assets in Oro Agri and Umongo.

Results for the year to end-March strongly intimate that the timing of those acquisitions was far from perfect. Revenue crept up 7% to R18.6bn, but higher distribution expenses of R2.14bn (previously R1.8bn) and administration expenses of R1.5bn (R1.2bn) hacked down profits. Operating profit was reduced to a sliver, at R24m. After-tax profits — taking in the bloated net finance expenses of R438m — sank over R400m into the red.

Wessel Joubert, analyst at Cannon Asset Managers, says the presentation did little to lift the prevailing market uncertainty around Omnia. Other investors canvassed are less diplomatic, contending that management was "wishy-washy" in addressing important questions, especially about the envisaged capital raise. One investor, who asked not to be named, says it is baffling that management does not have more details about the pending rights issue. "If investment analysts figured out months ago that Omnia needed a serious recapitalisation, how can it take management so long to figure out the details?"

The growing fear is that, to woo an underwriter, Omnia will need to pitch its rights offer at a meaningful discount to an already bombed-out share price.

Though the quantum of the rights issue was confirmed, there are still no details about the pitch price or a firm indication that the services of an underwriter will be secured.

Adriaan de Lange: There will be no holy cows. Picture: Freddy Mavunda
Adriaan de Lange: There will be no holy cows. Picture: Freddy Mavunda

Just how dilutive the rights issue will be is a serious consideration. "We don’t know if the rights will be pitched at 100c a share or R30 a share. How can we make a decision about it?" said one shareholder at the investor presentation. (Today, Omnia’s share price is R32 — 75% below where it was last year.)

What Omnia did provide was some information about the R6.8bn 12-month bridge facility that will replace existing debt facilities. This entails RMB, Standard Bank, Investec and Absa temporarily increasing their facilities.

The bridge loan will be repaid partly by the rights offer proceeds, with the balance set to be refinanced into a structured-term and working-capital debt package.

Omnia also confirmed that there is a "standby volume underwrite" from banks. In other words, banks will pick up the equity should retail investors fail to follow their rights.

What is certain is that Omnia needs the cash, fast. At the end of March its equation of net debt to earnings before interest, tax, depreciation and amortisation (ebitda) was a stifling 4.1.

An updated picture showed the equation at 3.9 based on net debt of R4.4bn. With the R2bn collected in the upcoming rights issue, the net debt of R2.4bn drops the equation to a more reasonable 2.4. Gearing will reduce from around 60% to 33%, and interest cover shifts to over four times.

Management response, for now, seems to be a series of bland platitudes.

"We will engage with shareholders and banks to sort this out. We are cognisant of the points you raise," said Omnia FD Seelan Gobalsamy.

The FM understands that Omnia recently approached certain listed investment companies in a bid to get an underwriter for the rights issue. These engagements were, apparently, not successful.

Omnia, of course, did itself no favours by flip-flopping on the cash call last month (see the FM of June 13-19).

It also won’t help that there is a growing suspicion that the initial communication by Omnia about not needing a rights issue could have been aimed at propping up the share price. Some market watchers have even suggested the rights issue about-turn verged on borderline market manipulation.

Such jaundiced sentiment will no doubt detract from Omnia offering guidance for a normalised ebitda of R1.5bn — which appears to be a medium-term target rather than a short-term goal.

On paper, this is a significant figure, remembering that operating profit in the 2018 and 2017 financial years was R1.16bn and R1bn respectively. It presumably also reflects the expected contribution from new acquisitions (most notably Oro Agri) and the cost savings from the new nitrophosphate plant in Sasolburg.

Joubert points out that even if the R1.5bn ebitda is a realistic medium-term target, the potential dilution from the pending rights offer will have a marked impact on bottom-line earnings in the years ahead.

Some market watchers are cheekily suggesting that it might be worth participating in Omnia’s capital raising if the rights offer is pitched between R5 and R8 a share. Consensus, however, puts a possible placement price at between R20 and R30 a share.

Optimistically assuming a pitch price of R30 a share would mean Omnia would need to issue around 67-million new shares. That would mean about 136-million shares in issue.

If Omnia can get back to financial 2018’s bottom-line figure of R664m in the medium term, that would translate into earnings of about 490c a share.

If Omnia needs to resort to placing rights offer scrip at R20 a share to full participation, the issued share number moves out to 169- million, and would mean that a recovery to 2018’s profits translate into earnings of about 382c a share.

That all seems reasonable enough, but this makes the huge assumption that Omnia trades through its traditional cycles and is successful in its ongoing cost-containment efforts. A rather ominous question was raised during the investor presentation: "What if things you think are cyclical are actually structural? And what if your competitors outsmart you?"

Gobalsamy stressed that the plan of action on the new capital structure would ensure systems were in place to cope with structural challenges.

Aside from flushing new capital into the balance sheet, some robust operational restructuring — including asset disposals — could be on the cards too, the body language of Omnia executives suggests.

MD Adriaan de Lange said Omnia would review all its businesses. "There will be no holy cows." There are even increasingly audible mutterings that Omnia should exit its chemicals operations, including the Umongo petroleum business.

When asked whether selling the chemicals segment may be an option to pay down debt, Gobalsamy said Omnia is considering all options. "Divesting is one. Trading through is another. We have made a decision we think is in the best interest for shareholders."

Either way, shareholders will know soon enough.