Hulamin misleads investors, underestimates competition

JOHANNESBURG - Hulamin (JSE:HLM) has clocked in an uninspiring performance after picking R750m from investors' pockets. Moneyweb looks at what was promised and what was delivered to shareholders.

Hulamin's listing on the JSE (JSE:JSE) on June 25 2007 was an exciting affair. At the time the company told investors how it added value to aluminium, "The rolled products business currently exports 70% of its output and is focusing increasingly on the production of high value complex products where there are high barriers to entry, both in terms of technological and capital requirements.

"There are relatively few producers of these products globally and these market sectors are dominated by a few major multi-national producers. The international customer base is accordingly very receptive towards smaller independent producers, such as Hulamin....

"Hulamin has a very competitive cost position and is comfortably at the lower end of the global cost curve. The business operates in a low-cost region and its unit costs also benefit from the high level of capacity utilisation that the company is able to achieve.

"Hulamin operates at more than 90% of its capacity whereas the global average has been slightly above 70% in recent years. Hulamin's profitability therefore compares well with industry levels and should still improve further as the business continues to grow its volumes, improve its mix and drive its costs down."

So Hulamin touted how it is at the low end of costs and the high end of value-add thus making its competitive position defendable... In the latest results it calls for tariffs to protect its business saying "Hulamin has submitted applications to ITAC for duties on both rolled and extruded products to be reintroduced. This has become necessary as imports of low priced products have increased, mostly from countries (particularly China) where industry support and protectionist measures are in place."

Oops. Also costs rocketed 35% while sales only rose 28%, leading to operating profit dipping 11% to R102m. Bear in mind that this period doesn't include too much benefit from the recent rights offer as it was only concluded at the end of the reporting period.

Hulamin repaid R421m of debt in the period, after receiving R736m from the rights offer. The operations produced negative cash flow due to the build up of inventories (which management attributes to Transnet delays increasing stock in transit...).

Investing activities consumed cash too for "additions to property, plant and equipment". The net result was the Hulamin burned cash again, leaving R30m in the bank from R64m at the end of the last financial year despite raising money from shareholders.

One hopes that paying down debt will help as much as hoped. Finance costs were R69m for the period, but the debt was only repaid once the rights offer money was received from shareholders so there was little impact on the finance costs in the half year.

It was not clear what effect the R421m of settled debt would have on finance costs, and investor relations spokesman, Johannes van Niekerk also didn't have the figure at hand, other than to say finance costs will come down after the repayment.