Investors, put off by years of profit volatility, have been shunning Hulamin.
It has left one of the world’s lowest-cost aluminium-product producers a sitting duck as an acquisition target.
"Hulamin is incredibly cheap," says Brendon Hubbard, manager of the ClucasGray Future Titans Fund. "It is trading on a forward p:e [to December] of no more than six."
He believes private equity firms are already prowling around Hulamin. Chinese aluminium producers — now trading on p:e ratings of over 30 — could also pounce, he warns.
Hulamin’s Pietermaritzburg plant would be a big prize. Hubbard estimates its replacement value is at least US$1bn, against Hulamin’s market cap of R1.73bn .
A move on Hulamin would come at a time when world aluminium market fundamentals are shifting in its favour.
After hitting a seven-year low in late 2015, the aluminium price has been rising — solidly underpinned by an automotive industry shifting from steel to aluminium.
"World rolled aluminium product demand is growing at 4%-6%/year," says Hubbard. "The big driver is rising automotive demand."
Rolled products account for about 90% of Hulamin’s annual production, now at just over 220,000t, and 95% of operating profit. Hulamin has another big attraction: global recognition as a reliable supplier of high-quality material.
"We can sell more than we can produce," says Hulamin CE Richard Jacob.
This came through strongly in Hulamin’s six months to June when demand for beverage can stock from Nampak fell short of expectation by around an annualised 10,000t.
"We achieved a big [51%] increase in can stock exports to the US, the Middle East, Europe and Australia," says Jacobs.
Hulamin has put behind it a troubled 2015 during which it was plagued by setbacks, including Eskom outages in the first quarter and liquid petroleum gas (LPG) supply problems in the third quarter.
"We have taken action to prevent plant disruptions," says Jacobs.
These include installation of generators capable of ensuring near-full plant output and the direct importing of LPG. Hulamin also took a big hit in 2015 from the fall in the US dollar aluminium price on the London Metal Exchange (LME). It cost Hulamin R55m in the first half of the year and R106m in the second.
This was the result of the so-called metal price lag.
In simple terms, says Jacobs, aluminium bought at the LME spot price remains on Hulamin’s books for three months until processed and sold. A fall in the spot price during the three months results in a loss, while a spot price rise results in a profit.
The metal price lag worked in Hulamin’s favour in its latest six months, generating a profit of R5m. The R60m turnaround was a big factor in the 86% jump in operating profit to R257m, but not the only one.
Excluding the metal price lag, operating profit lifted 31% thanks to improved sales volumes and 4% lower unit production costs.
Barring a sudden sharp aluminium price fall, Hulamin is set to deliver a strong showing in its second six months.
Elimination of the R106m metal price lag loss alone will enable it to increase second-half operating profit by 68% and full-year operating profit by almost 80%. Headline EPS should rise by a similar amount.
Chances of a big aluminium price setback appear low.
A midyear forecast by US-based Alcoa, the world’s largest aluminium group, looks to world demand for the metal rising 6% to 59.7Mt in 2016 and production by a lower 2.5% to 58.9Mt. Though Hulamin will remain prone to profit volatility, it is arguably now in its best shape since relisting in 2007.
It does, as Hubbard notes, look incredibly cheap.