Analysts predict profitable start for Hulamin¡¯s new recycling plant

The growing demand from Nampak follows the conversion of beverage can body stock in South Africa from steel to aluminium. “In the rest of the world aluminium makes up 90% of all beverage packaging, so we appreciate that Nampak has decided to convert their plants. While the conversion has taken place in soft drinks, beverage cans as a packaging material are still under-represented in alcoholic drinks packaging. This is changing as supermarket retailers distribute ever greater amounts of alcoholic beverages. They tend to prefer cans because they are lighter, stack better, use space more effectively and get colder quicker,” says Jacob.

While the company is staying mum on the financial benefits of its new recycling plant, investment managers have been taking a stab at what the investment will mean for the company’s bottom line. “When you take a serious look at the company, you realise that its largest client is Tesla (run by Elon Musk) and will shortly become SA Breweries as the aluminium can substitution continues,” says Brendon Hubbard, portfolio manager at Clucas Grey. “Those are not bad clients to have.”

In order to determine what impact the plant could have on profits, Hubbard has estimated the difference in price between sourcing new material or buying recycled. The assumptions can be seen in the table below:

ECONOMICS OF THE RECYCLING PLANT
Cost of New Aluminium (Not recycled)
LME Metals Price (US$/t) $1 800
Plus: Regional premium (US$/t) $180
Total price per tonne (US$/t) $1 980
Current Rand dollar exchange rate R12.00
Total cost per “new” tonne (R/t) R23 760

Cost of Recycled Aluminium
Recycled material ‘bought in’ (R/t) R15 000
Plus: Gas energy cost per tonne (R/t) R1 000
Plus waste factor of 15% (R/t) R2 250
Plus: collection/shredding/electricity (R/t) R2 000
Total cost per recycled tonne (R/t) R20 250
Savings between new and recycled material (R/t) R3 510
Nameplate capacity of recycling plant (t) 65 000
Total savings (Rands) R228 150 000

Source: Authors calculations, Clucas Grey

“So we think the plant can potentially increase the Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) by R228m,” says Hubbard. For the financial year ending December 2014, the company reported operating profit of R585 million. So at full capacity, the new plant can potentially increase this by 39% – at the least.

“We are trying to be very conservative as management are guiding us to the buy-in price of R15/kg (R15 000/tonne) but their website talks about scrap available at R5/kg (R5 000/tonne). As you can imagine, the spare R10/kg can make an enormous difference to the numbers,” says Hubbard.

Ignoring the earnings prospects of the new plant, the company as it stands is looking extremely cheap. But at least some of this discount can be attributed to the interruptions the business faces from Eskom. The current situation allows Eskom to impose “load curtailment” quotas on Hulamin, which require it to reduce energy consumption.

Due to the intricate nature of the company’s manufacturing processes, temperatures in the plant have to be kept in a very tight band. Because the timing of load curtailment cannot be foreseen, it disproportionately affects volumes at the plant as the temperatures take time to return to optimum levels. For this reason, the company provided a trading update on the 23rd of March advising HEPS for the six month period ending 30 June would be 20% lower than the previous corresponding period (June 2014).

The current price-earnings ratio of 7.32 makes it one of the few companies on the JSE in single digits. And in the last financial year, the company generated far more cash (R518m) than it declared in profits (R385m). It also paid a dividend.

While the company suffers in the short-term from interruptions to its power supply, over the medium term it appears to be a cheap rand hedge with the ability to easily increase profits.

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