Key message: Strong organic growth opportunity in being able to supply wide can body stock (CBS) and increase scrap absorption.
- We initiate on Hulamin with a Target Price of R5.30. Hulamin has a strong organic growth opportunity with the wide can body stock (CBS) project to match can producers demands for the fast-growing energy drink sector that favours wide body cans. Target cost reductions of R300m will also benefit margins.
- CBS volumes can grow by 40% by 2027 by replacing imported wide spec CBS, with overall Hulamin rolled products volumes able to grow 17% from 180kt to 211kt. This will increase the proportion of higher margin local sales in the mix.
- Increased scrap absorption will also benefit profitability, with increased use of pre- and post-consumer scrap able to reduce costs by approx. R10k/t by replacing primary metal input. Scrap usage is expected to increase from 9kt to 28kt by 2027.
- The capital cost of the wide CBS project is R512m and scrap absorption R195m. Phases 1 and 2 of the wide CBS project are complete with Phase 3 to be completed in FY25. Debt levels are expected to peak in FY25 and reduce thereafter.
- In the recent FY24 results, rolled products sales volumes increased by 2% with local sales improving from 51% to 55%. Normalised EBIT (adjusting for metal price lag and other non-trading items) was R379m, down 22%. The normalised EBIT was negatively impacted by the coil coating line fire (R45m for first 10 days not covered by insurance), R57m for the hot mill upgrade, R30-40m for mix (higher low-margin standards sales), the R33m loss in Extrusions and an R8m loss in Containers. Adding these back to the result takes it over the target R500m EBIT guided by management as a target converting profit.
- FY25 will have a 25-day shut for Phase 3 of the wide CBS project which will impact CBS sales (expected to fall to 49kt from 51kt). Approx R400m in inventory will be built up for the shutdown in 1H and extra facilities have been arranged with banks.
- Hulamin exports approx. 11% of volumes to the US. Potential tariffs are not expected to impact Hulamin as many countries exempt from the duties that Hulamin is subject to will now face duties – leaving Hulamin in a relatively better competitive position. The US is short on aluminium products and volumes are not expected to fall away.