Summer Rains - The South African agricultural economy

21-Nov-2011 | News-Press Release

The South African agricultural economy comprises a well-developed commercial sector and a predominantly subsistence-oriented sector in the rural areas. Only about 13% of South Africa’s surface area can be used for crop production, of which just 22% can be classified as high-potential land. Primary agriculture contributes about 2.6% to the gross domestic product (GDP) and almost 9% of formal employment. For the past five years, agricultural exports have contributed on average approximately 8% of total South African exports.


Omnia is a specialist chemical services company providing customised solutions in the agricultural, mining and chemical markets. The group experienced considerably growth during the interim period ended September 2008, mainly driven by a weaker Rand exchange rate and high international raw material prices. The agricultural division contributed 39% to group revenue and 53% to group operating profit.  The division manufactures and supplies granular, liquid and speciality fertilizers to individual farmers, co-operatives and wholesalers in southern Africa. It also supplies farmers in Australia and New Zealand. The chemical division contributed 42% to group revenue and 26% to group operating profit. Demand for the Group's chemical products will be influenced by the broader economic environment. The Rand's recent weakening could have a positive effect on manufacturing, as exports become more competitive and imported manufactured components more expensive. The reduction in oil prices will impact positively on prices of downstream petrochemical products and their derivatives.  The mining division contributed 18% to group revenue and 21% to group operating profit. The division is a market leader in blended bulk explosives for surface mines and also produces packaged explosives for underground mines and specialised blasting applications. Due to the nature of the group's operations, results are always going to be cyclical due to the commodity type product that the group produces and a number of external factors (like the weather) that is not under the control of management. In the medium term the group should experience a subdued period considering the sharp decline in commodity prices and coming off abnormal high growth levels (specifically from the Agricultural side) achieved in the first half. This should, to certain extent, be offset by a weaker exchange rate. We feel, trading on a historical PE ratio of 4.4 times, that the share offers good value. However, due to the group’s cyclical nature, high gearing and poor cash flow we will only recommend the share to speculative investors.


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