Useful spares in your workshop

Mining and industry are looking a bit derelict right now, but the wheel has to turn one day

With a base of heavy industry and world-class mining, SA in the 1970s, 1980s and 1990s was a boon for any industrial counter that supplied spare parts and “widgets” into this growing sector.

The two stalwarts were Invicta and Hudaco. Both enjoyed prosperity, sales growth and share price returns that kept investors happy.

When Chinese growth got going in the 2000s, it created unprecedented demand for minerals of all sorts. These were exported from SA to satisfy the dragon’s appetite.

Mining and, to some extent, industrial SA benefited, though weak government industrial policy and growing labour activism were sowing the seeds that would combine with the global financial collapse of 2008 and lead to a post-World Cup slump in South African output and productivity.

Companies such as Invicta, part of the Wiese empire, and Hudaco continued to expand, buying smaller competitors and cutting internal costs; and for many years underlying earnings growth was good.

In these years a new, smaller player, Torre Industries, emerged, “copying” the blueprint of its bigger brothers. It succeeded in building a “baby Invicta”, as I called it, and the share price rose from a 30c low to 550c as the market sniffed the “next big thing”.

But the wheels started to come off for the sector, led by declining demand in China for commodities. A collapse in key prices hit mining SA hard and this, alongside growing mining labour militancy, choked off mining investment.

Conditions were thus put in place for weak earnings for Invicta, Hudaco, Torre and specialist mining supplies business Winhold.

The market started to sharply de-rate the counters in mid-2015 and the share prices of Invicta and Torre have both plunged by more than 60% from their highs.

The PEs of all the stocks are now in single digits as the market has been expecting poor earnings and underperformance. To date, the market has been correct.

Recent trading updates show Invicta’s earnings are expected to fall by around half, Hudaco’s earnings outlook is negative, Torre (currently under rumours of a buyout) expects earnings materially lower than FY15 and Winhold slumped to a loss.

So there is no rosy picture, currently, in the industrial supply space of the JSE. This is true in the short term, but these counters have resilient businesses, great supply relationships and sound balance sheets. They will all survive and emerge leaner, picking off their smaller, distressed competitors and riding out the cycle until some economic growth eventually emerges in SA.

New capital investment in SA may be stalled and you can delay planned plant and equipment maintenance for a period, but eventually that spare part, gasket or ball bearing will need to be replaced for operational health and safety reasons.

The four counters are taking different paths to cope.

Giant Invicta is picking off smaller players and bolting on units to be more operationally efficient. It also has a large role in agricultural and capital equipment, both of which should rally in due course.

Hudaco is also doing bolt-ons but is moving away from mining and heavy industry towards the consumer supply space through recent deals in car parts supply and security.

Torre may not be around much longer. Rumours of a buyout from majority shareholder Stellar Capital are strong and perhaps being an unlisted division may shield it from prying eyes so it can grow at its own pace.

Winhold, as the smallest player in niche areas, looks most vulnerable to a takeover. It is asset-rich and its business remains stuck in the dark ages.

The mining and industrial supplies sector currently looks down and out. PE ratings are low, earnings are weak and investor appetite is lacking.

For long-term value seekers, the darkest times are the times to look. Invicta and Hudaco are solid counters with great management and sector positioning. Recovery will come and tucking away these stocks at bargain basement ratings may prove worthwhile on a three-year view.

Winhold, as the smallest player in niche areas, looks most vulnerable to a takeover. It is asset-rich