In­ter­waste, Hu­daco, Mustek, Sephaku, Zeder

Financial Mail - Investors Monthly - - Contents - Stafford Thomas

Do­ing well in good times says lit­tle about the true ca­pa­bil­i­ties of a com­pany’s man­age­ment team. The real test comes when the eco­nomic chips are down, as they now are.

Hu­daco’s man­age­ment team is pass­ing the test with flying colours in an econ­omy that the group’s CE, Gra­ham Dun­ford, de­scribes as “a war zone”.

At first glance, Hu­daco’s re­sults in its six months to May do not make great read­ing. Sales dipped 1.6% to R2.5bn while head­line EPS (HEPS) were off 13.9%. But there is more to the re­sults than meets the eye.

Re­sults in the six months to May 2015 re­ceived a R50m pre­tax boost which was ab­sent in the lat­est half year. At work last year was a surge in sales of al­ter­na­tive en­ergy prod­ucts, es­pe­cially bat­ter­ies, courtesy of a load-shed­ding Eskom. An added boost came from a big or­der for com­mu­ni­ca­tions equip­ment.

“Ex­clud­ing the R50m, our com­pa­ra­ble earn­ings were down only 3%,” says Dun­ford. “Go back to 2014’s in­terim re­sults and com­pa­ra­ble earn­ings in 2016 were 6% higher and our op­er­at­ing mar­gin was up from 9.5% to 9.8%.”

Hu­daco also achieved won­ders with costs, lim­it­ing their rise to

only 4% in the lat­est re­port­ing pe­riod. This was de­spite hav­ing con­cluded three ac­qui­si­tions in the year to Novem­ber 2015 at a to­tal cost of R603m.

It is a solid show­ing at a time when Hu­daco’s peers are far­ing far worse. Among them is In­victa, which ended its year to March with pre­tax profit 27% down. HEPS, hit by a rights is­sue in 2015, came in 48% lower.

Also tak­ing a ham­mer­ing is Torre In­dus­tries, warn­ing in a trad­ing up­date that HEPS will be 36%-45% down in the year to June. In­terim HEPS were 5% up.

Hu­daco’s rel­a­tive re­silience is not a fluke. At work is a strat­egy em­barked on in 2010 by for­mer CE Stephen Con­nelly. The goal was to trans­form Hu­daco, whose for­tunes six years ago rested heav­ily on the sup­ply of en­gi­neer­ing con­sum­ables to the de­clin­ing mining and man­u­fac­tur­ing sec­tors.

Con­nelly and Dun­ford, who picked up the CE’s ba­ton in July 2014, have made 18 ac­qui­si­tions, mostly in the broad consumer ori­en­tated mar­ket. “We have dou­bled Hu­daco’s size since 2010,” says Dun­ford, pointing to an­nual rev­enue which has risen from R2.5bn to more than R5bn.

Di­ver­si­fi­ca­tion has changed Hu­daco’s profit pro­file rad­i­cally. In the lat­est six months consumer prod­ucts ac­counted for 62% of op­er­at­ing profit, a far cry from 38% just six years ear­lier.

The big­gest sin­gle boost to Hu­daco’s consumer goods ex­po­sure came in December 2014 when in its costli­est deal yet it ac­quired au­to­mo­tive spares dis­trib­u­tor Partquip for R550m.

Dun­ford is up­beat on prospects for Partquip and Hu­daco’s other au­to­mo­tive in­ter­est, Abes, which com­bined are now the big­gest consumer goods profit con­trib­u­tors.

Work­ing in Hu­daco’s favour is SA’s age­ing car fleet. “Many peo­ple avoid ex­pen­sive deal­er­ships and go in­stead to pri­vate me­chan­ics,” says Dun­ford. “That’s where a Partquip comes in. Our au­to­mo­tive di­vi­sion has long legs.”

The most sig­nif­i­cant of four re­cent ac­qui­si­tions, Miro Distri­bu­tion, came on board on May 1. “In my 15 years of in­volve­ment with Hu­daco I have felt re­ally ex­cited about two ac­qui­si­tions. The first was Partquip. Miro is the sec­ond,” says Dun­ford.

Miro brings with it 29 lead­ing brands span­ning broad­band wire­less, sur­veil­lance, Wi-Fi and hotspot equip­ment. “Miro is an amaz­ingly dynamic com­pany and takes us into a mar­ket we have not been in,” says Dun­ford.

Hu­daco has big plans for Miro, for which it will pay a max­i­mum of R254m based on tar­geted profit be­fore in­ter­est and tax (PBIT) in three years’ time of R50m. At R50m Miro would have added 8% to Hu­daco’s R603m PBIT in its 2015 fi­nan­cial year.

A num­ber of small bolt-on ac­qui­si­tions are ahead which, if closed, will be funded out of cash flow. “We are keep­ing our pow­der dry for an­other Miro,” says Dun­ford, al­lud­ing to a R500,000 un­used bank fa­cil­ity.

He is con­fi­dent Hu­daco’s sec­ond-half re­sults will be stronger than its first half. At the very least, the ab­sence of the pre­vi­ous year’s R50m pre­tax profit boost will be spread across a full 12 months.

Re­cent ac­qui­si­tions will also be kick­ing in. And there are signs of an improvement in con­di­tions con­fronting the en­gi­neer­ing con­sum­ables di­vi­sion. Bar­clays’ man­u­fac­tur­ing pur­chas­ing man­agers’ in­dex in June stood at 53.7, up from 51.9 in May and a low of 43.5 in Jan­uary. A read­ing above 50 in­di­cates ex­pan­sion in the sec­tor, which still ac­counts for 18% of Hu­daco’s sales.

Now in its 125th year, Hu­daco has proved it can change with the times. It’s a small-cap stal­wart de­serv­ing con­sid­er­a­tion by long-term in­vestors.

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