Interwaste, Hudaco, Mustek, Sephaku, Zeder

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.