Financial Mail - Investors Monthly - - Opening Bell - Mzwandile Jacks

mpe­rial Hold­ings, the JSE-listed ve­hi­cles and lo­gis­tics group, has con­tin­ued its ac­quis­i­tive and cap­i­tal-in­ten­sive in­vest­ment strat­egy de­spite the chal­leng­ing trad­ing con­di­tions in its sec­tors.

It is still on the prowl for ac­qui­si­tions of lo­gis­tics tar­gets, par­tic­u­larly in the UK and Africa, as it plans to in­crease its fast-mov­ing con­sumer goods and phar­ma­ceu­ti­cal de­liv­er­ies there.

Some of its peers are hold­ing back on new buys as the gloomy sec­tor out­look and the Brexit vote have left many po­ten­tial buy­ers in the UK “paral­ysed”, in a sense.

How­ever, for in­vestors who like com­pa­nies that boost earn­ings through ac­qui­si­tions, Im­pe­rial’s at­ti­tude makes it an in­vest­ment to rush into.

Its planned ac­qui­si­tions will rapidly ex­pand Im­pe­rial’s busi­ness mix and change its char­ac­ter. This ac­tiv­ity will also grow the com­pany’s mar­ket cap while earn­ing great re­turns for in­vestors. Its mar­ket cap is R33.6bn at present.

As the com­pany has moved to re­struc­ture its as­set base and dis­pose of non­strate­gic as­sets, in­vestors must be be­gin­ning to look at Im­pe­rial with great in­ter­est. In ad­di­tion, the group’s al­most R119bn an­nual turnover, gen­er­ated mainly in Africa and Europe, has surely not gone un­no­ticed by new po­ten­tial in­vestors. Past value-ac­cre­tive ac­qui­si­tions will also bol­ster in­vestor in­ter­est in the com­pany.

In June this year, Im­pe­rial bought the cash-gen­er­a­tive UK-based Pal­let­ways, an ex­press de­liv­ery firm of pal­letised freight, for R3.8bn. Now the UK will ac­count for more than 24% of

Igroup rev­enue and more than 18% of group op­er­at­ing profit.

This is part of Im­pe­rial’s plan to ex­pand its op­er­a­tions be­yond the bor­ders of SA, ac­quir­ing as­set-light lo­gis­tics busi­nesses that ben­e­fit from Im­pe­rial’s ex­ist­ing foot­print, CEO Mark Lam­berti said at the time of the an­nounce­ment.

As if this is not enough, Im­pe­rial wants to con­tinue to buy more strate­gi­cally aligned firms to in­crease its scope in the phar­ma­ceu­ti­cal dis­tri­bu­tion of­fer­ings in se­lec­tive mar­kets in Africa and the UK.

Its phar­ma­ceu­ti­cal dis­trib­u­tor­ship in the rest of Africa, which to­gether gen­er­ate 10% and 13% re­spec­tively of Im­pe­rial’s group rev­enue and op­er­at­ing profit, is be­gin­ning to show steady growth.

Im­pe­rial dis­trib­utes phar­ma­ceu­ti­cals into coun­tries that in­clude Ghana, SA, Nige­ria and Botswana, among oth­ers. These are ad­min­is­tered by Im­pe­rial Health Ser­vices, its South African-based unit.

Im­pe­rial wants to take ad­van­tage of the on­go­ing mid­dle class growth in Africa, par­tic­u­larly in coun­tries whose health-care GDP spend­ing has surged dra­mat­i­cally in the past cou­ple of years.

In many African coun­tries, wealth cre­ation is re­sult­ing in a steady growth of the mid­dle classes, with the as­so­ci­ated in­crease in ur­ban­i­sa­tion and de­mand for goods and ser­vices, ac­cord­ing to Thu­lani Gcabashe, the out­go­ing chair­man of Im­pe­rial.

Im­pe­rial goes all out to pay more at­ten­tion to value cre­ation and lead­er­ship in its se­lected mar­kets by al­lot­ting cap­i­tal and re­sources to those ac­quis­i­tive growth prospects that will im­prove and be bol­stered by the group’s ex­ist­ing as­sets, scale and ca­pa­bil­i­ties.

An in­dus­try an­a­lyst said cer­tain of Im­pe­rial’s strate­gic ac­qui­si­tion options will be in­ten­tional while oth­ers will be due to un­planned or un­ex­pected ex­ter­nal de­vel­op­ments.

In both cases, well-de­fined cap­i­tal al­lot­ment prin­ci­ples will be em­ployed.

Im­pe­rial is look­ing to grow ac­quis­i­tively in other mar­kets other than SA be­cause its dom­i­nant mar­ket share in this coun­try a does not al­low it grow any fur­ther here. And weak eco­nomic con­di­tions in SA have led to softer de­mand for Im­pe­rial’s prod­ucts and ser­vices and ag­gres­sive com­pe­ti­tion on ev­ery front. In SA, ve­hi­cle buy­ers are highly price sen­si­tive, trad­ing down to smaller or pre-owned ve­hi­cles; con­sumer goods vol­ume growth is weak and bulk com­mod­ity vol­umes are shrink­ing.

To pay for its fu­ture ac­qui­si­tions, Im­pe­rial plans to use funds it got from the dis­posal of some of its “strate­gi­cally mis­aligned” busi­nesses.

Late last year, it sold its 100% in­ter­est in in­sur­ance firm Re­gent for R2.2bn, and 65% in Neska, a lead­ing player in port op­er­a­tions in Europe, for R1.3bn.

Im­pe­rial also sold its 67.5% in Goscor, the im­porter and in­dus­trial equip­ment, for R1.3bn.

At cur­rent lev­els — with the share of­fer­ing a for­ward earn­ings mul­ti­ple of around 11 times — in­vestors with a longer-term view have an op­por­tu­nity to buy into a blue chip mo­bil­ity busi­ness at af­ford­able lev­els.

To pay for its fu­ture ac­qui­si­tions, Im­pe­rial plans to use funds it got from the dis­posal of some of its ‘strate­gi­cally mis­aligned’ busi­nesses

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