Growth on the back of ac­qui­si­tions

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

Seven years ago Hu­daco faced the harsh re­al­ity that its key mar­kets, min­ing and man­u­fac­tur­ing, were in fun­da­men­tal de­cline. The value-added distributor’s only hope was di­ver­si­fi­ca­tion, a chal­lenge it has met with re­mark­able suc­cess.

“Our growth over the past seven years has es­sen­tially been driven by ac­qui­si­tions,” says CEO Gra­ham Dun­ford.

It is growth that has re­sulted in Hu­daco lift­ing an­nual rev­enue from R2.5bn seven years ago to what is set to be more than R6.5bn in its cur­rent year to Novem­ber. Op­er­at­ing profit over the past seven years dou­bled from R300m to R605m.

In Hu­daco’s lat­est half-year to May, ac­qui­si­tions again played a key role. Ex­clud­ing ac­qui­si­tions, rev­enue would have been down 2.3% at R2.41bn while op­er­at­ing profit would have been 0.8% down at R240m. Ac­qui­si­tions left rev­enue up 6.5% at R2.67bn and op­er­at­ing profit up 9.4% at R269m.

Since 2010 Hu­daco has closed 21 ac­qui­si­tions, with four in the past fi­nan­cial year and three in the lat­est half-year to May. Most have been of com­pa­nies with a strong slant to­wards con­sumer prod­ucts in sec­tors in­clud­ing au­to­mo­tive af­ter-parts, al­ter­na­tive power, pro­fes­sional com­mu­ni­ca­tions, se­cu­rity and power tools.

The deals have re­duced the group’s reliance on min­ing and man­u­fac­tur­ing. In 2010 min­ing ac­counted for 24% of group sales and man­u­fac­tur­ing 26%. These lev­els have since al­most halved, with min­ing con­tribut­ing 13% of sales and man­u­fac­tur­ing 16% in 2016.

The over­all con­tri­bu­tion from engi­neer­ing con­sum­able prod­ucts fell from 67% in 2010 to just over 50% in 2016.

Con­sumer prod­ucts upped their con­tri­bu­tion to group op­er­at­ing profit from 37% in 2010 to 62% in the half-year to May.

Hu­daco has proved it­self adept at rapidly in­te­grat­ing ac­quired com­pa­nies, some­thing Dun­ford at­tributes to its suc­cess in re­tain­ing their se­nior man­age­ment.

The group has also never bet the farm on any sin­gle ac­qui­si­tion. Tar­geted com­pa­nies have come with price tags rang­ing from about R30m to R170m, with pay­ments sub­ject to a three-year earn-out clause.

There has been one ex­cep­tion: au­to­mo­tive spares distributor Partquip, which it bought in 2014 for R531m.

It has proved a great buy for Hu­daco, lift­ing its rev­enue al­most 12% in 2016 to R1.05bn, or 19% of the group to­tal.

“Partquip is do­ing very well,” says Dun­ford. “In tough times peo­ple keep their cars longer and, when they are out of war­ranty, [they] shift from deal­er­ships to cheaper pri­vate garages for their ser­vic­ing.”

Hu­daco’s ac­qui­si­tion drive is show­ing no signs of slack­ing. “We have a good pipe­line of bolt-on ac­qui­si­tions,” says Dun­ford. “None is a big com­pany. There is just no big stuff around.”

When the ac­qui­si­tions come, deals are struck at about a 5 p:e to 6 p:e val­u­a­tion, notes Dun­ford.

While the fo­cus of ac­quisi- tions is on con­sumer-type com­pa­nies, Dun­ford stresses that ex­pan­sion of its engi­neer­ing con­sum­ables divi­sion re­mains im­por­tant. Re­flect­ing this is one of the group’s lat­est ac­qui­si­tions: the Dished End Com­pany, ac­quired in May for a max­i­mum of R79m based on a three-year earn-out.

“Dished End pro­duces steel end caps for pres­sure ves­sels up to 5.5 m in di­am­e­ter,” says Dun­ford. “It is a per­fect fit for our Bos­worth busi­ness, which fab­ri­cates steel into con­veyor pul­leys.”

Hu­daco has the fi­nan­cial ca­pac­ity to con­tinue adding a steady stream of mod­est-size ac­qui­si­tions. The com­pany’s bal­ance sheet is mod­er­ately geared, with net debt of R973m at 44% of eq­uity at the end of May. Im­por­tantly, it is a strong cash gen­er­a­tor.

In Hu­daco’s past fi­nan­cial year it gen­er­ated cash of R394m af­ter tax and div­i­dend pay­ments, more than enough to cover the costs of R168m for ac­qui­si­tions and R30m net for prop­erty, plant and equip­ment.

In the cur­rent eco­nomic en­vi­ron­ment Hu­daco is not set to shoot the per­for­mance lights out, but the com­pany should con­tinue to pro­duce steady head­line earn­ings growth of about 6%/year. On a for­ward p:e of about 10 and div­i­dend yield of al­most 4.5%, Hu­daco is a share to ac­cu­mu­late on price weak­ness.

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