A ship that was steered through times of crisis

Hudaco has a long and rich history in SA. It was formed in 1891 as an industrial supply business by J Hubert Davis, and first listed on the JSE as Hubert Davis and Co in 1938. Today it trades at more than R100 and has a market cap of more than R3bn.

Various acquisitions through the years have expanded the company from its traditional mining and manufacturing focus to a more diversified business to include automotive, communication, alternative energy and security sectors.

There are two operating segments: consumer-related products (representing 67% of operating profit) and engineering consumables (33% of operating profit). The company offers 23, 000 line items through these two operating segments, which are supplied to Hudaco by 800 international parties and distributed to its clients through 32 warehouses and 130 branches.

The business doesn’t suffer key client risk, as it has about 30, 000 active clients.

During 2020 management had to navigate the effects on the economy of rising unemployment, economic downgrades that affected financing and caused volatile rand exchange rate swings, load shedding and Covid-19 (which resulted in either no, or restricted, trading during the period). Covid-19 restrictions also had an impact the business through delays at ports, a vital factor for an importer such as Hudaco, which aims for quick availability of its products to clients.

Looking at Hudaco’s recently released results it is almost like viewing different years rather than two halves of the same financial year.

The first half of its 2020 financial year (December 1

2019 to May 31 2020) was hit the hardest from the issues mentioned above. It prompted decisive management interventions, such as three-month pay cuts, rationalisations, retrenchment, capex cuts and requests for extended payment terms from suppliers.

The impact from the first half overwhelmed the full-year numbers, with revenue for the full financial year down 6.7% and operating profit down 27.2% to R510m.

For the full year, comparable earnings per share were down 35.5% to 800c a share.

One can clearly see the impact of the first half on the full-year results.

Revenue for the second half was up 2.5% to R3.6bn and operating profit rose 6.8% to R431m, and second half comparable earnings increased by 1.5% to 731c a share (a big jump from the first half’s 86.8% drop to 69c a share).

The group also managed to generate strong cash flow from operations during the second half relative to the first, with full-year cash generated from operations of R908m (of which only R168m was generated in the first half). This strong cash flow facilitated an R365m cut in net borrowings to R643m.

The strong turnaround in the second half enabled the group to return R208m directly and indirectly to shareholders. This was broken down into R82m in share repurchases and R126m (410c a share) through a final dividend.

Investing in Hudaco involves getting to grips with a few key drivers. For an importer (65% of the firm’s group cost of sales is imported directly) an important factor is any movement in exchange rates. This is almost impossible to forecast — and management does not take a house view on exchange rates and hedge out all liabilities. Other drivers include the outlook for consumer spending, vehicle sales and activity in the building, mining and manufacturing sectors.

Despite the tough first half of the recently released full year financial results, the company has proven its resilience and the ability of management to steer the ship through times of crisis.

The business is well positioned to take advantage of any improvement in the economy off the current low base and below R100, and is well priced for any long-term investor who sees some potential for bright skies ahead.