Poised for more growth
THIS IMPORTER and distributor of leading international bearing, transmission, power and security products has one of the most consistent growth records on the JSE. Between the late Nineties and its 2005 financial year, sales rose from R895m to R1,55bn, operating profit from R72m to R183m, HEPS from 123c to 415c and distribution from 47c to 144c. Not only has Hudaco managed to increase trading margins moderately, but a strong balance sheet and tight control of overheads have considerably leveraged the gains lower down.
Hudaco says an important part of its success reflects a decentralised management structure and small head office. Moreover, despite the growth of recent years it has remained virtually ungeared throughout, with small but usually positive entries for net interest.
Preliminary figures for the year to November 2006 show an extension of these trends. Sales are up 20%, at R1,84bn, but operating profit is up 29% at R235m (the 2005 figure is restated at R181m) and HEPS are up 30% at 532c (409c restated). Distribution is up 32% and stands at 190c.
As sales were up only 14%, operating profit 21% and earnings and distribution 19% at halftime, this implies a considerable acceleration in activity in the second half.
Hudaco says power and security products were the main drivers of increased demand, and the changed product mix depressed gross margins slightly. But in bearings and power transmission there was a noticeable pick-up in quoting on project work from mines and manufacturers towards yearend.
Hudaco expects the next few years to be rewarding, as spending on infrastructure (especially power generation) and mining investment picks up. It says demand should remain strong at least until 2010 and the outlook for earnings growth is “very positive”.
While the company in principle is open to growth by acquisition, it says no attractive propositions came up last year. A few opportunities are still being looked at but if none materialise this year, Hudaco will consider a cash distribution, probably towards mid-year at the same time it hopes to announce a BEE deal.
After trading between 4 500c and 5 000c from last July to mid-November, the share price started to firm with increasing momentum. At the present 7 700c, the p:e ratio is 14,5 and yield 2,5%. These are demanding ratings, but not excessively so in view of the record. Hudaco may not be able to resist any broad short-term correction in the share market but should continue to reward long-term holders.