Fac­ing tough times

Finweek English Edition - - INVESTMENT -

If you lis­ten care­fully, you can hear the wheels of SA Inc. grind­ing to a halt as the econ­omy comes to a stand­still. We are all fa­mil­iar with the rea­sons, but it doesn’t make it any eas­ier when businesses like Hu­daco feel the brunt of the f ive-month strike en­dured in the plat­inum belt.

De­spite the com­plete shut­down of the large plat­inum mines, the busi­ness was still able to post re­spectable re­sults for the in­terim pe­riod to end May. Hu­daco’s busi­ness is di­vided into two di­vi­sions. The en­gi­neer­ing con­sum­ables busi­ness im­ports and dis­trib­utes prod­ucts used in the re­pair and main­te­nance of ma­chines, and in­cludes things likes diesel en­gines, bear­ings and power trans­mis­sion prod­ucts. Roughly 66% of sales for this di­vi­sion come from the min­ing and man­u­fac­tur­ing sec­tors, a part of the econ­omy that out­go­ing CEO Stephen Con­nolly de­scribed as hav­ing “no place to hide”.

With­out the ben­e­fit of re­cent ac­qui­si­tions, the di­vi­sion would have seen op­er­at­ing profit de­cline by 16% for the pe­riod, ref lect­ing just how chal­leng­ing the en­vi­ron­ment has been. In­stead, the di­vi­sion posted a 4% in­crease in op­er­at­ing profit from turnover that ad­vanced 14%.

It was much the same for the con­sumer-re­lated prod­ucts di­vi­sion. Op­er­at­ing profit from on­go­ing busi­ness fell 15%, largely as a re­sult of lower mar­gins, but ac­qui­si­tions al­lowed the di­vi­sion to post a 1% in­crease in op­er­at­ing profit to R86m. In ag­gre­gate, the com­pany in­creased turnover 16% to R2.1bn, oper-


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Aug 2013 at­ing profit by 3% to R200m and head­line earn­ings per share 2% to R4.56. The in­terim div­i­dend stayed in­tact at R1.55. So how will the rest of the fi­nan­cial year shape for the com­pany? In­com­ing CEO Gra­ham Dunford noted that even with the plat­inum strike over, it will take a cou­ple of months for the mines to reach steady-state pro­duc­tion as shafts need to be cleared for safety and staff need to be re­trained. He es­ti­mated that Hu­daco would prob­a­bly only see about six full weeks of pro­duc­tion from the mines be­fore the close of the com­pany’s fi­nan­cial year at the end of Novem­ber.

Ac­qui­si­tions, which have been par­tand-par­cel of the busi­ness since its for­ma­tion, will con­tinue un­der Dunford. But the com­pany will be a l it­tle bit con­strained in pur­su­ing these in fu­ture. Debt ac­cu­mu­lated from past ac­qui­si­tions, the an­nual re­stock­ing of in­ven­tory ahead of the busier sec­ond half of the year, com­bined with the ‘pay now, ar­gue later’ tax pay­ments of R20m a quar­ter re­lat­ing to the com­pany’s BEE struc­ture, have left the com­pany with an additional R400m in debt. This has left the net debt-to-eq­uity ra­tio at a man­age­able 30%, but it leaves ques­tions as to how the com­pany can grow in the cur­rent en­vi­ron­ment. Per­haps though, share­hold­ers should just be grate­ful the com­pany is sur­viv­ing.

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