Facing tough times
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-
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.