A big break­out is pend­ing

Im­pe­rial Hold­ings has been out of in­vestor favour the past year but the com­pany’s strat­egy now is to grow rev­enues and prof­its that are less sus­cep­ti­ble to cur­rency volatil­ity.

Finweek English Edition - - MARKETPLACE KILLER TRADE - Edi­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re­search team in t

anum­ber of fac­tors have hurt ve­hi­cle and lo­gis­tics group Im­pe­rial Hold­ings in re­cent months: sub­dued con­sumer goods and com­mod­ity vol­umes, cur­rency move­ments, a 14.3% de­cline in new ve­hi­cle sales in South Africa in the nine months to end Septem­ber, and low wa­ter lev­els on the Rhine and Rio Parana.

Although there are a num­ber of trans­porta­tion and lo­gis­tics com­pa­nies in SA, I’m con­cen­trat­ing on Im­pe­rial be­cause a sig­nif­i­cant break­out seems un­der­way. Im­pe­rial, which is un­der­go­ing re­struc­tur­ing, fo­cuses on two sec­tors of mo­bil­ity: lo­gis­tics and ve­hi­cles. Im­pe­rial Lo­gis­tics con­sists of three sub-di­vi­sions: South Africa, Africa Re­gions, and In­ter­na­tional. Its ve­hi­cle busi­ness has two di­vi­sions: Im­ports, Re­tail and After­mar­ket Parts as well as Mo­tor Re­lated Fi­nan­cial Ser­vices.

For the past 12 months or so, Im­pe­rial fell out of in­vestor favour as the com­pany en­dured a dif­fi­cult phase of its busi­ness cy­cle. On the charts, Im­pe­rial neg­a­tively broke out of a two-year sym­met­ri­cal tri­an­gle, re­sult­ing in a sharp fall (we had rec­om­mended a short in Au­gust 2015).

The group said at its AGM in Novem­ber that it ex­pects 56% of rev­enue in the year to end June 2017 to be de­rived from SA, 33% in the EU, Aus­tralia and South Amer­ica, and 11% in sub-Sa­ha­ran Africa north of SA.

With SA con­tribut­ing such a large por­tion of the group’s op­er­a­tions, CEO Mark Lam­berti high­lighted a num­ber of SA-spe­cific chal­lenges at the AGM, say­ing most of the slow­down in eco­nomic growth is at­trib­ut­able to “avoid­able lo­cal fac­tors”.

In an assess­ment of the state of af­fairs, Lam­berti said: “Busi­ness and con­sumer con­fi­dence is be­ing eroded by se­ri­ous po­lit­i­cal in­ter­fer­ence in the work­ings of core pub­lic in­sti­tu­tions and sta­te­owned en­ter­prises. Such ac­tiv­ity is be­ing con­ducted with ap­palling self-in­ter­est, im­punity and du­plic­ity, at the ex­pense of na­tional pri­or­i­ties such as eco­nomic growth, fis­cal rec­ti­tude, pol­icy cer­tainty, un­em­ploy­ment and poverty al­le­vi­a­tion, crime pre­ven­tion and fund­ing of univer­si­ties.”

With eco­nomic growth in SA ex­pected to be flat next year, Im­pe­rial said it ex­pects sin­gle-digit rev­enue growth and a mod­er­ate de­cline in op­er­at­ing profit in con­tin­u­ing op­er­a­tions for the 2017 fi­nan­cial year. It will con­tinue to dis­pose of “non-core, strate­gi­cally mis­aligned, un­der­per­form­ing or low re­turn on ef­fort as­sets”, us­ing the pro­ceeds to pay off debt.

Im­pe­rial’s strat­egy is to grow rev­enues and prof­its that are “less sus­cep­ti­ble to cur­rency volatil­ity, in or­der to re­duce the group’s ex­po­sure to ex­chang­er­ate sen­si­tive op­er­at­ing prof­its at­trib­ut­able specif­i­cally to di­rectly im­ported ve­hi­cles”, as men­tioned in its in­terim re­sults pre­sen­ta­tion. For­ward-look­ing in­vestors have al­ready con­sid­ered cur­rent val­u­a­tions on the share and a price-to-earn­ings ra­tio at 11.5 as an op­por­tu­nity for longer-term gains, which should gain trac­tion as busi­ness con­di­tions im­prove.

What next?

Pos­si­ble sce­nario: Im­pe­rial is tee­ter­ing on the re­sis­tance trend­line of its long-term bear trend – which would be breached above 17 875c/share. With the three-month rel­a­tive strength in­dex (RSI) es­cap­ing its four-year bear trend, a pos­i­tive break­out, con­firmed above 18 865c/share, seems pos­si­ble. There­after, a 100% re­trace­ment to 23 345c/share should en­sue. A new bull phase would com­mence above that all­time high. In­vestors could ini­ti­ate a neu­tral long above 17 875c/share and in­crease po­si­tions ag­gres­sively above 18 865c/share. Al­ter­na­tive sce­nario: A re­ver­sal be­low 15 580c/share would mark de­feat – at­tract­ing fur­ther sell­ing to­wards 13 610c/share or even 12 300c/share. In this case re­frain from go­ing long.

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