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.
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.
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.