Use­ful spares in your work­shop

Min­ing and in­dus­try are look­ing a bit derelict right now, but the wheel has to turn one day

Financial Mail - Investors Monthly - - Guest Column -

With a base of heavy in­dus­try and world-class min­ing, SA in the 1970s, 1980s and 1990s was a boon for any in­dus­trial counter that sup­plied spare parts and “wid­gets” into this grow­ing sec­tor.

The two stal­warts were In­victa and Hu­daco. Both en­joyed pros­per­ity, sales growth and share price re­turns that kept in­vestors happy.

When Chi­nese growth got go­ing in the 2000s, it cre­ated un­prece­dented de­mand for min­er­als of all sorts. These were ex­ported from SA to sat­isfy the dragon’s ap­petite.

Min­ing and, to some ex­tent, in­dus­trial SA ben­e­fited, though weak gov­ern­ment in­dus­trial pol­icy and grow­ing labour activism were sowing the seeds that would com­bine with the global fi­nan­cial col­lapse of 2008 and lead to a post-World Cup slump in South African out­put and pro­duc­tiv­ity.

Com­pa­nies such as In­victa, part of the Wiese em­pire, and Hu­daco con­tin­ued to ex­pand, buy­ing smaller com­peti­tors and cut­ting in­ter­nal costs; and for many years un­der­ly­ing earn­ings growth was good.

In these years a new, smaller player, Torre In­dus­tries, emerged, “copying” the blueprint of its big­ger brothers. It suc­ceeded in build­ing a “baby In­victa”, as I called it, and the share price rose from a 30c low to 550c as the mar­ket sniffed the “next big thing”.

But the wheels started to come off for the sec­tor, led by de­clin­ing de­mand in China for com­modi­ties. A col­lapse in key prices hit min­ing SA hard and this, along­side grow­ing min­ing labour mil­i­tancy, choked off min­ing in­vest­ment.

Con­di­tions were thus put in place for weak earn­ings for In­victa, Hu­daco, Torre and spe­cial­ist min­ing sup­plies busi­ness Win­hold.

The mar­ket started to sharply de-rate the coun­ters in mid-2015 and the share prices of In­victa and Torre have both plunged by more than 60% from their highs.

The PEs of all the stocks are now in sin­gle dig­its as the mar­ket has been ex­pect­ing poor earn­ings and un­der­per­for­mance. To date, the mar­ket has been cor­rect.

Re­cent trad­ing up­dates show In­victa’s earn­ings are ex­pected to fall by around half, Hu­daco’s earn­ings out­look is neg­a­tive, Torre (cur­rently un­der ru­mours of a buy­out) ex­pects earn­ings ma­te­ri­ally lower than FY15 and Win­hold slumped to a loss.

So there is no rosy pic­ture, cur­rently, in the in­dus­trial sup­ply space of the JSE. This is true in the short term, but these coun­ters have re­silient busi­nesses, great sup­ply re­la­tion­ships and sound bal­ance sheets. They will all sur­vive and emerge leaner, pick­ing off their smaller, dis­tressed com­peti­tors and rid­ing out the cy­cle un­til some eco­nomic growth even­tu­ally emerges in SA.

New cap­i­tal in­vest­ment in SA may be stalled and you can de­lay planned plant and equip­ment main­te­nance for a pe­riod, but even­tu­ally that spare part, gas­ket or ball bear­ing will need to be re­placed for op­er­a­tional health and safety rea­sons.

The four coun­ters are tak­ing dif­fer­ent paths to cope.

Gi­ant In­victa is pick­ing off smaller play­ers and bolt­ing on units to be more oper­a­tionally ef­fi­cient. It also has a large role in agri­cul­tural and cap­i­tal equip­ment, both of which should rally in due course.

Hu­daco is also do­ing bolt-ons but is mov­ing away from min­ing and heavy in­dus­try to­wards the con­sumer sup­ply space through re­cent deals in car parts sup­ply and se­cu­rity.

Torre may not be around much longer. Ru­mours of a buy­out from ma­jor­ity share­holder Stel­lar Cap­i­tal are strong and per­haps be­ing an un­listed di­vi­sion may shield it from pry­ing eyes so it can grow at its own pace.

Win­hold, as the small­est player in niche ar­eas, looks most vul­ner­a­ble to a takeover. It is as­set-rich and its busi­ness re­mains stuck in the dark ages.

The min­ing and in­dus­trial sup­plies sec­tor cur­rently looks down and out. PE rat­ings are low, earn­ings are weak and in­vestor ap­petite is lack­ing.

For long-term value seek­ers, the dark­est times are the times to look. In­victa and Hu­daco are solid coun­ters with great man­age­ment and sec­tor po­si­tion­ing. Re­cov­ery will come and tuck­ing away these stocks at bar­gain base­ment rat­ings may prove worth­while on a three-year view.

Win­hold, as the small­est player in niche ar­eas, looks most vul­ner­a­ble to a takeover. It is as­set-rich

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