PICK of the MONTH

mperial Holdings, the JSE-listed vehicles and logistics group, has continued its acquisitive and capital-intensive investment strategy despite the challenging trading conditions in its sectors.

It is still on the prowl for acquisitions of logistics targets, particularly in the UK and Africa, as it plans to increase its fast-moving consumer goods and pharmaceutical deliveries there.

Some of its peers are holding back on new buys as the gloomy sector outlook and the Brexit vote have left many potential buyers in the UK “paralysed”, in a sense.

However, for investors who like companies that boost earnings through acquisitions, Imperial’s attitude makes it an investment to rush into.

Its planned acquisitions will rapidly expand Imperial’s business mix and change its character. This activity will also grow the company’s market cap while earning great returns for investors. Its market cap is R33.6bn at present.

As the company has moved to restructure its asset base and dispose of nonstrategic assets, investors must be beginning to look at Imperial with great interest. In addition, the group’s almost R119bn annual turnover, generated mainly in Africa and Europe, has surely not gone unnoticed by new potential investors. Past value-accretive acquisitions will also bolster investor interest in the company.

In June this year, Imperial bought the cash-generative UK-based Palletways, an express delivery firm of palletised freight, for R3.8bn. Now the UK will account for more than 24% of

Igroup revenue and more than 18% of group operating profit.

This is part of Imperial’s plan to expand its operations beyond the borders of SA, acquiring asset-light logistics businesses that benefit from Imperial’s existing footprint, CEO Mark Lamberti said at the time of the announcement.

As if this is not enough, Imperial wants to continue to buy more strategically aligned firms to increase its scope in the pharmaceutical distribution offerings in selective markets in Africa and the UK.

Its pharmaceutical distributorship in the rest of Africa, which together generate 10% and 13% respectively of Imperial’s group revenue and operating profit, is beginning to show steady growth.

Imperial distributes pharmaceuticals into countries that include Ghana, SA, Nigeria and Botswana, among others. These are administered by Imperial Health Services, its South African-based unit.

Imperial wants to take advantage of the ongoing middle class growth in Africa, particularly in countries whose health-care GDP spending has surged dramatically in the past couple of years.

In many African countries, wealth creation is resulting in a steady growth of the middle classes, with the associated increase in urbanisation and demand for goods and services, according to Thulani Gcabashe, the outgoing chairman of Imperial.

Imperial goes all out to pay more attention to value creation and leadership in its selected markets by allotting capital and resources to those acquisitive growth prospects that will improve and be bolstered by the group’s existing assets, scale and capabilities.

An industry analyst said certain of Imperial’s strategic acquisition options will be intentional while others will be due to unplanned or unexpected external developments.

In both cases, well-defined capital allotment principles will be employed.

Imperial is looking to grow acquisitively in other markets other than SA because its dominant market share in this country a does not allow it grow any further here. And weak economic conditions in SA have led to softer demand for Imperial’s products and services and aggressive competition on every front. In SA, vehicle buyers are highly price sensitive, trading down to smaller or pre-owned vehicles; consumer goods volume growth is weak and bulk commodity volumes are shrinking.

To pay for its future acquisitions, Imperial plans to use funds it got from the disposal of some of its “strategically misaligned” businesses.

Late last year, it sold its 100% interest in insurance firm Regent for R2.2bn, and 65% in Neska, a leading player in port operations in Europe, for R1.3bn.

Imperial also sold its 67.5% in Goscor, the importer and industrial equipment, for R1.3bn.

At current levels — with the share offering a forward earnings multiple of around 11 times — investors with a longer-term view have an opportunity to buy into a blue chip mobility business at affordable levels.

To pay for its future acquisitions, Imperial plans to use funds it got from the disposal of some of its ‘strategically misaligned’ businesses