Right royal turnaround at Imperial

The logistics and automotive company has undergone a radical restructure — and more changes look likely

High hopes were pinned on Mark Lamberti when he took on the role of CEO at a faltering Imperial Holdings roughly three years ago. He has lived up to expectations and then some.

Lamberti has not only transformed Imperial’s very tired business model; he has also positioned it for potential division into two substantial, separately listed businesses.

What Lamberti found in Imperial was an oldstyle conglomerate. “[Its] approach had been to buy anything that made a profit,” he says. “In its old form Imperial was no longer a sustainable business.”

It was showing.

“In 2014 Imperial’s market cap was the same as it had been 10 years earlier,” says Lamberti.

Wielding a big axe, he waded into the automotive and logistics group. By the end of Imperial’s latest year to June, 42 noncore businesses and 52 properties had been sold.

Imperial has also been active on the acquisition front, bringing on board 15 new businesses at a total cost of R5.4bn since the first half of the group’s year to June 2016.

“Essentially we swapped strategically misaligned, underperforming or low return on effort businesses for businesses with higher growth potential,” says Lamberti.

The new businesses are also less capital intensive and generate sufficient cash flow to be self-sustaining.

The exercise has not been without some short-term pain. Combined operating profit of the businesses sold since 2014 was R982m, compared with R880m of those acquired.

In part, this was a factor in a 10% fall in headline EPS (HEPS) in Imperial’s latest financial year. It left HEPS at the same level as 10 years earlier.

Lamberti did not stop at a sweeping restructuring of the R120bn annual revenue Imperial business components. He also turned his attention to its top management structure.

“Many top executives were retiring or nearing retirement,” he says. He made full use of the opportunity. Of Imperial’s 35 top executives, 23 are new to their jobs.

“We also needed new thinking and had to pay more attention to transformation,” says Lamberti. “We have also opened up succession paths. It has instilled a lot of energy in the group.”

Lamberti’s third decisive move in Imperial’s restructuring has been the creation of two very distinct divisions: Imperial Logistics and vehicle retail, vehicle spares and car rental-focused Motus. The two divisions came formally into being in July 2016.

With the heavy restructuring largely complete,

Lamberti is brimming with confidence.

“If I may quote Winston

Churchill, we are at ‘the end of the beginning’,” he says. “Our two divisions are ready to run hard.”

Analysts polled by Thompson Reuters agree, with their consensus forecast calling for Imperial’s HEPS to rise almost 20% in its current year and 14% in the year after.

An Imperial back on a growth path could be the precursor to separate listings for Imperial Logistics and Motus. It is a potential move that has captured the market’s imagination and helped drive Imperial’s share price a third higher in the past 12 months.

The decision is set to be made known before the end of the current financial year.

It is a move Lamberti appears to be championing. “Unbundlings in SA and overseas have all created value for shareholders,” he stresses.

Imperial

Denker Capital analyst Jan Meintjes has mixed feelings on the issue. “I think they [Imperial] will go ahead and split the group in two,” he says. “But I am not convinced it will add huge value.”

What it would do is give investors a choice between the potential of a dynamic international logistics business that already derives two-thirds of its R2.8bn operating profit outside SA and a largely Sa-bound and, for now at least, low-growth automotive business.

Lamberti leaves no doubts about his first choice.

“Our motor business is a great cash producer with good returns, but logistics is poised for the fastest growth,” he says.

Growth through acquisitions also appears to hold appeal. “The international logistics market is fragmented,” he says.

There is also a growing shift away from owning huge capitalintensive truck fleets to move goods from point A to point B, to one in which intellectual property plays a key role. Imperial made a serious move in this direction in July 2016 with the acquisition of a 95% stake in Uk-based Palletways for £155m.

“Palletways is a brilliant business,” says Lamberti. “It is a market leader in the UK, big in Spain and Italy, and growing well in Germany and Poland.”

Palletways owns no truck fleet. Instead it operates through 350 franchisee truck operators, moving more than 8m pallets a year and controlled by what Palletways describes as an “immense IT infrastructure”.

Lamberti is also upbeat on Imperial’s non-sa African logistics business, which has been built primarily on distribution for international pharmaceutical groups.

“We started African operations from scratch five years ago and in our past year they delivered R9.4bn revenue and R756m in operating profit,” he says.

Imperial’s target is to have the contribution from African operations equal those of its SA logistics business by 2020.

Having just undergone sweeping restructuring and top management changes, Imperial is not without risk. But for those prepared to back Lamberti, on a 17.4 p:e it is a share worth close consideration.