Positive signs from traditional bellwether

Old hands at the JSE will argue that there were always two mid-cap blue-chip stocks that were considered bellwethers of the health of the domestic economy because of their businesses and diversity.

The first was Afrox, an industrial gases company with wide health-care, industrial and mining interests, which was delisted by majority shareholder Linde in early 2021.

The other bellwether was Hudaco. The 100-year-old business is known for its wide basket of products, as it is principally an importer and distributor of high-quality branded industrial, automotive and electronic consumables.

There are few sectors of the domestic economy that do not require some part or product supplied by Hudaco. With 230,000 line items in stock, 29 nationwide distribution points at 130 branches and 30,000 active customers, the company is a microcosm of the South African economy.

For much of 2022 the Hudaco share price was stuck in a rut, much like the domestic economy. The share traded in a narrow range of R125-R150 as the market fretted that its solid but pedestrian growth might be hampered by the increasingly fragile domestic economy and low GDP growth.

Hudaco smashed its ceiling trading range in late-January, when a robust trading update highlighted the group was guiding headline earnings 20%-24% higher. The market was not expecting such a statement, and Hudaco ran

14% by the time results for the year to end-November 2022 were released on Sens.

The company detailed that revenue in the year rose 12.3% to R8.1bn. Tight control of expenses (which rose only 7.7%) and organic sales growth of 9.1% from ongoing operations boosted operating profit which increased 23.3% to R1bn.

Despite tough economic conditions and the rand’s volatility, Hudaco was able to pass on costs from its mainly imported basket of goods. This, together with the tight cost control that was implemented, helped fatten the operating profit margin to 12.5%. Headline earnings rose 22% to R20.07 a share, with a 21.7% increase in the yearly dividend to 925c a share. The company has a conservative and robust balance sheet and the NAV rose 11.6% to R106.47 a share.

Though Hudaco is known for its acquisitive nature, the group had a quiet financial 2022 as regards corporate action. At the results call, management commented that one of the best acquisitions Hudaco could make at the time was buying back its own shares. The group repurchased and cancelled shares worth R133m in the year. Management stated this would be an ongoing trend.

The four largest segments within Hudaco are wholesale & retail (27%), automotive (18%) and manufacturing & mining (15% each). The consumer side is dominant, representing 58% of operating profits. The consumer-related products and engineering consumables divisions each had a solid period, with revenue growth of 13% and 11.6% respectively. The engineering side outshone consumables in operating profit, rising 28.5% to R470m, vs 19.8% for the consumer side to R661m.

Consumer products operated in a tough environment, with good growth despite some volume reduction. There was strong demand for security and communication products, perhaps reflecting the state of the domestic economy. The margin increased to 15.5% from the prior 14.6%. In the engineering consumables division there was robust growth, with almost all businesses performing well. The best growth points were from diesel engines, specialised steel and a range of bespoke engineering consumables. The margin increased from 10.4% to 12%.

What was clear from results and the management presentation was that despite the hostile economic environment, Hudaco still prospered. The business’s tight control of costs and its resilience and agility allied to its ability to pass on costs of mostly imported products allowed it to protect its position and grow margin and profitability. Few listed stocks on the JSE can say the same.

Upon the release of the results, Hudaco charged to a record high of R161.50 eclipsing the March 2018 record share price. On an earnings multiple of eight and a dividend yield of 5.7%, Hudaco is on a reasonable valuation. Management was upbeat about prospects.

As a quality mid-cap blue chip with an impeccable record, the stock will now, after a year of treading water, surely attract interest. Factoring in a more normalised financial 2023 as who knows what will happen with the economy or Eskom and Hudaco is a perfect widows-and-orphans share. But do realise that the stock is tightly held and somewhat illiquid.

However, IM can comfortably rate Hudaco a buy, with a target value of R184.

On the release of the results, Hudaco charged to a record high of R161.50