Imperial Logistics to expand ‘asset light’ strategy in Africa
● Imperial Logistics plans to double the size of its consumer and health-care operation in the rest of Africa over the next three to five years, banking on a division that has helped it weather the pandemic.
Mohammed Akoojee, group CEO of Imperial Logistics, said this week: “That has been our biggest growth area, our most profitable area and the area that offers the highest return on capital and the most cash flow. This is because of the ‘asset light’ nature of this business because there is no capex and you’re not running trucks.”
The consumer and health-care division, known as Market Access, with revenue of more than R12bn, sources, markets, distributes and sells health-care and consumer goods in more than 20 countries including Kenya, Nigeria, Namibia, Mozambique and Ghana.
Akoojee said the division mostly uses what Imperial refers to as an “asset light” strategy, meaning its major investment is in the goods it sells and distributes rather than assets such as trucks that carry high fixed costs. Generally, smaller vehicles are used to transport goods to pharmacies, hospitals and retailers.
“Our major investment is goods and capital, and that is largely funded by creditors so there is no capex, and that is why we have grown that business significantly over the last 10 years.
“Ten years ago that business didn’t exist and it is now the biggest part of Imperial,” said Akoojee.
“We would like to, outside of SA on the continent, double our business over the next three to five years. That won’t just be organic growth, that will also be acquisitive,” he said.
The biggest challenge with traditional logistics businesses is that 50% of the overheads are fixed and include labour, asset depreciation and leases, whereas in Imperial’s Market Access division only about 20% of the costs are fixed, Akoojee said.
“It gives you more flexibility and that is why the business model of Market Access is so attractive.”
Imperial’s results for the year to June 2020, released this week, show the Market Access division grew revenue 18% to R12.4bn, with operating profit dipping 1% to R710m even with the negative effect of the pandemic brought into the equation.
In contrast, Imperial’s Logistics Africa division, which provides road freight and contract logistics services in SA and the rest of Africa, was more severely affected by Covid19, recording revenue growth of 3% and a 34% decline in operating profit.
Other divisions exposed to chemicals, liquor, tobacco and the industrial sector, and in Europe automotives, were hard hit by lockdowns.
Abdul Davids, portfolio manager at Kagiso Asset Management, said Imperial’s results “were heavily skewed by Covid-19”, with the second half of its financial year dominated by the lockdown in SA and also in Europe, mainly Germany.
Davids said Imperial had made significant strides, especially in managing its balance sheet.
“The working capital performance was actually quite amazing, so they managed to extract about half a billion rands’ worth of working capital savings from the business,” Davids said.
On Imperial’s plans to expand in the rest of Africa, Akoojee said that though the “asset light” strategy worked in reducing costs in some contexts, in other places, such as Nigeria, owning the trucks would be the better option because the market there was not developed enough to support a sub-contractor market.
The group has also applied the “asset light” concept to its Logistics International division, from which it received R3.4bn in July, proceeds from the sale of its European shipping business, which included the ownership of barges and ships.
Kagiso’s Davids said the sale of the European shipping business “shored up the balance sheet quite nicely” and fitted in with Imperial’s strategy.
“You can’t fault the timing of that sale and also the overall strategy as well. It is a good strategy.
“I think if you look at the performance of that Market Access business, it was a fairly resilient performance for the full year and then the returns on investment capital in that business are still healthy as well.”
Davids said a balance would need to be struck between growing the business and allowing the existing portfolio to settle.
“I think it is the right thing to do to try and grow through acquisitions because for a logistics business it is all about scale. My only concern is that Imperial will need to make significant acquisitions to get to those growth targets it has set.
“At some point we would like to see the business settle down and grow more organically than just through acquisitions,” said Davids.