Hudaco expects boost from acquisitions in second half

Hudaco Industries has reported an almost 20% rise in headline earnings per share at the halfway stage and is optimistic that its recent acquisitions will help boost trading in the second half.

The group, which imports automotive, industrial and electrical products, reported a 1.5% rise in operating profit for the six months to end-May to R419m, achieved through strict control of gross margins and operating expenses. The result was a rise in the operating margin for the first half from 10.4% to 10.8%.

Revenue declined 2.4% to R3.89bn. Headline earnings per share (HEPS) rose 19.6% to 938c.

The group, which is valued at R6bn on the JSE, said cash generation remained robust and trading activities in the first half resulted in a cash inflow of R534m, of which R92m was invested in working capital.

An interim dividend of 350c per share was declared, up 7.7% from a year ago.

Its consumer-related products segment, which includes 12 businesses that generated 46% of group sales and 45% of operating profit, bore the brunt of weak economic conditions and increased pressure on consumers.

“We have seen reduced volume sales across most businesses,” Hudaco said.

“Our battery, energy, power tool, fastener and security businesses struggled to gain traction in the period. Conversely, our automotive, data communications, and Cadac businesses performed significantly better, and we are confident this trend will continue into the second half,” it said.

The 20 businesses that make up the engineering consumables segment faced a challenging first half, as mining and manufacturing in SA, its biggest markets, continued to decline.

However, within the segment, the diesel engine, electrical power transmission and thermal plastic pipes and fittings businesses performed “exceptionally well”, it said.

The group expects the impact of its two most recent acquisitions — Isotec and Flosolve — to be realised in the second half.

It acquired Flosolve, a specialist equipment supplier to the mining and industrial sectors, in June. In January, Hudaco paid about R709m to acquire the trading assets and liabilities of Isotec.

“Isotec, a leading provider of insulation materials and solutions in SA, is a very significant business in the context of the group, and its offering will complement and enhance the range of products and services that Hudaco already provides to the electrical power transmission sector,” it said.

The Isotec acquisition contributed R39m to turnover and R5m to operating profit and is expected to make a much more significant contribution in the second half.

Hudaco said though its potential was enormous, as an SA Inc company it depended heavily on the country’s broader economic landscape for business growth, which faced policy and governance challenges.

“The uncertainty and costs around critical policy issues (such as BEE and expropriation without compensation) and criminal activities (including endemic corruption) accompanied by a breakdown in the criminal justice system, have been a disincentive for foreign investment and have added to the cost of doing business,” it said.

Despite the difficult conditions under which it operates, Hudaco said it remained resilient, though achieving organic growth from its existing mature businesses in declining market sectors was difficult.

As part of its long-term strategy, it maintains a diversified portfolio of cash-generative businesses and manages the elements within its control, such as gross margins, expense ratios and working capital.

“Our existing businesses remain well-positioned to capitalise quickly on any uptick in market conditions, and we look forward to positive contributions from Isotec and Flosolve, both of which will be included for the full six months of the second half,” it said.

mackenzieJ@arena.africa