Imperial looking to expand an empire
Imperial is selling off businesses and assets, paying off debt and stepping up efforts elsewhere in Africa and in Europe
Logistics and vehicle group Imperial Holdings is driving hard towards doubling profit from its rest-of-Africa operations. It is seeking to rely less on a shaky SA trading environment, where 59% of group revenue and 64% of operating profit were generated in the interim period to December 2016.
To this end, it has been selling noncore businesses and assets that are not likely to be competitive in future, including properties, garnering billions of rand to help pay down debt.
Imperial has just announced the sale of 100% of the ordinary shares and also the tier-2 capital of insurer Regent Group for about R1.8bn to Hollard. The transaction date will be approved by the Financial Services Board.
Most recently, falling commodity demand, low oil prices, currency volatility and dwindling consumption have hampered Imperial’s African businesses. The rest-of-Africa region generated 9% of turnover and 16% of operating profit in the latest six-month period.
But the group has bet a big part of its future on acquiring foreign logistics assets, especially in African health care. At the same time it has been undergoing a substantial consolidation process. It also recently paid more than R3bn for British express delivery service Palletways, which is busy expanding in Europe.
Under the tenure of CEO Mark Lamberti, Imperial has been split into two businesses: logistics and motor. The motor division trades in vehicle imports, distribution, dealerships, rental, aftermarket parts and vehicle-related financial services.
By agreement, the original decision to dispose of the entire Regent group would have resulted in Imperial continuing to participate in profits that accrued from the value-added vehicle, life and travel insurance products. However, the competition commission objected to this component of the proposed transaction and recommended prohibiting the overall deal, which valued Regent at about R2.3bn.
The parties subsequently agreed on revised terms and conditions. Under these, Imperial retains Regent’s value-added products business instead of selling it to MotoVantage Holdings, a 50-50 joint venture between FirstRand Group and Hollard.
MotoVantage has withdrawn from the proposed transaction, claiming it was taking up too much management time.
The retained businesses are usually much higher-margin businesses than for vehicle sales. In the meantime, in February, Regent’s Botswana and Lesotho assets were sold to Hollard for R697m.
"This is just a pragmatic move by Imperial to ensure the majority of the sale transaction goes through ... and Hollard still [gets] a good deal," says Mark Hodgson, analyst at Avior Capital Markets.
"Hollard bought the non-SA operations of Regent for R697m, so effectively Regent in SA is valued at R1.1bn. In total Imperial is receiving proceeds of R1.8bn compared with R2.3bn previously, with [the SA warranties business] retained now in Imperial," he says.
Imperial says slow economic recovery is continuing and trading conditions remain satisfactory in the UK, Eurozone and Australia, where 32% of group revenue and 20% of operating profit were generated in the latest six-month period.
Group revenue was up 2% to R61bn, while operating profit rose 4% to R3.2bn.
Imperial is not the only SA player to be hit by turmoil in major African markets. AES, the Angolan associate of Consolidated Infrastructure Group, dragged down the firm’s headline EPS by 18.5% in the six months to February, from the same period in 2016. This came despite "robust energy markets" elsewhere in Africa.
The group supplies high-voltage products, heavy building materials and waste management services to the continent’s oil and gas sectors. About 65% of profit after tax is derived from SA. But CEO Raoul Gamsu says he is confident the group’s focus on the Middle East and the rest of Africa will benefit from renewable energy projects and continued demand for electricity grid infrastructure.
However, a slowdown in Angolan oil exploration, a stronger rand and higher interest costs have taken the gloss off substantial growth in earnings before interest, tax, depreciation and amortisation (Ebitda), and diluted significant double-digit growth in both revenue and the company’s order book.
"Having deliberately grown [its] presence across the continent over the past number of years, Consolidated Infrastructure Group continues to enjoy strong revenue growth despite [SA’s renewable energy projects having been delayed]," says Meyrick Barker, an investment analyst at Kagiso Asset Management.
Meanwhile, the recent R850m buyout of electricity and smart-meter provider Conlog in SA has further diversified revenue streams and is expected to boost group profitability by more than 30% in the year ahead.
Barker says Conlog has been a large contributor to Ebitda, as the weak global oil price has dragged down the group’s Angolan operations by half.