With the positive sentiment and economic growth expectations stemming from recent political changes in South Africa, Hudaco Industries continued to deliver sound results in the six months to May 31.
Characteristic of this trading environment, however, is the “Ramaphoria” phase, Hudaco CE Graham Dunford said on Friday, which has not yet translated into increased economic activity.
The “expropriation without compensation” debate has further restrained the economy, with statistics showing that the South African economy has shrunk the most in the recent quarter of any quarter in the past nine years.
The strengthening in the rand in the first four months of Hudaco’s financial year put further pressure on prices.
Despite these tough trading conditions, Dunford pointed out that group sales are at almost R3-billion for the half-year, up 10.6% on the same period in 2017.
Operating profit increased by 7.7% to about R290-million, which he said gave Hudaco an operating margin of about 9.8%, which is “very respectable for the first six months”.
Comparable earnings a share increased by 7% to 517c, while basic and headline earnings a share are up 9.3% to 528c.
The interim dividend has been increased by 5.6% to 190c a share.
According to Dunford, the industrial supplier’s financial position is strong, while bank borrowings are up R185-million, since November last year, to just over R1-billion.
Of the R338-million in trading cash generated, R238-million was reinvested in working capital, including R144-million in inventories, which Dunford said normally peak halfway through the year, as the company stocks up for a busier second half.
During the six-month period, Hudaco also paid finance costs of R43-million, taxes of R30-million and dividends of R144-million.
“Borrowings are still well within our self-imposed conservative guidelines and our available banking facilities. Unless we make further acquisitions, our usual strong second half cash generation should reduce them by year-end”.
Trading conditions in the supplier’s consumer-related products segment were difficult in the first half of the year, and although consumer confidence improved initially, he lamented that disposable income came under pressure.
This segment’s contribution to group sales continues to benefit from strategic acquisition activity over the past few years and it accounted for 54% of group sales and 68% of operating profit.
There are 11 businesses in this segment which serve to diversify Hudaco’s opportunities, risks and market segment mix.
All businesses in this sector, Dunford said, bar the security business, performed well in the first half.
Segment sales increased by 19.3% to R1.6-billion, of which R127-million, about 9.4%, was from acquisitions.
The company’s Boltworld acquisition, which amounts to about R111-million, became effective on June 1, and will merge into industrial equipment supplier Rutherford’s FTS division.
Another acquisition in the six-month period, made in 2017, Eternity, is estimated at about R300-million and has a three-year earn-out period.
Operating profit increased by 19.6% to R211-million at an operating margin of 13.2%.
In its engineering consumables segment, which comprises 21 businesses, trading conditions were tough in most of the markets served by this sector. Hudaco FD Clifford Amoils said this was evident in the first-quarter economic indicators, which reflect significant declines in mining, manufacturing, construction and agriculture.
These trading conditions, he added, continued in the second quarter and created aggressive pricing pressure.
“We were resolute in protecting market share, however, as well as the gross margin,” Amoils averred.
He further added that “when times get tough, Hudaco will manage the elements it can manage”.
The segment increased sales by 1.8% to just over R1.3-billion, of which acquisitions contributed about R21-million, or 1.6%.
Operating profit, however, decreased by 7.8% to about R99-million at an operating margin of 7.3%.
Looking forward, Dunford highlighted that Hudaco’s prospects are largely dependent on general economic activity which, in turn, is largely dependent on government policy and its implementation.
“We still hope that the “Zuma-hangover”, witnessed so far this year, will fade, and that the optimism around President Cyril Ramaphosa will translate into growth in the economy, as well as into investment in those sectors of the economy that are traditional Hudaco markets,” he said.