As JSE-listed Hudaco Industries continues diversifying into markets with stronger growth potential, acquisitions remain on the cards as the company feels the pinch of a stalled economy.
Businesses in the automotive, food and beverage and communication sectors were of particular interest to Hudaco, as these markets were considered attractive, with better prospects in terms of growth in a struggling economy.
“South Africa, right now, is a difficult place to do business,” said CEO Graham Dunford at the firm’s half-year financial results presentation, in Woodmead, on Friday.
Trading conditions remained “extremely tough” in the aftermath of a severe drought, an anaemic economy and a drawn-out low commodity price environment.
During the six months to May, Hudaco struggled with pricing owing to a weaker rand and, amid lower demand, aggressive pricing pressure reduced the return on sales, particularly in the engineering sector.
Further, consumer spending had slowed and would likely remain under pressure.
Three of the sectors served by Hudaco, namely mining, manufacturing and agriculture, were likely to stay depressed until commodity prices increased and the drought had broken.
“Businesses heavily exposed to these markets are bound to battle to get organic growth and will have to manage the relationship between sales, gross margin and expenses even more carefully until conditions improve,” said Dunford.
However, Hudaco had successfully implemented measures over the past few years to reduce its reliance on mining and manufacturing, embarking on acquisitions aimed at diversifying its markets.
In December, Hudaco acquired hydraulic cylinder manufacturer and repairer Hydraulic Engineering Repair Services (HERS) for around R64-million.
During the period under review, Hudaco also bought specialised fasteners distributor All-Trade Distributors and wireless, networking, VoIP and video products distributor Miro for R24-million and R254-million respectively.
Post the half-year, in June, the group acquired Brewtech Engineering for R47-million.
“Notwithstanding the substantial shift in Hudaco’s exposure away from mining and manufacturing over the past few years, these remain important sectors for the group and their fortunes still have a significant impact on Hudaco’s trading results,” he noted.
However, Hudaco delivered “satisfactory” first-half results under difficult economic circumstances, with welcome increases in revenues and earnings from sectors of the economy that had better prospects, said Hudaco FD Clifford Amolis.
The group’s basic and headline earnings a share decreased by 13.9% to 472c for the six months ended May 31.
Comparable earnings a share fell 19.7% to 440c during the first half of the year.
The comparable earnings for the six months to May 31 would have been down only 3% had it not been for a R50-million profit boost in the comparable period last year, owing to higher sales of alternative energy products as a result of load-shedding and a large contract for communication equipment.
Turnover for the period under review decreased 1.6% to R2.5-billion, while operating profit declined 15.8% to R246-million and operating margin was maintained at 9.8%.
Net cash generated from operating activities reached R172-million.
Operating expenses were well controlled, increasing 4% despite acquisitions made during the period.
Hudaco reduced its interim dividend by 5.6% to 170c a share.
“The financial position is in good shape. Bank borrowings normally peak at the half year as we stock up for what is usually a busier second half and, with the depreciation of the rand, our inventory is costing us considerably more than last year,” Dunford concluded.