JSE-listed Hudaco was optimistic of resolving its tax challenges, but warned that it was a slow process and could take two to three years.

Speaking at the group’s interim financial results presentation, financial director Clifford Amoils said the South African Revenue Service (Sars) had slapped Hudaco with R1.9-billion in assessments, including interest and 200% penalties, for the financial periods from 2007 until 2011, relating to the group’s 2007 black economic-empowerment (BEE) structure.

In a notice to Hudaco, in November last year, Sars had outlined a series of other complex arrangements connected to the structure and entered into by third parties.

“Hudaco had no knowledge or suspicion of these [complex arrangements] and is confident of refuting the assessments,” Amoils stressed.

The maximum potential contingent liability was considered to be R1.3-billion, plus a further R600-million assumed for the 2012 and 2013 financial years.

“Hudaco has lodged objections to the assessments and will continue to pursue all appropriate legal remedies,” the group said.

While the case was being argued, Hudaco agreed to pay R20-million a quarter “on account” until the conclusion of the legal process, and should the company be found clear of liabilities, the funds would be refunded with interest.

He emphasised that the fees were not a payment of liability but formed part of a “pay now, argue later” arrangement.

The group had, in response to the notice and changes in tax legislation, requested Cadiz to gross up the dividends in Hudaco subsidiary Barbara Road Investments, but instead Cadiz had exercised its right to redeem its preference shares investment of R2.18-billion, resulting in Morgan Stanley, the existing funder of the BEE transaction, putting debentures to Hudaco.

As a result, Hudaco had internally financed – since February – the BEE funding arrangements that were intended to be financed externally until August 2017.

The company declined to further delve into, or speculate on, the details and prospects of the case, owing to its sensitivity and confidentiality.

“We don’t want to conduct this case in public and answer 'what if' questions,” said CEO Stephen Connelly, requesting shareholder understanding of this matter and assuring investors that the tax issue was being taken seriously but without shifting focus from operations.

The BEE financing restructure was expected to lower basic earnings and headline earnings by about R33-million, or 103c a share a year, and the group income statement would no longer reflect R201-million a year in received preference dividends or R234-million a year in debenture interest paid.

However, the BEE shareholders would continue to hold their shares in Hudaco Trading and the BEE credentials of all entities in the Hudaco group would remain intact, the company assured.

The restructure would impact basic and headline earnings a share for the year to November 2013 by 77c, with a further 17c charge owing to a securities transfer tax payment of R5.5-million in the redemption of the preference shares.

The impact of the restructure on basic and headline earnings for the six months to May 2013 was 43c.

FINANCIAL RESULTS

Hudaco posted a 14% rise in sales and an 8% increase in operating profit during the six months to May 2013.

The group achieved a turnover of R1.8-billion during the interim period under review, up from the R1.59-billion recorded in the prior corresponding period.

Operating profit reached R195-million during the six months to May 2013, compared with R181-million in the six months to May 2012.

While total comprehensive income for the period rose 2% to R148-million, profit for the period remained flat at R143-million.

Basic and headline earnings a share were 448c during the six months under review, up from 441c in the corresponding period the year before.

“The group continues to deliver satisfactory results in an uncertain and difficult economic environment. In particular, mining activity continues to be beset by work stoppages and exchange rate volatility makes pricing difficult,” the company said in a statement.

Hudaco’s units serving underground mining, particularly platinum and gold, had been hard hit by work stoppages since August last year.

Sales volumes in these sectors had only started to recover towards the end of the first half, the company noted.

Sales volumes in opencast mining, mainly coal and iron-ore, remained “closer to normal levels” as these sectors were not impacted as much by the stoppages.

The company pointed out that the good performance of the consumer related products segment had offset the weak performance in the engineering consumables segment.

Hudaco declared a dividend of 155c a share for the first half of 2013.