A much-improved trading environment enabled investment and property holding company ARB Holdings to achieve increases across the board during the six months ended December 31.

Following a year of lockdowns and restrictions induced by the global Covid-19 pandemic, which weighed on the company’s 2020 full-year results, ARB “bounced back” from these adverse conditions to report a solid performance for the period under review.

“Key achievements during the period included significant improvements in operating profit and operating margin. This was largely the result of our trading environment improving significantly over the six months, despite the economic effects of the pandemic-related lockdowns applicable during the period,” says ARB CEO Billy Neasham.

ARB reported a 59.2% increase in operating profit to R169.2-million for the six months, with an operating margin of 11.3% of revenue, a rise from the 7.5% reported in the corresponding period last year.

Increased margins in both major trading divisions enabled a gross margin increase from 25.1% to 26.5%.

ARB has investments in closely related trading and distribution businesses, including 74% of ARB Electrical Wholesalers and 60% of Eurolux.

During the half-year to December, ARB’s earnings per share increased by 24.8% to 41.02c apiece and headline earnings per share were up by 25.9% to 41.12c.

“ARB’s financial position is robust and its cash flow has been resilient in challenging circumstances,” he says, noting that the results for the six months demonstrated the company’s ability to bounce back from adverse trading conditions while reducing the costs of a largely fixed-cost business to maximise the operational leverage from an improvement in revenue and gross margin.

Revenue for the period climbed 5.3% to R1.49-billion.

Revenue from the electrical division, which comprises ARB Electrical Wholesalers, GMC Powerlines, ARB Global, CraigCor and CE, increased 5% and operating profit was up 60.9%, mostly due to an improvement in the gross margin from trading and other cost- saving efforts.

“During the period under review, management undertook a number of right-sizing initiatives, [such as] closing two branches, retrenching surplus employees and freezing a number of vacant positions,” he explains.

The group also assessed the footprint of each branch with a view to reducing excess space, simplified systems to reduce staff requirements, emphasised staff costs and time management and conducted a thorough review of all expenditure and eliminated nonproductive costs.

“The new warehouse management system at the Lords View distribution centre went live on December 14, but, as is to be expected, it will take time to settle down and then be optimised. It is estimated that this process will take another six months,” Neasham comments.

In the lighting division, which incorporates Eurolux, Radiant and Cathay Lighting, revenue increased by 5.8% and operating profit by 94.9%.

“Profitability improved substantially over prior years, largely [due] to the effects of the rationalisation from the integration of the Eurolux/Radiant facilities in Johannesburg, which is now starting to reflect significant savings,” Neasham explains.

While the lighting division was overstocked at the June financial year-end, this, ultimately, positively impacted on the results in the six months under review and led to a slight increase in market share.

“Having stock available was a significant factor in the group’s success during this period,” he says, noting that the stock had been acquired at favourable rand:dollar prices.

“The stock has been reduced by almost R90-million and is more balanced than at the end of June 2020; however, given the long procurement lead times of this business, stock management will continue to be a major focus.”

Further, the restructuring of the lighting division is now finalised, with the right-sizing of the business for the “next normal” resulting in a substantial reduction in the cost base.

This included the rationalisation of the Johannesburg warehouses, retrenchments and a reduction in contract workers. In addition, transport services have been put out to tender, which should result in further savings.

“Unfortunately, both divisions went through Section 189A retrenchment processes during the period and froze a number of vacant positions as a result of the effects of the pandemic.”

Meanwhile, revenue decreased by 4.9% and operating profit increased by 2.9% in the corporate division, which comprises the property portfolio and the Xact ERP Solutions business.

“The results are down, but in line with expectations, given the fixed nature of the property rental income and the reduction in rentals received during the lease renewals on July 1 as a result of Covid-19.”

The group ended the six months to December with R304.7-million cash on hand, which is a significant increase on the cash on hand of R84.9-million in the corresponding period of 2019.

“Cash generation [was] very positive during the last six months, partly as a result of the improvement in working capital management, particularly with regard to stock levels in the lighting division; exceptional debtors’ collections in the electrical division; cost savings and efficiencies, and [also as a result] of the conscious decision not to pay a dividend at year-end to retain cash reserves during the uncertainty of the Covid-19 pandemic.”

ARB has restructured its cost base to be profitable at uncertain trading levels.

While it is expected that it could take two to three years for life to normalise, Neasham points out that some economists believe that it could take up to four years for South Africa’s economy to revert to 2019 levels.

The visibility for planning purposes remains low as large project work slows, while the group and its customers face pressure from credit insurers, which are cutting cover limits, increasing co-insurance levels and charging increased premiums.

“We remain strongly positioned to service the electrical needs of Southern Africa, which will provide above-average long-term growth and returns as the continent increases its electricity generation and use,” he concludes.

ARB did not declare an interim dividend for the six months to December.