JSE-listed engineering consumables supplier Hudaco stresses that its prospects are dependent on how the economy performs and warns that it expects the economy’s performance for the remainder of this year and next to be no different to that of the past 18 months.

Nevertheless, the company, which on Friday posted its results for the six months ended May 31, said its high-margin, strong cash flow generating business that requires limited investment in fixed assets, made it resilient in difficult times.

“This set of results bears testament to that characteristic,” the company stated.

Despite every economic sector in which the company operates, including the manufacturing, mining, agriculture, electricity generation, transport, trade and construction sectors, having contracted in the first quarter of the 2019 calendar year, Hudaco still managed to increase its sales by 7.5% year-on-year to R3.2-billion.

Hudaco’s operating profit also increased by 2.4% to R297-million, and it achieved an operating margin of 9.3%.

“Comparable earnings per share were only slightly up by 0.5% to 520c and headline earnings per share were up by 0.9% to 533c. The interim dividend has been kept the same as in 2018, at 190c apiece.”

Hudaco stated that the load-shedding implemented by power utility Eskom in the first quarter, which contributed to a 3.2% decline in gross domestic product, had further dampened business confidence in South Africa.

CEO Graham Dunford pointed out that the company had also recorded flat growth in the rest of Africa during the period under review.

However, the company said it was encouraging that, under these severe trading conditions, ongoing operations in the engineering consumables segment managed to increase turnover while holding operating margins steady.

“The pressure felt by consumers has, on the other hand, clearly impacted on our consumer-related products segment, which had to give up margin in order to hold turnover.”

All 14 businesses in Hudaco’s consumer-related products segment experienced difficult trading conditions during the six months under review.

“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 65% of operating profit.

“The profits of all businesses in this segment, apart from our battery business (owing to load-shedding), experienced declines in the first half [of the 2019 calendar year],” it pointed out.

The segment’s sales had increased by 7.2% to R1.1-billion, of which R108-million (6.3%) was from acquisitions made in the second half of 2018. Operating profit decreased by 2.9% to R205-million at an operating margin of 12.

Again, all 21 businesses that make up Hudaco’s engineering consumables segment, reported tough trading conditions.

“Trading conditions were extremely tough in almost all markets served as shown by the first quarter economic indicators which reflect significant declines in mining, manufacturing, construction and agriculture. These gruelling trading conditions continued in the second quarter, creating aggressive pricing pressure.

“We are starting to see the benefit from the strengthening of our senior team and the synergies being achieved in the restructuring of the portfolios within this segment,” the company highlighted.

Sales in this segment grew by 8.2% to R1.4-billion even though there were no acquisitions. Operating profit increased by 10% to R109-million at an operating margin of 7.4%.

INVENTORY
Hudaco in November 2018  indicated that its inventory levels were higher than it had anticipated because of the businesses having been overambitious in stocking up for the last quarter of 2018.

During the six months under review, substantial progress had been made in getting inventories back in line. By the end of May, overall inventory was only 1% higher than in May 2018.

“Ordering was curtailed to better align with sales levels, but some products have long lead times so the full benefit will only come through in the second half of 2019. Working capital is a key focus of management and we expect further improvements by the end of the financial year.

“We continue to look for suitable acquisitions and, although we have a pipeline, nothing suitable crystallised during the period,” the company said.