Industrial distributor Hudaco Industries was “in good shape” to continue its good performance in 2013, as exports from South Africa to neighbouring countries grew and the global economy showed signs of improvement, CEO Stephen Connelly said Friday.

“The global economy is probably through the bottom, which could result in commodity prices rising. We have seen some signs of this in 2012 and hope it will continue into 2013,” he stated at the presentation of the JSE-listed company’s 2012 results, in Johannesburg.

Connelly’s statement came on the back of a 10% rise in the company’s turnover for the year ended November 30, 2012, to about R3.5-billion, up from R3.1-billion the previous year. Nevertheless, gross profit slipped some 7% to R1.35-billion on the back of weakening rand conditions, which resulted in price volatility.

Headline earnings a share of R10.71 were up 5% on that of the previous financial year.
The company expected trading conditions to remain muted into 2013, but planned to take advantage of expected strong growth on the continent.

Adding to Connelly’s optimism was growth in opencast mining, which was beneficial to the company’s subsidiary Filter and Hose Solutions, which distributes filter products. Similarly, sales of digital communication equipment were also expected to continue growing.

However, he noted that the company’s engineering consumables segment was expected to face some tough conditions in the next year, as the local mining industry was plagued with challenges that included lower prices than during the ‘boom’ five years ago, labour unrest, regulations and a lack of infrastructure and power.

“On top of that, we find that we are moving, in a ten-year period, from a low-cost electricity country to a high-cost electricity company. The mines are having to cope with that as well,” Connelly said.

Further, although mining in South Africa’s neighbouring countries was growing, problems were emerging in the form of poor-quality coal and regulatory challenges in relation to transporting coal to the coast and constructing railway lines to execute this.

However, construction activity seem to have started to turn the corner, “We do not think it is going to be a hockey stick, you know, straight upwards, but we are hoping that the recent [anticipated] improvement [in earnings] reported by Group Five will be followed by others,” he noted.

The company’s consumer-related products segment was expected to continue to be impacted on by the slowing growth in the power tools market, while South Africa’s migration from analogue to digital terrestrial television faced possible delays. However, the automotive parts aftermarket had steadied.

The security equipment market was also anticipated to improve later in the year.

TAX AND BEE

Meanwhile, Connelly said he was confident in Hudaco’s position in the South Africa Revenue Service’s (Sars’) dispute of the company’s black economic-empowerment (BEE) structure, which was implemented in 2007.

Hudaco was issued a notice by Sars in December, wherein it communicated concern that Hudaco’s BEE structure was possibly a scheme to avoid taxes.

Sars intended to assess the situation and Hudaco’s potential exposure between 2007 and 2012 to an estimated R65-million in interest, and R92-million in secondary tax credits, besides others.

However, Hudaco financial director Clifford Amoils said the numbers were disproportionate to the tax proportion of the benefits of the BEE structure.

“The notice was issued over the holiday season, which gave us no time to consult the counsel and respond adequately by the set deadline…an adequate extension to do so was not granted,” he stated.

Amoils indicated that the counsel reviewed all documentation and established that Hudaco had a strong case, which would be assessed by Sars in due course.

“We plan to vigorously contest any assessment issued,” he assured.