Despite a difficult economic and trading environment, JSE-listed industrial products provider Hudaco remains cash-generative, with operations having generated net cash of R247-million for the six months to May 31.

Speaking at a presentation of the group’s results on Friday, CEO Graham Dunford emphasised that the results were reported during a technical recession for South Africa, with the tough trading conditions impacted on by the March 31 Cabinet reshuffle, a volatile rand and credit rating downgrades, as well as low business confidence.

“The tough environment resulted in lower demands and created aggressive pricing pressure in all of our businesses, the effects of which we are seeing,” Dunford said.

He noted that the engineering consumables division had a good start to the year, while the consumer-related products divisions came under pressure in the first six months.  

FINANCIAL RESULTS
Group sales were R2.7-billion for the six months, a 6.5% increase from sales in 2016, and include R259-million from acquisitions made after December 2015.

Operating profit increased by 9.4% to R269-million, which provided Hudaco with an operating margin of 10% – a “respectable” margin for the first six months, which included the Christmas and Easter holiday periods.

Comparable earnings a share increased by 10% to 483c, while basic and headline
earnings a share increased by 2% to 483c.

While basic and headline earnings were boosted by a downward adjustment to the fair value of (the) vendor liability in 2016, this was not the case this year, therefore the lower increase.

The interim dividend has been increased to 180c 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. Notwithstanding this, and the fact that we paid dividends of R116-million and R90-million for acquisitions, net borrowings increased by only R68-million in the half-year, to R973-million,” Dunford said.

He noted that borrowings were still well within the group’s self-imposed conservative guidelines and its available banking facilities. Unless the group makes further acquisitions, its usually strong second-half cash generation should help the group reduce its debt by year-end.

CONSUMER-RELATED PRODUCTS
The consumer-related products segment, comprising ten businesses, benefited from acquisition activity over the past few years and, in the six months under review, accounted for 50% of group sales and 62% of operating profit.

Despite tougher trading conditions, segment sales increased by 8.5% to R1.34-billion, of which R229-million was from acquisitions.

Operating profit increased by 10% to R177-million at an operating margin of 13%.

The businesses diversify our opportunities and market segment mix, [with] the automotive after-market [being] our biggest market sector and continuing to perform well, Dunford stated.

Meanwhile, power tool sales increased because of authority approval for the new
Makita MT series, Dunford said, adding that Miro had a good six months and integrated well into Hudaco.

However, the group’s security and communications businesses have had a difficult start to the year.

ENGINEERING CONSUMABLES
The engineering consumables segment, comprising 21 businesses, performed well, increasing sales by 5% to R1.33-billion, of which acquisitions contributed R30-million. Operating profit increased by 9% to R107-million at an operating margin of 8%.

Despite tough trading conditions in the markets for the engineering consumables division, which continues to create aggressive pricing pressure, Dunford noted some improvements such as performances from businesses supplying hydraulics, bearings, belting and electrical products.

“The other businesses in this sector struggled but, even though they were down on the prior year, they produced acceptable returns on sales,” Dunford acknowledged.

GPM (gearpumps) export sales were picking up, while the Dished Ends business, acquired in May, were integrated and performing to expectations, Dunford said.

PROSPECTS
Dunford said South Africa remained a “difficult place” in which to conduct business, with business confidence at a lower level than what it had been during the global economic crisis of 2008. He further raised concerns about the effects of the revised Mining Charter, in that “it has the potential to make the mining industry, together with much of its supply chain, ‘uninvestable’, resulting in a further significant loss of jobs”.

“The group’s strategy over the past few years of reducing its exposure to the mining industry has proven to have been appropriate. Unless business confidence improves, we believe that trading conditions in the second half of this year will also be challenging,” Dunford said.

However, he expects a stronger performance for Hudaco in the second half of the financial year, owing to an expected improvement in sales.

While most of the businesses in the engineering consumables segment would struggle to achieve organic growth, they generally had a high market share and remained the company’s “cash cows”, Dunford said, noting that the group continued to closely manage the relationship between their sales, gross margins and expenses.

“The businesses are mature and [operate] in mature markets. They generate the cash needed to fund the acquisitions that are providing us with growth going forward,” Dunford said, noting that the sectors in which these businesses operate remained important for the group, with their fortunes continuing to have a significant impact on Hudaco’s trading results.

Dunford concluded that the group continued to make good acquisitions, was pursuing a pipeline of potential acquisitions and targeting markets with stronger growth potential.