23 May 2019 10:42:42 AM

Hudaco Industries' Turnover up 8%

- 2019-02-01 11:23:19 AM
Hudaco Industries released its abridged audited results for the year ended 30 November 2018. 
Value added includes product specification, technical advice, application and installation 
training and troubleshooting, combined with availability at a fair price.

2018 began with much optimism but by year end hopes were frustrated, for the time being at least, by a combination of economic inertia and political rhetoric. We started the year with a new president and a new hope for our country and its economy. In his maiden State 
of the Nation Address, the president outlined a recovery plan for South Africa, much of which we felt was likely to translate into investment in those sectors of the economy that were traditional Hudaco markets. This would have enabled those of our businesses that have 
been in austerity mode for the past few years to thrive once again. Notwithstanding the positive steps that have been taken to restore good governance, tackle corruption and boost the economy, specifically mining and manufacturing, it is clear that past mismanagement means it is going to take longer than anticipated for us to see the benefits. Unfortunately this delay had a negative effect on the economy, with the first two quarters showing negative growth pushing South Africa into a technical recession, the first since 2009.

The extreme volatility of the Rand in 2018 made pricing exceptionally challenging. The currency strengthened in the first four months and subsequently declined in the remaining eight months. In the period March to September, the Rand weakened 33% against the US$ from 
R11,67 to R15,54. The last quarter of our year is generally our strongest but this year, although we managed to grow sales marginally, the gross margin suffered as the decline in the currency was too sharp for us to be able to put through the corresponding increases in 
selling prices. The more the economy came under pressure from the likes of increases in VAT, petrol, currency and drought the more pressure was put on prices.

There were two notable changes in turnover from the market sectors we serve. Sales to the wholesale and retail sector grew 17% acquisitions and MiRO) and to the security sector shrank 7%.

Annual sales were up 8% to R6,4 billion, whilst operating profit decreased 3% to R655 million. Ongoing operations' sales for the group increased 3% to R6 billion, whilst operating profit declined 11%, with both segments battling with pricing in a difficult economy and extremely volatile exchange rates. Sales from ongoing operations in the consumer-related products segment were up 6% while operating profit decreased 1%, whereas engineering consumables' sales from ongoing operations increased 1% and its operating profit declined 14%.

Headline earnings per share were up 3% to 1 289 cents, while comparable earnings per share fell 4% to 1 198 cents because a positive fair value adjustment on the vendor liability (required to be reflected in headline earnings but, in our view, not an item that should 
be in comparable earnings) was deducted. The return on equity was 16%.

The final dividend has been maintained at 380 cents, giving us a total dividend for 2018 up 1,8% at 570 cents. Comparable earnings cover the full dividend 2,1 times, which falls within our long-standing dividend policy range of paying between 40% and 50% of comparable earnings.

Financial position
The financial position remains healthy but the cash generation was not as good as usual, mainly because of an investment in readily saleable inventories that was higher than planned. The group had R1 163 million in net bank borrowings at year end, up from R860 million in 2017, after R242 million was spent on acquisitions. More importantly, interest payments were covered seven times by operating profits, compared with our internal benchmark of at least five times. We have significant additional bank borrowing facilities available so there is still capacity for acquisitions, and we continue to look for businesses in growth areas to further diversify and strengthen our portfolio.

Inventories at year end of R1 822 million are higher than we anticipated because some of our businesses turned out to be over ambitious in stocking up for the last quarter. Rutherford, Partquip and MiRO have a total of R140 million more stock than last year. It is all run-rate stock which will turn into cash in 2019. Inventories in the rest of the group are up 8,5%, excluding take-on inventory of acquisitions of R66 million. The return on net operating assets including goodwill (RONA) in 2018 is 17,3%.

Consumer-related products
The consumer-related products segment comprises 14 businesses. In 2018, it made up 55% of Hudaco's sales and 65% of operating profit.

The segment increased sales by 14% to R3,5 billion and operating profit by 8% to R462 million. Operating profit margin was 13,2%.

MiRO, our distributor of wireless connectivity products, achieved another year of strong growth as it continued to add to its impressive basket of wireless technology products. The automotive spares and accessories businesses, Partquip, A-Line and Abes, had another good year. There was good organic growth from our battery businesses of SBS, Deltec and Eternity. This mainly in the alternative energy and wholesale and retail sectors.

Rutherford, the second largest business in this segment and the main activity of which is the distribution of Makita power tools and garden equipment, had a tough year, as sales to the big box stores declined. The move at the beginning of the year to a larger, more effective distribution centre at City Deep has already started paying dividends, including through the very smooth physical integration of Boltworld, which was acquired to bolster FTS, the fastener division of Rutherford. The combined business now trades under the name FTS Boltworld.

Unfortunately, we had disappointing results from our security businesses, Elvey and  Pentagon, and our communications business, SS Telecoms. These businesses have dampened what would otherwise have been a good result for the consumer-related products segment.

Engineering consumables
The 21 businesses that constitute engineering consumables made up the other 45% of sales and 35% of operating profit.

The segment sales were up 1,7% to R2,9 billion whilst operating profit decreased by 9,7% to R246 million. Operating profit margin decreased to 8,4%.

The majority of businesses in this segment distribute mature industrial products to mature economic segments (mainly mining and manufacturing). These market sectors have been in decline for the last approximately ten years partly due to natural boom and bust cyclicality of resources but also in recent years due toconditions in South Africa not being investment friendly. Whilst Hudaco businesses 
in this segment are now sized correctly for current market conditions, profits are not growing. We are modifying the structures of some of these businesses to extract synergies where it makes sense. It is important to note however that the returns in most of these businesses are acceptable and they generate the cash we use to diversify and expand our portfolio of businesses.

Deutz Dieselpower and our steel businesses of Ambro, Bosworth and The Dished End Company performed well. HERS, supplying automotive drive trains to the platinum mining sector, also had a much-improved year. Disappointing results came from Astore Keymak (thermoplastic pipes and fittings), Powermite (electrical), Ernest Lowe, Berntel and GPM (hydraulic and pneumatic businesses) and Joseph Grieveson.

Lawsuit against Bravura and certain associates
We are pleased to report that a court date has now been set for our claim against Bravura, Cadiz and certain of their associates for up to R490 million. The matter is to be heard in the last quarter of 2019. Hudaco has brought the action to recover, inter alia, secret profits made on the financing arrangements around the Hudaco BEE transaction that ran from August 2007 to February 2013. We note with interest the announcement by another listed company that was also advised by Bravura on its BEE structure that it too has settled with SARS.

Prospects for Hudaco will depend largely on how the economy performs and, in 2019, that is bound to be influenced by the lead-up to and outcome of the national elections in May. We expect that in the first half we will experience more of the same inertia as business adopts a wait and see approach. We are hoping for a positive electoral outcome coupled with some meaningful action and implementation from the government on the economic front. This should kick-start the economy and will hopefully translate into investment in those sectors that are traditional Hudaco markets. Our businesses are well placed to benefit immediately from such a scenario. We expect a stronger year in cash 
generation as the excess stock in our mainly growth industry businesses is sold. 

We look forward to the contribution from the new senior management we have brought on board to strengthen our team, as well as the synergies to be gained from the planned restructure of the engineering consumables portfolio and the bolt-on acquisitions in the consumer-related products segment.

Declaration of final dividend no 64
Final dividend number 64 of 380 cents per share (2017: 380 cents per share) is declared payable on Monday, 4 March 2019 to ordinary shareholders recorded in the register at the close of business on Friday, 1 March 2019. 
Royden Vice, who was an independent non-executive director from June 2007 and served as chairman of the board from March 2008, retired from the board on 5 April 2018 after the annual general meeting. He was a great  asset to the group and his contribution will be missed both personally and professionally. We wish him well in his retirement. On Royden's retirement, Stephen Connelly assumed the role of non-executive chairman and Daisy Naidoo was appointed lead independent non- executive director.

We welcome Louis Meiring as an executive director with effect from 14 January 2019. Louis, an electrical engineer, was with the Zest WEG 
Group for the past 27 years and served as its Group CEO from 2012. His extensive experience of the engineering consumables industry will 
significantly enhance the skills, capacity and leadership capability of the Hudaco executive team.
Approval of financial statements
The financial statements have been approved by the board and abridged for purposes of this report. Grant Thornton has signed an unqualified audit opinion on the annual financial statements. Both the financial statements and the auditor's report are available for inspection at the company's registered office.

This abridged report is extracted from audited information, but is not itself audited.
Hudaco Industries is a South African group specialising in the importation and distribution of high-quality branded automotive, industrial and electronic consumable products, mainly in the southern African region.