Hudaco’s interim results to end-May 2021 look spectacular when compared to its prior period numbers, but those were mired in hard lockdown, creating a distorted picture.
Its interim results for the 2019 financial year are far more comparative as a ‘normal’ trading period.
Against its half-year results for 2019, Hudaco’s revenues grew 6.5%; margins expanded, seeing gross profit rise 9%; operating leverage rallied, resulting in operating profits increasing 20%.
Comparable earnings per share (EPS) have leapt 32% since its first half of 2019.
In other words, Hudaco group is flying.
Not only is the group’s top-line growth encouraging, but the lean operating structure has seen this growth affect its bottom line.
Hudaco is a diversified supplier of automotive, industrial and electronic consumable products across South Africa and southern Africa. In this aspect, the group is not just a long-running, good-quality mid cap, it is also a great bellwether for broader aspects of the SA Inc economy that is services.
The company has seen a strong recovery in the domestic mining, automotive and manufacturing sectors.
Healthily, management highlights that revenue has been driven by volume growth as oppose price growth (as an importer, a strengthening rand sees price decreases).
This perhaps echoes the strong Absa second-quarter 2021 Manufacturing Survey results, showing rising domestic confidence, adding another data point to the recovery story.
Is SA Inc recovering? Things are never that simple …
Over and above the Covid-19 third wave, management highlights major problems in South Africa being load shedding, inefficient ports (Hudaco specifically references Durban’s port authority as “useless”), and crumbling municipal infrastructure.
Globally, the group sees supply chain disruptions, shipping challenges as well as parts and chip shortages as negatively impacting the reporting and current trading periods.
Interestingly, management note that parts shortages have shifted the pricing power towards suppliers that have the parts and, to some degree, the expansion in the group’s gross margins (up from 36% in the first half of 2019 to 36.9% in the first half of 2021) could be attributed to this.
The group currently has 3.1 months’ worth of inventory on its floors (though it notes that it would prefer closer to 3.5 months’ worth), which does set it up well for the current period.
Looking forward, Hudaco’s management is “cautiously optimistic”. The group is likely to continue this strong run-rate, though management sees the third wave of the pandemic and supply chain issues as key risks.
The group’s second-half period is typically seasonally stronger than its first half, but ‘typical’ is not the world I would use to describe how the world is currently trading.
Demand globally has rebounded far faster than supply chains have expected.
Coupled with logistic market chaos and Covid/lockdown dynamics, there are strange shortages across a range of items.
Each management team I speak to is ordering more stock than they need (including Hudaco), thus aggravating the short supply and straining supply chains even more.
This is probably a topic for another time, but it does add to the assertion that the pricing power has swung strongly towards those that have supply, which I suspect will become a recurring theme in the months ahead.
Collectively, though, the rebounding domestic manufacturing, automotive and mining sectors and the rising pricing power from Hudaco’s 3.1 months’ worth of inventory on hand, should all translate into a strong second half for a stock that is trading on a 12-month trailing 8.64 x price-earnings ratio (per comparable EPS).
Perhaps more importantly, Hudaco serves to highlight the quality, resilience and – dare I say it! – greenshoots in SA Inc’s off-the-radar industrial counters.
Listen to Keith McLachlan’s MoneywebNOW podcast interview with Mustek CEO David Kan (or read the transcript here):
Keith McLachlan is investment officer at Integral Asset Management.
* Integral Asset Management may hold Hudaco Industries in some portfolios.