Hudaco fighting headwinds not of its own making

Earnings up and debt down despite challenges, while action to recover ‘secret profits’ of R490m related to BEE transaction moves to commercial court.
Outboard motors are among the products imported by Hudaco. Image: Supplied

Hudaco Industries, which distributes branded automotive, industrial and electronic consumable products, released reasonable numbers in its results for the year to November 30 – but a looming court case hangs over it.

The integrated annual report has not yet been released but will provide far more detail regarding the period.

We do know that South Africa’s quarterly GDP growth rates for 2019 were (in sequence): -3.2%, 3.1%, -0.6% and 1.4%.

At the beginning of Hudaco’s financial year on October 1, 2018, the exchange rate was R14.20 to the dollar, and 12 months later (on November 30, 2019) it had crept up to R14.60. Import costs would have been subjected to the vagaries of the volatile exchange rate during the year. Even though Hudaco follows a hedging policy to safeguard against a downward movement in the exchange rate, this would result in expensive cover if the rand strengthens in the cover period.

Business operations were further negatively impacted by load shedding and the downsizing of large businesses. 

Financial results

Despite the above headwinds, Hudaco grew headline earnings by 5.1% to 1 355 cents and comparable earnings by 3.5% to 1 240 cents.

Turnover was up 5.1% to R6.7 billion, while operating profit increased 6.9% to R701 million. Cost of sales stood at 63.6% of sales. Comprehensive income was R472 million (2018: R403 million), while finance costs amounted to R103 million (2018: R91 million).

Return on equity increased from 16.3% to 17.4%, and cash generated from operations was an improvement at R853 million (2018: R468 million).

Goodwill, at R1.512 billion (2018: R1.505 billion), comprises 30.6% of total assets (2018: 29.8%). The R7 million increase resulted from acquisitions during the year.

The company paid dividends of R189 million (2018: R211 million). The net bank overdraft at the end of the year was R90 million (2018: R149 million).

Bank borrowings have reduced from R1.2 billion to R1.1 billion. Hudaco points out that it has significant additional borrowing facilities available for further acquisitions.

Lawsuit against Bravura and others

The legal action against Bravura, Cadiz and certain associates has been moved to the commercial court. This will result in a delay. The legal action concerns an action to recover so-called secret profits (in the region of R490 million) made on the financing arrangements around the Hudaco black economic empowerment (BEE) transaction that ran from August 2007 to February 2013.

Acquisitions

On March 1, 2019 the group acquired 100% each of Dosco Precision Hydraulics and Industrial Filtration Maintenance for a total consideration of R10.2 million.

Hudaco is a mid-cap share with a price-earnings ratio of 7.52 and a dividend yield of 5.89%.

The share price, which has been in a steady decline for the past year, is currently sitting at R102.43. It has battled through tough trading conditions and low consumer confidence – and is one of many businesses struggling under the weight of incompetence not of its own making.

 

Tough year for the Hudaco share

 

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I like this company actually.

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