Over five years, which means since just before the Covid chaos, Hudaco’s share price has achieved a compound annual growth rate of an impressive 14%.
It gets even better when you remember that the dividend yield has been solid throughout that period and currently sits at 5%.
Clearly, Hudaco has beaten the broad market index. But how has it done against its peer group, particularly those with strong international interests? This tells a different story, as Invicta and especially Argent Industrial have outperformed Hudaco over that period. Where Hudaco’s share price is 93% higher over five years, Invicta is up 174% and Argent has blown both of them away with a 358% increase!
Inflation has been the rising tide for all these boats in recent years. Industrial groups with fixed assets enjoy inflation, as much of the industrial plant has already been built at “old” prices, so being able to sell the output at “new” prices in inflationary conditions tends to boost return on assets. Of course, this only holds true if costs are kept under control. If variable costs run too hot, then all the benefits of inflation disappear quickly.
With Hudaco having released numbers for the 12 months to end-November 2024, it’s worth recapping how poor the interim period was. In the six months to May 2024, sales fell 6.3% and operating profit was down 11%, leading to a nasty decrease in headline earnings of 15.3%. The interim dividend was left unchanged despite the drop in bottom line, so Hudaco adjusted the payout ratio to avoid a dividend decrease.
The engineering consumables segment wasn’t the issue, as sales were up 4% and operating profit jumped 20% there. All the trouble lay in the consumer segment (contributing 43% of operating profit), where sales and operating profit fell 15.7% and 36% respectively. Hudaco laid the blame at the door of seasonal weather changes (which affected Cadac’s heating products) and delays at the ports, as well as the sudden disappearance of load-shedding and the overstocked environment that the entire energy sector found itself in. Hudaco was one of many companies caught by that surprise.
The full-year result saw headline earnings drop 6.3%, a useful improvement from the disaster in the interim numbers but obviously still disappointing. The dividend was left flat once more, justified by strong cash generation. In truth, companies only cut their dividends as a last resort as it sends a terrible signal to the market.
Hudaco laid the blame at the door of seasonal weather changes (which affected Cadac’s heating products) and delays at the ports, as well as the sudden disappearance of load-shedding
There was some improvement in the consumer segment in the second half but it still ended the year deep in the red, with sales down 12.3% and operating profit down 19.9%. With the overstocked energy business sorted out, management blamed various declines in the wholesale, retail and security sectors.
Retail share prices on the JSE certainly suggest otherwise, so those excuses are starting to feel stretched. The ports and load-shedding issues are out of Hudaco’s control, but the rest is a matter of choosing where to focus and with which products.
Surprisingly, the engineering consumables business had a disappointing finish to the year. Turnover was up just 0.6% and operating profit was up 7.6% for the year, both far lower growth rates than we saw in the interim period. To make it worse, acquisitions boosted 2024 vs the comparable year based on the timing of the deals. Exposure to agriculture, platinum mining and manufacturing hit the business.
The recently announced Isotec deal is Hudaco’s largest acquisition to date and should give the 2025 numbers a lift. But the important metric for investors to focus on is organic growth, with the overarching theme in the Hudaco numbers being one of too many excuses, in the consumer segment in particular, and the maintenance of the dividend to paper over the cracks. Though the narrative in corporate South Africa has been somewhat mixed around the GNU, there’s enough underlying positivity to suggest that Hudaco’s challenges may not be macro in nature.
The share price seems to have run out of puff, with range-trading having been the order of the day since November 2024. On a p:e of 10, the multiple expansion story of 2024 has played out. From here onwards, earnings growth is needed.
The dividend yield means that investors are being paid to wait, so holding and giving management a chance to deliver into an improved macro story in 2025 may be prudent. If the share price breaks below the current range though, rather get out of the way — the p:e could quickly move to 9, and earnings growth looks unlikely to offset such a move.
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