Hudaco, the 130-year-old company which listed (for the second time) on the JSE in 1985, has managed to grind out annual profit growth of 25% from a 12% rise in turnover. Like Reunert, the industrial consumables group appears to have rekindled investor interest with its shares returning 69% over three years. The FM spoke to CEO Graham Dunford.
In your results commentary you’re scathing about the government and you’ve called for “bold moves” to create an environment for business to thrive. What would you like to see being done?
As we put it, it’s not rocket science. They know what they have to do; they’re very good at talking about it but there’s just no implementation or follow-through.
You say that “in the right environment, Hudaco has outstanding potential”, which is also a pretty bold claim. If there was even a slight improvement in our economy, would that have a significant multiplier effect on your business?
No doubt at all and you can see it in our numbers. The leverage is there because the expense base is pretty much covered. So everything else just falls straight to the bottom line. Over the past couple of years we’ve tried to get Hudaco as lean and mean as possible. The consolidation of some of the businesses — putting three into one, though with each business having a sales team and identity — has brought expenses down. So now, everything we can add to that just falls to the bottom line.
So is Hudaco quite a different beast from what it was a few years ago?
I think we’re totally different to where we were 10 years ago. Hudaco was predominantly mining and manufacturing, but that’s just been going backwards for the past 20 years, for numerous reasons. And we saw that we needed to diversify. Our mining and manufacturing is down to 30% of the total group.
You also say that the market share your businesses have gained will be maintained. What gives you that confidence?
We tell it like it is. But over the past years I think we’ve built to a new level. In this economic climate it’s the smaller guys that take the most strain. They can’t afford to run their businesses because either they don’t have generators or solar panels and they don’t have the capital to increase the amount of stock. Those poor guys are disappearing. At some stage, maybe they’ll come back but the market share gains that we’ve got — I can’t see a reason we would need to give them up.
What are you hoping for from Hudaco Energy? I guess it’s a no-brainer to get involved in alternative power supply.
The problem with it is every Tom, Dick and Harry’s trying and anybody with a bakkie is an installer. But there’s no doubt Eskom’s a disaster and is going to be a disaster for a while. We moved into batteries a few years ago; our first battery business was an automotive business that we bought — Deltec — and then we bought SBS, which was a UPS battery supplier, and then we bought Eternity, which supplies traction batteries for forklifts and mining. Our Deutz diesel engines with generators are having a really good time right now, and alternative energy is about 5% of our business. In December 2021 we said, OK, we need to do this properly, so we got a full team on board, we found the right products from China and we’ve brought in a whole lot of stock. That’s one of our growth areas. Eskom is not going to fix their problems, I don’t believe it for one minute and if they do start supplying energy it’s going to be at a helluva cost.
How big could this business become?
If you look at our market sectors, definitely in our top five. If you think about the potential in South Africa, it’s really the listed or bigger players that will get through this. The problem now is that people are bringing in junk, there aren’t enough quality installers and they’re not installing them correctly. With tier 1 products, the banks will finance a solar system on your house, for example. It’ll be those companies that have got the quality products that are going to get the 10-year warranties, and banks will finance that because they know if something goes wrong, you can go back and get it fixed. Whereas with the bakkie brigade guys, you’re not going to find them in a few years’ time.
It feels like the investor community is waking up to Hudaco, Reunert and Invicta all of a sudden. Are you seeing this?
We’re fortunate in that our two biggest shareholders are about 10% each, which is what we like; we don’t have any of them sitting on our board trying to tell us what to do. We’re disappointed in our share price but it’s not our job to move it. If you look at what it was in 2018/2019, it was around R150 — we’re now at R159 but we’re making 60% more in earnings. The problem is that everyone is saying South Africa Inc is in a heap, South Africa is a disaster, we’re not going to get any growth so rather put your money offshore, but there are some really good South African companies that are producing fantastic results. That’s why we’re buying back shares because on the profits we’re making, at R150 a share, you’re looking at a 6% dividend yield. Where can you buy a R9bn business that makes these kinds of profits, on a 7.5 p:e?
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