The market is rarely wrong. But is it perhaps erring on the side of caution in its rating of three of the JSE’s top industrial stocks — Hudaco, Argent and Invicta?
All three counters issued impressive financial results recently and all showed considerable resilience in the face of ongoing load-shedding, logistical hitches, higher interest rates, testy inflation and a generally dour business mood.
The disconnect between the robust profit performances and the dismissive market ratings might offer investors an opportunity to snag strong capital growth and lock in decent yields for the years ahead.
At the time of writing, Hudaco — which dabbles in a vast array of industrial products, from bearings to motors, auto spares, gas, batteries and security products — was trading on a trailing earnings multiple of 7.5 and a dividend yield of over 6%. The share price is up just more than 5% this year despite Hudaco pushing up headline earnings and dividends 8% to 928c a share and 325c a share respectively for the interim period ending May.
Argent, which has reshaped its local operating base while building a viable specialist engineering niche in the UK, trades on a historic earnings multiple of less than four and a yield of close to 6%. The company’s share price is also up only about 4%, even though year to end-March headline earnings were hiked 21% to 411c a share and the dividend more than doubled to 95c a share.
Invicta, whose operational profile was sharpened by new CEO Steven Joffe, trades on an earnings multiple of less than six and offers a yield of about 3.5%. The share price is up a mere 4.8% this year — seemingly oblivious to the fact that Invicta pumped up headline earnings from continuing operations by 42% to 488c a share and nudged the dividend up 11% to 100c a share.
It’s possible that all three counters are being painted with an SA Inc brush. Perceptions are that the current structural challenges hindering growth in the local economy might not be resolved any time soon. Eventually such prolonged hitches will erode the earnings base of even the best-run industrial group.
And it’s not like there’s not a tangible sense of frustration, with some executives not holding back on their assessment of the government’s role in rebuilding the economy and renewing investor interest in the country.
Argent’s plain-speaking CEO, Treve Hendry, wrote in his official commentary that accompanied the group’s results: “Domestically the consequences of the perfect Fun Show put on by the current elected party has made an absolute mess of the SA markets and is the inspiration to place one’s operations and production elsewhere in the world.”
Graham Dunford, CEO of Hudaco, says: “SA Inc is in really tough times, and will continue being in tough times for a while because we got people who can’t make decisions or get things done.”
The billion-rand question is whether investors can bank on an eventual economic recovery and on these three industrial counters enduring this uncomfortable impasse profitably.
Dunford summed the situation up succinctly at last week’s investor presentation when pointing out that the group was 48% ahead of its financial 2019 operating profit and headline earnings numbers.
“We are almost 50% more than the 2019 numbers, but our share price is more or less at the same levels. Everyone says Hudaco is SA Inc. But I don’t think SA Inc has moved up 50% in the past two years … unless I missed something. Though we do supply a lot into SA Inc, I think we are better than SA Inc.”
We are grinding it out … every day is a bloody slog
— Graham Dunford
Dunford did add, though: “We are grinding it out … every day is a bloody slog.”
Hudaco’s advantage is its low-risk customer spread. Its receivables book of R1.37bn covers 30,000 active customers, which means the individual transactions are relatively small, with a low level of tender, contract or project business. Cash generated from operations was a reassuring R893m.
ClucasGray portfolio manager Brendon Hubbard says diversified industrial counters are fortunate in that three underlying drivers still remain. “Mining is robust, globally; the automotive sector has restarted and the agricultural sector is seeing some decent crops.”
Hubbard says debt levels at a number of industrial counters had been markedly reduced and smart share buy backs have been hugely earnings accretive. Hudaco, Argent and Invicta have all been actively buying back their own stock.
Hudaco indicates it is in the convenient position of being able to consider further share buy-backs, debt culling, dividend payment and pursuit of well-priced acquisition opportunities.
Argent and Invicta seem to have more specific goals — for now.
Argent, which now generates almost 40% of its R2.45bn revenue outside South Africa, looks certain to continue expanding abroad and is pushing export business. At the end of March, R170m of Argent’s R293m profit before tax was generated outside SA. This is bias that will undoubtedly extend in the next few years.
Hendry notes that Argent’s planned operational investments for Fluid Transfer, Flofuel and Partington in the UK are complete, while the current expansion of Fuel Proof started last month and should be complete by January next year.
“We continue to examine high return on equity investment opportunities, mostly in the UK, while being disciplined on valuation,” Hendry says.
Interestingly, Invicta is also looking to make some bold moves offshore. The group had, under previous CEO Arnold Goldstone, indicated some serious global ambitions, including an offshore listing, before this was put on the backburner after a huge tax dispute setback strained the balance sheet about five years ago.
In Invicta’s just released annual report, chair Christo Wiese discloses that the group — whose main offshore thrust is its investment in engineering consumables business Kian Ann, operating in the Far East — invested $2.5m (almost R50m) for a 40% stake in a trading platform in a Chinese industrial consumable parts business.
“Our objective over the next three years is to have established a geographically and sectorally diverse group, with 50% of the group’s income from abroad.”
Hudaco, on the other hand, seems content to concentrate on the local market, even if share buy-backs probably seem more prudent than stumping up premiums for private businesses put up for sale.
That said, Dunford points out that smaller players in the industrial supplies market did not have Hudaco’s resilience. “These businesses may not be sustainable, so we should gain market share. We are already seeing liquidations up 30% on prior years, and it’s going to get worse, as many of the smaller businesses don’t have money for generators or solar.”
In terms of new opportunities, Dunford sees enormous growth in alternative energy and the private sector capitalising on degradation in public sector infrastructure.
Overall, Argent, Invicta and Hudaco offer an intriguing trifecta on the JSE’s much-maligned industrials board. Perhaps one should back Hudaco to keep winning the attritional scrap for market share, and make side bets on Argent and Invicta morphing into counters with a dependable local base feeding expansion into viable offshore niches. It’s difficult, even at this stage, to see these shares getting much cheaper.
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