Hudaco is a quality company that has been listed on the JSE since 1938, albeit with a four-year interruption from 1977 to 1981, when it delisted briefly.
Hudaco’s main business is importing and distributing high-quality branded automotive, industrial and electronic consumable products. Traditionally, it has been heavily dependent on SA’s GDP growth rate and the rand/$ exchange rate. Almost two-thirds of the group’s cost of sales is accounted for by direct imports. Notwithstanding these observations, Hudaco has performed remarkably well in the past couple of years, against an exceptionally poor economic background and a highly volatile exchange rate.
Agency agreements with suppliers generally restrict Hudaco’s activities to Africa south of the equator. But the highly diversified portfolio of business interests limits the group’s risk and reinforces the resilience of Hudaco.
Though a small capitalisation share at only R5bn, it has nevertheless managed to attract the attention of a good selection of institutional investors over a long period of time. It has survived the pandemic, once again proving its resilience in the face of adversity. It recently bought SA icon Cadac and the share price is edging towards its all-time high. And yet, with all these positives, it still languishes on a relatively modest price/earnings ratio.
On a fairly low (+8.3%) growth in turnover to R7.3bn, operating profit rose by almost 18% to R826m and headline earnings per share (Heps) rose 21.1% to 1641c. A 760c dividend per share has been declared. All of these comparisons are made relative to 2019, as the group regards comparisons with the artificially low base of the pandemically hobbled 2020 as being relatively meaningless. Debt was reduced to a relatively low R469m.
Consumer-related products comprise 11 businesses and contributed 60% of operating profit in financial 2021 compared with 67% in 2020. Operating profit margin in this segment increased from 11.7% in 2019 to 14.6% in 2021. Engineering consumables comprise 18 businesses and contributed 40% of 2021’s operating profit, compared with 33% in 2020. Operating margin from this source improved slightly between 2019 and 2021, going from 9.1% to 10.4%.
Hudaco this month acquired the Cadac business for an estimated R100m. Cadac is a distributor of a wide range of outdoor cooking and heating products, including gas cylinders, stoves, cookers, braais, skottels, heaters, lamps, blowtorches and accessories in Southern Africa and beyond. The group has been looking about for a decent acquisition for some time, but asking prices were in many cases too high. Management is confident that Cadac will fit in well with the Hudaco portfolio.
Though the SA economy is not expected to show a great deal of growth in 2022, Hudaco is well-placed to extract the maximum advantage from its niche positions in areas in which it operates. The momentum and market share gains that the various businesses established in 2021 are likely to continue into this year and beyond. The automotive aftermarket should benefit from the larger second-hand car pool in SA.
Considering that the Eskom rotational power outages are likely to be a feature of life for the foreseeable future, the alternative energy sector in which Hudaco is well represented should flourish. And though a commodity windfall as large as last year's may not materialise in 2022, the mining sector in Southern Africa should continue to be strong. Mining and engineering consumables should thus continue to be in high demand.
At a share price of 15,914c, Hudaco’s Heps of 1,641c puts the share on a very reasonable PE ratio of 9.7 times. The dividend of 760c puts the share on an attractive 4.8% dividend yield. These are not demanding metrics at all and would normally result in the Hudaco share price eventually surpassing its previous peak of R163 set almost three years ago. Considering the high quality and resilience of this company, it must also be a target for an offshore acquirer.
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