ARTICLES

Hudaco

In the current environment investors should be looking for listed companies that have managed to weather the COVID-19 storm and emerged with strong growth. These companies would have had two important components before the pandemic began – a strong balance sheet and highly competent management. Hudaco had both.

Hudaco is a company with two primary divisions:

1. The automotive aftermarket, power tool and fasteners, data networking, security and communication equipment businesses which are affected by consumer spending.
2. The bearings and belting, electrical power transmission, diesel engine, hydraulics and pneumatics, specialised steel, thermoplastic fittings and filtration businesses supply engineering consumables mainly to mining and manufacturing customers.

Their results for the year to 30^th November 2020 show that the first half was bad with the extra costs and write downs made necessary by the pandemic. Goodwill and intangibles were written down by R348m – which resulted in a loss for the period. The second half showed a remarkable recovery with turnover rising 2,5% and headline earnings per share (HEPS) up 4%. Operating expenses were reduced by 0,4% which shows a strong focus on efficiency and working capital management.

Impressively, the company managed to reduce debt levels year-on-year by R365m – after conducting a share buy-back which cost R82m. In effect a share buy-back is a dividend and is treated as such by the Receiver of Revenue. The company buys its own shares back in the open market and then cancels them so reducing the number of shares which it has in issue. This makes the remaining shares more valuable.

Hudaco is a traditional business with all the working capital problems. Working capital management is vital. This means keeping its debtors' book under control, managing stock levels to avoid over-stocking and paying creditors as late as possible so that they help to fund the business. In the second half of the year Hudaco managed to generate a 24% return on equity.

Technically, the share has been in a long-term downward trend which ended on 27^th January 2021 when the price broke decisively up through its long-term downward trendline. Consider the chart:

You can see here the long-term downward trendline which has been in place since the share peaked at 16375c in March 2018. COVID-19 took the share down to lows around R55 in March 2020, but it has bounced back and now trades at 9900c. At that price it is on a multiple of 9,43 and a dividend yield of 3,31 which looks like good value.

By any measure this is a solid business that will benefit directly as the South African economy improves.

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