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Hudaco’s H1:21 results look spectacular when compared to H1:20 numbers, but H1:20 was mired in hard lockdown creating a distorted picture. H1:19 is far more comparative as a “normal” trading period. Against H1:19, Hudaco’s H1:21 revenues grew +6.5% p/p, margins expanded seeing Gross Profit rise +9.0% p/p, operating leverage rallied Operating Profits +20% p/p and Comparable EPS leapt +32% p/p.
In other words, Hudaco’s group is flying! Not just is the Group’s top-line growth encouraging, but the lean operating structure has seen this growth fall to its bottom-line.
Hudaco is a diversified supplier of automotive, industrial and electronic consumable products across South Africa and southern Africa. In this aspect, the Group is not just a long-running, good-quality mid cap, but it is also a great bellwether for broader aspects of the “SA Inc” economy that is services.
Hudaco has seen a strong recovery in the domestic mining, automotive and manufacturing sectors. Healthily, management highlight that revenue has been driven by volume growth as oppose price growth (as an importer, a strengthening Rand sees price decreases). This, perhaps, echoes the strong ABSA Q2:21 Manufacturing Survey showing rising domestic confidence (LINK), adding another data point to the recovery story.
Is SA Inc recovering? Things are never that simple…
Over and above the COVID 3rd wave, management highlight major problems in South Africa being loadshedding, inefficient ports (LINK – Hudaco specifically references Durban’s port authority as “useless”), & crumbling municipal infrastructure (LINK). Globally, the Group sees supply chain disruptions, shipping challenges (LINK) & parts & chip shortages (LINK) as negatively impact the reporting and current trading periods.
Interestingly, management note that parts shortages have shifted the pricing power towards suppliers that have the parts and, to some degree, the expansion in the Group’s gross margins (H1:19 – 36.0% rose to H1:21’s 36.9%) could be attributed to this. The Group currently has 3.1x months’ worth of inventory on their floors (though they note they would prefer closer to 3.5x months’ worth), which does set them up well for the current period.
Looking forward, Hudaco’s management is “cautiously optimistic”. The Group is likely to continue this strong run-rate, though management see 3rd Wave and supply chain issues as key risks. The Group’s H2 period is typically seasonally stronger than its H1 period, but “typical” is not the world I would use to describe how the world is currently trading…
Demand globally has rebounded far faster than supply chains have expected. Coupled with logistic market chaos and COVID/lockdown dynamics, there are strange shortages across a range of items. Each management team I speak to is ordering more stock than they need (including Hudaco), thus aggravating the short supply and straining supply chains even more.
This is probably a topic for another time, but it does add to the assertion that the pricing power has swung strongly towards those that have supply, which I suspect will become a recurring theme in the months ahead.
Collectively, though, the rebounding domestic manufacturing, automotive and mining sectors and the rising pricing power from Hudaco’s 3.1x months’ worth of inventory on hand, should all translate into a strong H2:21 for a stock that is trading on a 12m-trailing 8.64x Price Earnings (per Comparable EPS).
Perhaps more importantly, Hudaco serves to highlight the quality, resilience and—dare I say it!—greenshoots in SA Inc’s off-the-radar industrial counters.
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