What feels like a billion years ago in 2021, I shone a light on the fantastic job domestic industrial and consumer distribution group, Hudaco (HDC), was doing: Hudaco group is flying. While global supply chains have eased (though Durban port & South African infrastructure has worsened) and COVID has receded (only to be replaced by floods early last year and relentless loadshedding thereafter), many of the original points I made remain true for Hudaco and have come through in the Group’s FY 22 results released last week.
In FY 22, Hudaco’s turnover grew +12% y/y from both Consumer (+13% y/y) and Industrial (+12% y/y) segments, its costs were well-controlled and bottom-line margins expanded to boost shareholder net profit up nearly +20% y/y. Importantly, all these metrics are well up on pre-COVID levels too, thus implying good relative market share gains.
The Group’s share buy-back programme bought back 928,740 shares during the period, invested further into nearly a month’s “extra” stock levels and bedded down its recent inspired acquisition of CADAC, yet the Group’s cash flows remained strong and its balance sheet gearing comfortable.
There is nothing to fault in this performance! A superb outcome that has come from a focussed, experienced management team keenly aware of sticking to their knitting as they adjust to the chaotic macro environment.
Despite all of this, the stock is only up around +6% over the last twelve months (basically just tracking a JSE All Share Index that is +6% over the same period). It is on a Price Earnings of c.8.5x with a juicy Dividend Yield of close to 5.8%.
Tracking some of Hudaco’s valuation metrics through time (and smoothing for the IFRS distortions in 2014/15), two observations become apparent:
- Cyclical valuation: Hudaco’s multiple tends to expand and contract along with the economy. Notice the highs pre-2008 and the lows thereafter and during the 2020 COVID crash period.
- Current valuation is approaching but still below the average valuation: Hudaco’s share’s 15-year average Price Earnings is 9.5x. It is currently trading at c.8.5x or c.10% off from its average, albeit during a period of sub-standard domestic growth. The latter point ties into the cyclical view of Hudaco’s valuation and makes sense as its underlying business services the broader consumer and industrial economy (i.e. a “GDP+ ” style business).
This investment case’s balance of a quality group of businesses, relatively undemanding valuation and endless macro challenges is perhaps best summarized by Hudaco’s management commentary on their prospects where they explain that “If we get more of the same on the political and economic front, we will continue to grind it out as we have done over the past few years… In the right environment, Hudaco has outstanding potential.”
Simplistically and coupled with its cyclical valuation, Hudaco should perform fine and its share price has a degree of margin of safety if the domestic and global environment remains the same, it may come under some pressure if things get worse and it should offer a stellar return if the balance of domestic problems resolve positively over the next couple of years. This may be stating the obvious, but that is important to do as an investor because investing is a logical art made difficult by its intersection with both an uncertain future and volatile human emotions.
ARTICLE FIRST APPEARED ON MONEYWEB