JOHANNESBURG – ON FRIDAY, Hudaco will report its full-year results.
There hasn’t been much news of this company since it published its last results in June 2018, which was also around the time that it acquired Boltworld for integration into its fasteners division, Rutherford.
Due to the small and mid-cap rout on the JSE, Hudaco’s share price does not reflect the quality it represents. Over the past 20 years, Hudaco’s total shareholder return was 25percent a year, compared to the FTSE/JSE Top40 index, which delivered 15.8percent a year. This 9.2percent annual difference is noteworthy.
An investment of R1million in Hudaco in 1998 would be worth roughly R86.7m today. The same investment in the Top40 would be worth R18.8m. Average return on equity over this period was 20.7percent versus the Top40’s yield of 15.6percent. This indicates that Hudaco is, in general, a better quality company than the average Top40 firm.
For this kind of quality, a historical price-earnings ratio of 11 times does not seem excessive, especially if compared to the Top40’s average price-earnings ratio of around 16. The relatively low valuation leaves a margin of safety in place, even if it does not grow its earning in this financial year.
At the half-year in June, the company reported a 10percent increase in turnover, and 9percent increase in headline earnings per share.
Hudaco was founded in 1891 by Hubert Davies as a company that supplied equipment to mines. More than 100 years later – having successfully navigated many ups and downs – the company still bears its founder’s name (Hubert Davies and Company) and still supplies equipment to mines.
Hudaco specialises in importation and distribution of branded industrial and security products.
Its operations are divided into three: bearings and power transmission products, powered products and security equipment.
Hudaco sources branded products, mainly on an exclusive basis, directly from leading international manufacturers and to a lesser extent from local producers. The company seeks out niche areas in markets where customers need and are prepared to pay for the value Hudaco adds to the products it distributes.
The value added includes product specification, technical advice, application and installation training and troubleshooting, combined with ready availability at a fair price.
The group has a network of specialised branches and independent distributors throughout southern Africa to ensure product availability to its customers.
Except for DD Power, in which Deutz has a 30percent share, all Hudaco businesses are 15percent owned directly by BEE shareholders.
Hudaco has a proud history of more than 120 years since J Hubert Davies saw the long-term business potential of the initial gold rush, and they now employ around 3000 people.
Given its depressed valuation, we believe there is sufficient upside in Hudaco, even without significant economic recovery. Under a scenario where growth recovers to the average long-term rate, however, the upside could be considerable.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Hudaco shares are held on behalf of clients.