Engineering News

Diversified consumer and engineering products group Hudaco has faced a challenging start to the 2024 financial year, with the reduction in loadshedding negatively impacting on some of its alternative energy businesses, resulting in an overall lacklustre set of interim results.

"It's been a rather challenging six months for us, I think for most of South African business. There was reduced loadshedding, but we have an up and down factor in that, when there is loadshedding, we have some businesses that tend to perform well, but when there's no loadshedding, that business kind of falls away,” Hudaco CEO Graham Dunford said at the release of Hudaco’s interim results for the six months ended May 31.

He said the trading environment in South Africa during the first half of the year was weakened owing to business inertia arising from apprehension about the potential outcomes of the May elections, and well-documented financial constraints on the disposable income of consumers.

"We've seen [business inertia] in our daily sales during the month of May, and we felt it through into June now as well. We've wasted another month while [political parties are] trying to sort out who gets the biggest piece of the pie. Until we get some positiveness and idea of what's going on [in government], it just seems to be a lull in the economy waiting for something to happen,” Dunford said on June 28.

The inefficiency at South Africa’s ports also impacted on Hudaco’s performance.

"The inefficiency at the ports – I don't know how many years we need to talk about that – but it affected us, and has affected us quite badly at the end of last year and into this year, and still continues," he said.

However, Dunford noted that the lack of loadshedding played a significant role in the negative performance of some of Hudaco’s businesses.

"Overall, we had, unfortunately, some poor performing businesses and those were Cadac and our battery and energy businesses; they performed poorly in the six months.

“However, the rest of Hudaco’s portfolio of businesses delivered an acceptable result under the circumstances. They kind of came out flat," Dunford said.

The net result of these factors was an overall decrease in operating profit for the group in the first half of the year of 11% to R414-million. Group sales of R4-billion for the first half were down 6.3% year-on-year, and there was a decrease in operating margin from 10.9% to 10.4%.

Headline, basic and comparable earnings a share for the first half decreased by 15.3% to R7.85. The interim dividend has been left unchanged at R3.25 a share, in line with the company’s view on prospects for the rest of the year. This dividend remains within Hudaco’s longstanding policy of being covered between 2.5 and 2 times comparable earnings.

Cash generated from operations was robust at R573-million, which included R44-million released from working capital.

Hudaco paid tax of R112-million, finance expenses of R64-million, premises lease payments totalling R76-million and share-based compensation of R73-million during the period.

Additionally, R40-million was invested in property, plant and equipment, and dividends totalling R221-million were paid.

Dunford noted that, by the end of the first half, borrowings remained within the limits set by Hudaco’s financial guidelines and available banking facilities. Barring any acquisitions, the expected strength of the cash inflow during the traditionally busier second half of the financial year was expected to reduce borrowings significantly by year-end, he explained.

Hudaco’s consumer products segment, comprising 12 businesses, accounted for 47% of group sales and 43% of operating profit during the period.

Dunford said this segment bore the brunt of weak economic conditions and increased pressure on consumers, leading to reduced volume sales across all businesses.

Segment sales decreased 15.7% to R1.9-billion, while operating profit declined 36% to R187-million, at an operating margin of 10%. Operating profit in businesses other than Cadac and batteries/energy went down by 5%. The battery and energy businesses, along with Cadac, were the primary contributors to the decreased performance, with a combined reduction of R93-million in operating profit in the first half of this year compared to the first half of last year.

The main reasons for this decline, according to Dunford, were suboptimal management which had been addressed and largely corrected, demand contracting in the first half owing to the absence of extensive loadshedding experienced in the first half of last year, oversupply of energy products in the market, the writedown of energy stock to realisable value and the late arrival of winter at the end of May, which significantly affected Cadac’s sales of gas heaters and cylinders.

Additionally, Cadac’s summer range was delayed at the Durban port late in 2023, which impacted both the second half of last year and the first half of this year’s sales, Dunford explained.

The engineering products segment, comprising 19 businesses, showed resilience and benefitted from Hudaco’s diverse portfolio, Dunford said.

He noted that, despite customers being hesitant to spend beyond essentials until after the May election results were known, the engineering consumables businesses maintained their performance from last year, while growth was achieved through the acquisition of Brigit Fire and Plasti-Weld.

Engineering consumables accounted for 53% of group sales and 57% of operating profit. Sales increased by 4% to R2.1-billion, and operating profit rose by 20% to R244-million, with an operating margin of 11.6%.

Looking forward, Dunford said the profit in the battery and energy businesses in the second half of the year was expected to be better than in the second half of last year, as management issues had been effectively addressed, and the exceptional demand for energy products had already subsided by May last year.

He pointed out that Brigit Fire and Plasti-Weld would be included for six months in the second half, and that the rest of the portfolio should continue to perform well.

“For these reasons, it is believed that the first half deficit will be recouped in the second half of the year. The election outcome has been about as good as could realistically be hoped for.

“Hudaco is encouraged by the extent to which the formation of a government of national unity (GNU) has been favourably received by markets, which augurs well for responsible economic policymaking by the new government and a resumption of investment in the economy,” Dunford said, noting that the GNU had the potential to be a significant positive for South Africa and, in turn, Hudaco.

“Hudaco’s businesses are well positioned to supply an economy potentially revitalised as it recovers from 16 years of stagnation and responds to increased demand driven by consumer spending,” he added.