Domestic distribution gem

In what feels like a billion years ago (2021), I shone a light on the fantastic job domestic industrial and consumer distribution group Hudaco (share code HDC) was doing: Hudaco group is flying.

While global supply chains have eased (though Durban port and South African infrastructure has worsened) and Covid has receded (only to be replaced by floods early last year and relentless load shedding thereafter), many of the original points I made remain true for Hudaco and have come through in the group’s FY22 results, released last week.

In FY22, Hudaco’s turnover grew 12% year on year (y/y) from both Consumer (13%) and Industrial (12%) segments. Its costs were well-controlled and bottom-line margins expanded to boost shareholder net profit up nearly 20%.

Read: Hudaco buys gas products brand Cadac, reports strong results [Feb 2021]

Importantly, all these metrics are well up on pre-Covid levels too, thus implying good relative market share gains.

The group’s share buyback programme saw 928 740 shares being bought back during the period, it invested further into nearly a month’s ‘extra’ stock levels, and bedded down its recent inspired acquisition of Cadac – yet Hudaco’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 focused, experienced management team keenly aware of sticking to their knitting as they adjust to the chaotic macro environment.

Despite all this, the stock is only up around 6% over the last 12 months (basically just tracking the JSE All Share Index over the period). It is on a price-earnings (PE) ratio of around 8.5 times, with a juicy dividend yield of close to 5.8%.

Tracking some of Hudaco’s valuation metrics through time, and smoothing for the IFRS (International Financial Reporting Standards) distortions in 2014/15, two observations become apparent:

• Cyclical valuation: Hudaco’s PE 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: The Hudaco share’s 15-year average PE is 9.5 times. It is currently trading at around 8.5 times or around 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 (it is a ‘GDP+’ style business).

Source: Supplied

This investment case’s balance of a quality group of businesses, relatively undemanding valuation and endless macro challenges is perhaps best summarised by Hudaco’s management commentary on their prospects, where they explain: “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.

* Integral Asset Management may hold Hudaco Industries Ltd in some portfolios.