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JOHANNESBURG - Hudaco (R126) - not a household name in South Africa - but a long-standing, stable industrial supplies business. Hudaco ticks all the boxes when it comes to criteria for a healthy, investable company.

Equity is lower than their peers, return on equity is higher than the industry average and the average growth in headline earnings per share is greater than the average on the JSE over the last five years. Their annualised returns with dividends reinvested over the last seven years are 12.7percent. This is a solid company with roots going back to 1891, and a first listing on the JSE in 1938.

Nature of business

A group of companies specialising in importation and distribution of branded industrial and security products. Their 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. It 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 DD Power, in which Deutz has a 30percent share, all Hudaco businesses are 15percent owned directly by BEE shareholders. Today, with a proud history of more than 120 years since J Hubert Davies saw the long-term business potential of the initial gold rush, the group remains true to its roots. It now employs nearly 3000 people and has a market capitalisation of about R3billion. Its shareholders include many blue-chip players in the South African investment industry

Primary market

Seven years ago the management of Hudaco realised that their primary market is in fundamental decline. They decided to diversify away from mining and manufacturing, which they did with great success. To this end, the group had over the past few years cut its mining exposure in favour of retail consumables.

Hudaco made several significant acquisitions, including Filter and Hose Solutions, Global Communications and the Dosco group. Partquip, which serves the automotive after-market, was acquired at the beginning of the 2015 financial year and is now the group’s largest single business.

It has proved a great buy for Hudaco, lifting its revenue almost 12percent in 2016 to R1.05bn, or 19percent of its total. Partquip is doing very well because in tough times people keep their cars longer and, when they are out of warranty, they shift from dealerships to cheaper private garages for their servicing. These acquisitions have enabled the group to weather tough conditions and reduced their reliance on mining and manufacturing. In 2010 it accounted for 50percent of sales, and in 2016 it almost halved to 29percent.

The overall contribution from consumable engineering products fell from 67percent in 2010 to just more than 50percent in 2016. Consumer products upped their contribution to group operating profit from 37percent to 62percent over the same period. Management is likely to continue with the acquisition strategy. So far their acquisitions were earnings enhancing, paying between five and seven times earnings.

Prospects

This 126-year-old company, operating 50 distribution centres and sourcing products from 750 suppliers, is reliable. My records go back to the early nineties, and Hudaco has never skipped a dividend.

They are now trading at a dividend yield of 4.2, similar to what you will earn on a money market investment after tax. Operating profit over the past seven years doubled from R300million to R605m. Do not expect earnings that will blow you away, but it can be a good addition to a long-term share portfolio.

Amelia Morgenrood PSG Wealth regional director.

- BUSINESS REPORT