Hudaco: life's a gas

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Hudaco: life's a gas
Credit: © Reuters.

Industrials company Hudaco (JO: HDCJ ) has released its results for the year to November 2021. I must kick off with a nod of appreciation to the company for including the 2019 financial year in the SENS alongside 2020 and 2021. It's always helpful seeing the through-the-cycle trend.

Naturally, companies choose to do this when they have a good story to tell. Hudaco's revenue increased 16.1% vs. 2020. Perhaps more importantly, it's also 8.3% higher than in 2019, so this wasn't just a case of recovering strongly off a lockdown base.

Thanks to the impact of operating leverage, operating profit jumped 61.9% vs. 2020 and 17.9% vs. 2019. Operating leverage means that a percentage change in revenue can end up driving a larger percentage change in operating profit due to the presence of fixed costs vs. variable costs. This works on the way up and on the way down, as many investors on the market have learnt the hard way.

Headline Earnings Per Share (HEPS) is 56.3% higher than 2020 and 21.1% higher than 2019. The dividend per share of 760 cents compares very well to 410 cents last year and 600 cents in 2019.

In the earnings report itself, the opening sentence talks about the "ravages of the Covid-19 pandemic" which is as colourful as it is true. The opening paragraphs also remind investors that Hudaco did not escape the looting in mid-2021 that most of us have tried to block out of our minds.

Hudaco notes the supply chain issues and increased costs that have plagued so many companies, but highlights that the business has the pricing power to pass these increases on to customers and protect margins. This is a critical thing to look out for in inflationary times. Businesses with pricing power flourish and those without the ability to increase prices can be crushed.

In what will go down as a strong result for the group, turnover from the consumer-related products segment increased 5.2% and the engineering consumables segment increased 12.2%. Sectors with growth included mining, manufacturing, agriculture, wholesale and retail. Sectors which declined include security and export.

Return on equity increased from 17.4% to 19.5%, a healthy level indeed.

The balance sheet is very strong, with interest cover of 23x (operating profits divided by interest payments) and additional facilities are available if needed. The impact of supply chain issues can be seen in the inventory line, as the company increased levels by R400 million (one month's sales) to allow for shipping delays.

By now, you must be wondering about the headline of this article. The reference is to the news that Hudaco has acquired CADAC as a going concern, purveyors of various braais, heaters, skottels and iconic cooler boxes for the South African summer. The purchase price is a "maximum of R100 million" with no further details given.

Overall, this is an impressive result.

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