Wrap Text
Audited preliminary report
HUDACO INDUSTRIES LIMITED
Incorporated in the Republic of South Africa
Registration number: 1985/004617/06
JSE code: HDC ISIN: ZAE000003273
Audited preliminary report
for the year ended 30 November 2013
- Sales up 13% to R3,9 billion
- Sales into Africa up 40%
- Comparable earnings per share up 4% to 983 cents
- Headline earnings per share down 13% to 928 cents
- Final dividend maintained at 310 cents per share
Hudaco Industries is a South African group whose principal activity is the distribution of high quality branded industrial and
electronic products in the southern African region. Hudaco businesses serve markets that fall into two primary categories.
The bearings, power transmission and diesel engine businesses supply engineering consumables mainly to mining and
manufacturing customers whilst the security, power tool and automotive aftermarket businesses supply products into markets
with a bias towards consumer spending. Adding value to the product sold by offering instant availability, advice and training
etc. is a key part of Hudaco's business model.
Results
The group has delivered reasonable results in an uncertain and difficult to manage economic environment. The second half of
the year is now regularly characterised by periods of industrial strike action which close targeted industries or businesses for
weeks at a time. This year automotive manufacturing and distribution and mines (for the second year running) were targeted.
The Rand exchange rate weakened significantly in 2013 which is good for exporters and Hudaco but due to the currency's
volatility the full benefit of pricing to replacement was not obtained this year.
Comparable earnings per share increased 4% to 983 cents. Comparable earnings have been calculated as if the restructuring
of the financing of the BEE transaction (which happened on 28 February 2013) had taken place before the start of the 2012
financial year and also excludes the charge to income (2012: gain) arising from adjustments to estimated earn-out payments
on acquisitions. Previous to the revision of IFRS 3 this would have been included in goodwill.
Group sales of R3,9 billion are 13% up on last year whilst operating profit is up 7% to R469 million. The operating profit
margin declined from 12,5% to 11,9% mainly due to difficulties in pricing to replacement with the volatile currency, coupled
with slightly lower sales than planned for.
The Engineering Consumables Segment is the biggest profit contributor to the group. Mining and manufacturing account
for 66% of sales in this segment whilst acquisitions continue to strengthen the sales base and spread. Trading conditions
were tough as low commodity prices resulted in mining cutbacks and a focus on reducing costs. Strike activity impacted
demand in the second half of the year. In response to lower demand from mining customers, cost cutting measures were
implemented in Bearings International and Deutz Dieselpower during the year.
In 2013 the Engineering Consumables Segment comprised 63% (last year: 65%) of group turnover and 59% (last year: 62%)
of group operating profit. Turnover grew by 9% to R2,5 billion and operating profit grew 4% to R292 million.
The Consumer-Related Products Segment businesses supply products which either wear out or need to be replaced in
reasonably predictable timeframes, or require upgrading as more efficient products with additional features are introduced.
Our security and communication equipment businesses improved profits in 2013 but power tools and automotive products
were flat.
In 2013 the Consumer-Related Products Segment comprised 37% (last year: 35%) of group turnover and 41% (last year: 38%)
of group operating profit. Turnover grew by 20% to R1,5 billion whilst operating profit grew 18% to R199 million.
Headline earnings per share is down 13% because of the increased tax charge resulting from the restructuring of the BEE
financing arrangements set out below (the effect of which was communicated to the market in February and June 2013), and
the accounting requirement for earn-out adjustments.
Our longer term policy remains to pay a dividend of about 40% of comparable earnings but this year we have decided to
maintain the dividend at 465 cents, which represents 47% of comparable earnings.
The financial position is sound. The group has R204 million in net borrowings at year end (last year: R17 million) but a further
R180 million will be borrowed early in the new year mainly to finance the acquisition of Dosco, GPM and Joseph Grieveson
now that all of the suspensive conditions have been fulfilled. Inventories have been reasonably well managed given the
declining Rand – they are up 20% to R1 104 million but this includes acquisitions. The return on net operating assets in 2013
is 22,1%, down on the 24,6% of last year but still well above our pre-tax cost of capital, which is approximately 15%. We
have alerted shareholders in the past that this number is bound to decline as acquisitions are made and goodwill increases.
BEE financing arrangements restructured
As detailed in a SENS announcement in February 2013, the financing arrangements pertaining to the group's BEE transaction
have been restructured. Cadiz redeemed the preference share investment of R2 181 million and as a result Morgan Stanley,
the existing funder of the BEE transaction, exercised its option to put to the group the debenture issued by Hudaco Trading
Pty Ltd. Consequently, the BEE funding arrangements that were intended to be financed externally until August 2017 have
been financed internally by the Hudaco group since 28 February 2013.
As a result of the restructuring:
- the group statement of financial position no longer reflects a preference share investment of R2 181 million or a
subordinated debenture liability of R2 181 million;
- with effect from 1 March 2013, the group statement of comprehensive income no longer reflects preference dividends
received of R201 million per annum or debenture interest paid of R234 million per annum;
- basic earnings and headline earnings will decrease by approximately R33 million or 103 cents per share per annum; and
- for the financial year ended 30 November 2013, the effect of the abovementioned items on basic and headline earnings
per share is 77 cents, plus there has been a further charge of 17 cents because of a one-off Securities Transfer Tax
payment of R5,5 million on the redemption.
The BEE shareholders continue to hold their shares in Hudaco Trading and the BEE credentials of all entities in the Hudaco
group remain intact.
Tax challenge
The group is facing a challenge from SARS in relation to the funding arrangements for the BEE structure put in place in 2007.
In a SENS announcement on 12 February 2013, stakeholders were advised that assessments had been received from SARS for
the financial years 2007 to 2011 relating to certain aspects flowing from the implementation of the BEE structure. SARS has
set out detailed descriptions of other very complex arrangements connected to the structure and entered into by third parties
without Hudaco's knowledge, or suspicion, which presumably resulted in tax leakage to the fiscus.
The amounts assessed by SARS comprise R1,3 billion under the general anti-avoidance regulations (GAAR) and R0,6 billion
under alternative grounds of Hudaco having allegedly having become entitled to an amount because of the security
arrangements. The amounts are broken down as follows: Tax on re-categorised interest imputed on Hudaco – R279 million,
tax imputed on Hudaco as it allegedly became entitled to an amount because of the security arrangements – R143 million,
impact of STC credits disallowed – R72 million, interest – R446 million, penalties – R987 million. It is assumed that SARS will
take a similar approach in respect of the year ended 30 November 2012 and the three months to the redemption of the
preference shares on 28 February 2013.
The maximum potential exposure, reflected as a contingent liability, is considered to be the assessment under GAAR of
R1,3 billion plus a further R0,4 billion assumed for 2012 and 2013, including further interest and penalties.
Based on advice from senior counsel, Hudaco remains confident of refuting the assessments. Hudaco has lodged objections
to the assessments and will continue to pursue all appropriate legal remedies. SARS was to have responded to these
objections by mid-October 2013 but has invoked its right to extra time and now has until mid-February 2014. Hudaco
has also lodged an application in the High Court to have the assessments set aside on a number of grounds, including
constitutional aspects.
In respect of the requirement to "pay now, argue later", rather than face a demand for the full amount, Hudaco has agreed
to pay an amount of R20 million per quarter and the remainder will be deferred until the legal process has run its course,
which Hudaco estimates is likely to be two to three years. Two quarterly payments had been made by year end and these
have been accounted for as taxation paid in advance. We hope that despite receiving these payments, SARS will expedite
the legal process.
Prospects
The South African mining industry and the manufacturing and service sectors supporting that industry account for about half
of Hudaco's sales. Low commodity prices and insufficient infrastructure, particularly electricity and rail capacity, are short-
term issues impacting these industries. Longer term challenges, affecting their very viability include annual strikes. It indeed
becomes more challenging each year to do business in South Africa. Prospects in neighbouring countries are better but
commodity price weakness and the threat of new indigenisation legislation negatively affect investment decisions.
Consumer spending appears to be weakening but our businesses are positioned in niche areas which we believe will continue
to perform satisfactorily.
Until economic circumstances improve we foresee only modest organic volume sales growth in South Africa although exports
into Africa should grow a little faster. Earnings in 2014 will however be impacted positively by a combination of factors;
pricing to replacement, cost reductions effected in 2013 and the contribution from recent acquisitions, particularly Dosco,
GPM and Joseph Grieveson, which have come into the group from December 2013.
Declaration of final dividend no 54
Final dividend number 54 of 310 cents per share is declared payable on Monday, 10 March 2014 to ordinary shareholders
recorded in the register at the close of business on Friday, 7 March 2014.
The timetable for the payment of the dividend is as follows:
Last day to trade cum dividend Friday, 28 February 2014
Trading ex dividend commences Monday, 3 March 2014
Record date Friday, 7 March 2014
Payment date Monday, 10 March 2014
Share certificates may not be dematerialised or rematerialised between Monday, 3 March 2014 and Friday, 7 March 2014,
both days inclusive. The certificated register will be closed for this period.
In terms of the Listings Requirements of the JSE Limited regarding the new Dividends Tax effective 1 April 2012, the following
additional information is disclosed:
- the dividend has been declared out of income reserves;
- the local dividend rate is 15%;
- Secondary Tax on Companies (STC) credits of 310 cents per share will be utilised;
- the gross local dividend amount is 310 cents per ordinary share for shareholders exempt from the Dividends Tax;
- the net local dividend amount is 310 cents per ordinary share for shareholders liable to pay the new Dividends Tax;
- Hudaco Industries Limited has 34 153 531 shares in issue (which includes 2 507 828 treasury shares); and
- Hudaco Industries Limited's income tax reference number is 9400/159/71/2.
Directorships
As reported on SENS, Mr PC Baloyi was appointed to the board with effect from 27 July 2013 and Mrs Dolly Mokgatle
resigned with effect from 25 October 2013.
Results presentation and annual general meeting
Hudaco will host presentations on the financial results in Johannesburg and Cape Town on Friday, 31 January 2014 and
Monday, 3 February 2014, respectively. Anyone wishing to attend should contact Janine Yon at +27 11 657 5007.
The slides which form part of the presentation will be available on the company's website from Tuesday, 4 February 2014.
The company's 29th annual general meeting will be held at Hudaco's corporate office situated at Building 9, Greenstone Hill
Office Park, Emerald Boulevard, Greenstone Hill, Edenvale at 11:00 on Thursday, 27 March 2014. The notice and proxy form
for the company's annual general meeting will be posted to the shareholders during the second week of February 2014 and
will be included in the integrated report that will be published on Hudaco's website during February 2014.
Approval of financial statements
The financial statements have been approved by the board and abridged for purposes of this report. Grant Thornton has
signed an unqualified audit opinion on the annual financial statements. Both the financial statements and the auditors' report
are available for inspection at the company's registered office.
The auditors' report does not necessarily cover all of the information contained in this announcement. Shareholders are
therefore advised that in order to obtain a full understanding of the nature of the auditors' work they should obtain a copy of
the report together with the accompanying financial information from the registered office of the company.
For and on behalf of the board
RT Vice SJ Connelly
Independent non-executive chairman Chief executive
30 January 2014
Nedbank Capital
Sponsor
Group statement of financial position
30 Nov 30 Nov
R million 2013 2012
ASSETS
Non-current assets 922 3 040
Property, plant and equipment 214 205
Investment in preference shares 2 181
Goodwill 619 594
Intangible assets 39 49
Taxation 40
Deferred taxation 10 11
Current assets 1 902 1 679
Inventories 1 104 919
Trade and other receivables 780 684
Taxation 2
Bank deposits and balances 16 76
TOTAL ASSETS 2 824 4 719
EQUITY AND LIABILITIES
Equity 1 835 1 696
Interest of shareholders of the group 1 816 1 670
Non-controlling interest 19 26
Non-current liabilities 30 2 244
Subordinated debenture 2 181
Amounts due to vendors of businesses acquired 30 63
Current liabilities 959 779
Trade and other payables 673 592
Bank overdraft 220 93
Amounts due to vendors of businesses acquired 61 88
Taxation 5 6
TOTAL EQUITY AND LIABILITIES 2 824 4 719
Group statement of comprehensive income
Year Year
ended % ended
30 Nov change 30 Nov
R million 2013 2012
Turnover 3 942 13 3 492
– Ongoing operations 3 558 6 3 360
– Acquired in 2012 and 2013 384 132
Cost of sales 2 463 2 137
Gross profit 1 479 9 1 355
Operating expenses 1 010 918
Operating profit 469 7 437
– Ongoing operations 429 2 418
– Acquired in 2012 and 2013 40 19
Reversal of impairment on property 1
Fair value adjustment to amounts due to vendors (23) 8
Profit before interest 446 446
Dividends received on preference shares 50 202
Finance costs (71) (250)
Profit before taxation 425 7 398
Taxation 120 47
Profit for the year 305 (13) 351
Other comprehensive income
Movement on fair value of cash flow hedges 2
Total comprehensive income for the year 305 (14) 353
Profit attributable to:
– shareholders of the group 294 340
– non-controlling shareholders 11 11
305 351
Total comprehensive income attributable to:
– shareholders of the group 294 342
– non-controlling shareholders 11 11
305 353
Headline earnings per share (cents) 928 (13) 1 071
Basic earnings per share (cents) 930 (13) 1 074
Comparable earnings per share (cents) 983 4 947
Diluted headline earnings per share (cents) 917 1 055
Diluted basic earnings per share (cents) 918 1 058
Diluted comparable earnings per share (cents) 970 933
Calculation of headline earnings
Profit attributable to shareholders of the group 294 (13) 340
Adjusted for:
Reversal of impairment and profit on disposal of property,
plant and equipment (1) (1)
Tax effect 1
Headline earnings 294 (13) 339
Calculation of comparable earnings
Headline earnings 294 (13) 339
Adjusted for:
Preference dividend received (50) (202)
Interest on debenture 59 234
Tax effect (16) (65)
STT on redemption of preference shares 5
Fair value adjustments on amounts due to vendors 23 (7)
Non-controlling interest (4) 1
Comparable earnings 311 4 300
Dividends
– Per share (cents) 465 465
– Amount (Rm) 147 147
Shares in issue 31 646 31 646
– Total (000) 34 154 34 154
– Held by subsidiary (000) (2 508) (2 508)
Weighted average shares in issue
– Basic (000) 31 646 31 646
– Diluted (000) 32 054 32 124
Group statement of cash flows
Year Year
ended ended
30 Nov 30 Nov
R million 2013 2012
Cash generated from trading 513 458
Increase in working capital (138) (121)
Cash generated from operations 375 337
Taxation paid (169) (54)
Net cash from operating activities 206 283
Net investment in new operations (181) (229)
Net investment in property, plant and equipment (32) (39)
Disposal of preference shares 2 181
Dividends and interest received 50 202
Net cash from investing activities 2 018 (66)
Debenture repurchased (2 181)
Decrease in finance leases (3)
Finance costs paid (66) (237)
Dividends paid (164) (163)
Net cash from financing activities (2 411) (403)
Net decrease in cash and cash equivalents (187) (186)
Group statement of changes in equity
Year Year
ended ended
30 Nov 30 Nov
R million 2013 2012
Equity at beginning of the year 1 696 1 525
Comprehensive income for the year 305 353
Decrease in equity compensation reserve (1) (19)
Non-controlling interest required (1)
Dividends (164) (163)
Equity at end of the year 1 835 1 696
Supplementary information
The consolidated financial statements have been prepared in accordance with IAS 34: Interim Financial Reporting,
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB),
SAICA Financial Reporting Guides as issued by the Accounting Practices Board, the requirements of the South African
Companies Act and the JSE Listings Requirements. The same accounting policies, presentation and measurement
principles have been followed in the preparation of the preliminary report for the year ended 30 November 2013 as
were applied in the preparation of the group's annual financial statements for the year ended 30 November 2012,
apart from the adoption of the amendment to IAS 1 – Presentation of Financial Statements. These results have
been compiled under the supervision of the financial director, CV Amoils, CA (SA). The directors of Hudaco take
full responsibility for the preparation of the preliminary report and ensuring that the financial information has been
correctly extracted from the underlying annual financial statements.
30 Nov 30 Nov
2013 2012
Average net operating assets (NOA) (Rm) 2 119 1 773
Operating profit margin (%) 11,9 12,5
Average NOA turn (times) 1,9 2,0
Return on average NOA (%) 22,1 24,6
Average net tangible operating assets (NTOA) (Rm) 1 315 1 172
PBITA margin (%) 12,3 13,0
Average NTOA turn (times) 3,0 3,0
Return on average NTOA (%) 36,9 38,7
Net asset value per share (cents) 5 737 5 277
Return on average equity (%) 17,3 21,8
Comparable return on average equity (%) 18,4 19,2
Operating profit has been determined after taking into account
the following charges (Rm):
– Depreciation 29 25
– Amortisation 16 16
Capital expenditure (Rm)
– Incurred during the year 38 43
– Authorised but not contracted for 59 50
Contingent liability
The group has received and is strongly refuting tax assessments relating to
the financing of the BEE transaction. The maximum exposure for tax, interest
and penalties is considered to be R1,7 billion but the prospects of having
to pay such an amount are considered remote.
Commitments
– Operating lease commitments on properties 202 168
– Tax payments in advance of legal process: R20 million per quarter until
matter is resolved.
– Commitment to purchase businesses: Dosco, GPM and Joseph Grieveson,
for a maximum consideration of R154 million.
Acquisition of businesses
The group acquired 100% of the businesses of Donsteel, Three-D Agencies and
Specialised Battery Systems for total considerations based on future profits and
which are estimated to be R78 million.
Plant and equipment of R5 million, inventories of R35 million, trade and other
receivables of R42 million, trade and other payables of R14 million, borrowings
of R15 million, taxation of R6 million, intangible assets of R6 million and
goodwill of R25 million were recognised at date of acquisition. These values
approximate the fair values as determined under IFRS 3.
The results since acquisition date included in consolidated results for the year
are as follows:
– Turnover (Rm) 96
– Profit after tax (Rm) 7
If the acquisitions had been concluded at the beginning of the financial year,
consolidated results for the group would have been as follows:
– Turnover (Rm) 4 081
– Profit after tax (Rm) 315
Events after reporting date
On 12 December 2013, Hudaco Trading acquired Dosco, GPM and
Joseph Grieveson from a company controlled by Graham Dunford,
a director of Hudaco, for a maximum consideration of R154 million.
Plant and equipment of R18 million, inventories of R32 million, trade and
other receivables of R45 million, trade and other payables of R43 million, net
borrowings of R8 million, taxation of R15 million, intangible assets of R17 million
and goodwill of R108 million will be recognised at date of acquisition. These
values approximate the fair values as provisionally determined under IFRS 3.
If the acquisitions had been concluded at the beginning of the financial year,
consolidated results for the group would have included:
– Turnover (Rm) 221
– Profit after tax (Rm) 28
In December 2013 the group entered into a three year, R300 million revolving
credit facility arrangement with ABSA Bank.
Segment information
Turnover Operating profit Average net operating assets
Year Year Year Year Year Year
ended % ended ended % ended ended % ended
30 Nov change 30 Nov 30 Nov change 30 Nov 30 Nov change 30 Nov
R million 2013 2012 2013 2012 2013 2012
Engineering consumables 2 478 9 2 280 292 4 280 1 394 19 1 169
– Ongoing operations 2 273 3 2 216 272 1 268 1 372 22 1 127
– Acquired in 2012 and 2013 205 64 20 12 22 42
Consumer-related products 1 470 20 1 223 199 18 169 601 23 487
– Ongoing operations 1 291 12 1 155 179 10 162 596 27 469
– Acquired in 2012 and 2013 179 68 20 7 5 18
Total operating segments 3 948 3 503 491 449 1 995 1 656
Head office, shared services and eliminations (6) (11) (22) (12) 124 117
Total group 3 942 13 3 492 469 7 437 2 119 20 1 773
Transfer secretaries:
Computershare Investor Services Pty Ltd, PO Box 61051, Marshalltown, 2107
Registered office:
Building 9, Greenstone Hill Office Park, Emerald Boulevard, Greenstone Hill, Edenvale
Tel +27 11 657 5000 Email info@hudaco.co.za
Directors:
RT Vice (Chairman)*
SJ Connelly (Chief executive)
CV Amoils (Financial director)
PC Baloyi*
GR Dunford
SG Morris*
D Naidoo*
* Independent non-executive
Group secretary:
R Wolmarans
"Value-added distribution – our core competency”
www.hudaco.co.za
Date: 31/01/2014 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
