IMPERIAL produces good performance for the first half ended 31 December 2013
- Revenue 13% higher at R51 357 million
- Operating profit improved 8% to R3 166 million
- Core EPS up 7% to 937 cps
- Diluted Core EPS up 10% to 915 cps
- Annualised ROE of 21%
- Interim dividend per share up 5% to 400 cps
- Balance sheet remains strong - net debt to equity ratio of 62% - with significant room for acquisitive growth
- Group portfolio resilient despite challenging trading conditions in South Africa and Europe;
- Operating profit from foreign operations grew to R712 million; now 22% of group operating profit;
- Operating profit from African operations outside of South Africa increased by 31% to R240m;
- Excellent performance from Logistics - operating profit up 50%;
- Successful expansion of distribution activities in Nigeria and entry into South America;
- Good growth from after-sales parts, service and used car sales;
- Financial Services operating profit growth of 11%.
Commenting on the results, CEO Hubert Brody said: “Imperial’s first half results were good and we are pleased that the diversity of our portfolio was resilient in the face of challenging trading conditions in South Africa and Europe.”
“We have continued to drive acquisitive growth in and adjacent to existing industries and geographies. We are excited about the expansion of our pharmaceutical distribution activities in Nigeria with the acquisition of Ecohealth Limited (Ecohealth).”
Ecohealth has an annual turnover of approximately USD 180 million. It distributes a significant proportion of the pharmaceuticals consumed throughout Nigeria, with a meaningful market share of the ethicals (branded products) market. It has an excellent distribution network supplying pharmaceutical products to 4 200 hospitals, 8 000 pharmacies and 2 000 clinics. It adds sales and marketing capabilities to Imperial’s service offering and will enable Imperial to offer an end-to-end capability to its customers in Nigeria’s fast-growing pharmaceutical sector. Imperial is fast becoming the undisputed leader in consumer product distribution in sub-Saharan Africa.
Brody noted that in the International Logistics business ”we have secured a long term push-boat shipping contract to transport iron ore from Brazil via Paraguay to Argentina as a first step to expanding in a region with excellent growth prospects and where our expertise as the leading inland shipping company in Europe will stand us in good stead.”
“Our over-arching strategic objective is to drive the improvement of returns on capital, as this is the ultimate generator of value for our shareholders. In line with this objective, the group achieved a return on invested capital (ROIC) of 15,1%, against a weighted average cost of capital (WACC) of 8,9%. Our target is to achieve a ROIC of 4% above WACC through the cycle.”
The group’s operating profit grew by 8% with operating profit from foreign operations growing to R712 million which now comprises 22% of group operating profit. Diluted core EPS increased by 10%.
A new seven year bond amounting to R1,5 billion was issued to refinance shorter term debt which provides more flexibility and capacity on shorter term facilities. The liquidity position remains strong with R3,2 billion of unutilised facilities.
Logistics produced an excellent first half result with revenue growth of 26% and operating profit growth of 50%. Despite a sluggish South African economy, the Africa Logistics division performed well due to contract gains, recent acquisitions and rationalisation measures. The logistics businesses in the rest of Africa increased turnover and operating profit by 23% and 54% respectively. The International Logistics division performed satisfactorily in an environment where activity levels in some of its core markets were under pressure. The performance was assisted by the translation effects of a weaker Rand, with operating profit up 34% in Rand terms.
The Automotive and Industrial pillar performed satisfactorily under challenging trading conditions with revenue up 8% while operating profit decreased by 7%. It was adversely impacted by a combination of Rand weakness, a slowdown in vehicle sales and a more competitive market. This was countered by the continued growth from after-sales parts and services and the balance of the automotive value chain, which produced a good result.
Financial Services performed well achieving operating profit growth of 11%. The termination of non-performing insurance business lines contributed to an improved underwriting margin. Investment income was also higher than in the prior period due to favourable equity markets.
Trading conditions in the South African logistics market remain challenging, with subdued volumes as the manufacturing sector struggled to gain momentum and many segments of the retail sector experienced little or no growth. The consumer market across many African countries continued to grow with the emerging middle class. Germany experienced tough market conditions, especially in December 2013, while German exports into markets outside Europe benefitted the group.
The new passenger vehicle market faced difficult trading conditions and was slightly down year on year according to NAAMSA. Inflationary pressures as a result of a weakening currency, the high base and lack of economic and employment growth all presented headwinds for the new vehicle market. Industrial action in South Africa during the period also impacted volumes. The used car market improved during the period as a result of new vehicle price inflation. The medium and heavy commercial vehicle market performed well showing growth of 16% year on year.
Commenting on the group’s strategy, Hubert Brody said, “Our strategic objective remains to deliver improving returns on capital to generate value for our shareholders. As a result, we continuously seek growth opportunities in and adjacent to existing industries and geographies such as our expansion in pharmaceutical distribution in Nigeria and the recent entry into the South American inland shipping market.”
Imperial’s deep involvement in the automotive value chain provides a competitive advantage to generate the cash needed to grow logistics operations which offer good growth prospects, while still pursuing opportunities to enhance its participation in the automotive value chain.
Imperial’s balance sheet remains strong allowing the group to take advantage of organic growth and acquisition opportunities. Acquisitions will continue to be a growth driver.
Trading conditions in the logistics industry in South Africa will remain challenging due to subdued economic activity. The division recently undertook rationalisation measures which better positions itself to be more competitive and cost-effective in a tough market. Given the strong industry fundamentals and Imperial’s established infrastructure and network, the division is ideally positioned to capitalise on these growth opportunities and gain more business in South Africa. There are good prospects in the rest of Africa and expansion into the continent will continue to gain momentum, especially in consumer markets with CIC, Imperial Health Sciences, MDS Logistics and now Ecohealth providing the ideal platform to take advantage of growth opportunities in African markets. Imperial Logistics International remains well positioned in attractive niches in Germany and will continue to follow its customers who are entering new markets.
The group anticipates trading conditions in the new motor vehicle market to be tougher. Reduced disposable income, interest rate increases, a significantly weaker currency and the high base created by strong volume growth over the past four years all present headwinds affecting margins and growth. While the inventory position has improved, the market is expected to be more competitive as market conditions become more challenging. As a result of new vehicle price increases, the used car market should improve further and after sales parts and service revenues will continue benefiting from the increase in the installed base of vehicles, especially in the brands that the group represents exclusively. The group also expects to benefit from its strong position in the commercial vehicle market.
Regent will focus on improving its underwriting result and the investment portfolio will continue to be prudently managed.
Hubert Brody concluded, “Overall, given current market conditions, it will be difficult to achieve growth in the 2014 financial year as we expect our vehicle distribution activities to be under continued pressure in the second half of the financial year whilst the remainder of our automotive value chain together with Financial Services is expected to be robust and our Logistics pillar is expected to perform well.”