Imperial Logistics seeks growth abroad

South Africa’s Imperial Holdings reported record revenues and marginally lower earnings per share in fiscal 2016, with rising operating income and unchanged dividends year-on-year.

Its equity valuation currently implies a rich trading multiple of 1.5x against book value, but it becomes less demanding based on trading multiples of 10x and 6x for P/E and EV/EBITDA, respectively.

Unsurprisingly, it is looking for targets abroad to shore up its core logistics activities as well as its own valuation on the stock exchange.

Net earnings multiples are boosted by a mildly stretched capital structure. Investors have been willing to pay up for incremental earnings so far, lured by growth and generous dividends – its forward yield stands at 4.5% – yet preliminary annual results, which were announced earlier this month, left a bitter taste in their mouths as downbeat growth prospects and profitability weighed on performance.

“Total revenue and operating profit for the Imperial Group grew 8% to R118.8bn [US$8.2bn] and 3% to R6.4bn respectively,” it said, “supported by the inclusion of the Imres and S&B Commercials acquisitions for the full year, and strong performances from the Vehicle Import, Distribution and Dealerships division and the Logistics Rest of Africa sub-division.”

Its core logistics unit – consumer and industrial logistics make up 40% and 42% of group revenue and operating profit, respectively, with 71% of profit generated internationally – delivered both domestically and abroad.

Logistics turnover in Africa rose 7% to R27.1bn from R25.3bn a year earlier, but operating income dropped 4% to R1.53bn as South Africa’s activities were faced with “challenging trading conditions” which continued “to put pressure on revenue and profitability due to soft volumes, particularly in the manufacturing, commodities, fuel and chemicals sectors”.

The unit reported declining margins and returns on invested capital, while the cost of capital surged – and this mix in such a core market could point to diminishing returns for shareholders.

At group level, South African activities were responsible for 58% of group revenues and 64% of group operating profit.

International logistics, meanwhile, grew at a greater clip, turning over R20.7bn, up 9% year-on-year, with operating income coming in at R1bn, up 6% versus one year earlier. Returns dropped, while the cost of capital rose, but the damage was contained.

Meanwhile, the vehicle importation, distribution and dealerships unit saw revenues rise 4% to R28.4, while operating earnings surged 20% to R1.5bn, driving up margins. “The improved performance was seen in all three of our major exclusive imported brands (Hyundai, Kia and Renault),” the group said. Both unit returns and the cost of capital rose.

Finally, its vehicle retail, rental and aftermarket parts division turned over R41bn, with unchanged operating profit at R1.67bn. Return on invested capital was marginally lower year-on-year, but the cost of capital was on its way up.

While the group envisages additional asset disposals, it recently said that it also plans acquisitions outside its domestic market, targeting growth in logistics.

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Source: Transport Intelligence, 30 August, 2016

Author: Alessandro Pasetti