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Imperial Holdings toughing it out

The home-grown, locally listed entity boasting an international group of operations, has − through the nature of its businesses (logistics and vehicle import, distribution, retail parts and vehicle related financing) − fallen out of investor favour for the last 12 months or so, as the company endures a difficult phase of the business cycle.

Macro factors including rand depreciation, rising interest rates and a slowing economy have weighed on investor sentiment for the group, which derives more than half its revenue from operations in SA.

Interim results for the six months to December 2015 revealed the astuteness of management, led by CEO, Mark Lamberti, who’s been at the helm of the group since March 2014.

While the rand depreciated 24% year-on-year against the dollar, forward cover and the stocking of inventory at more favourable rates saw the vehicle import, distribution and dealerships division still increasing operating profit by 15%. Overall, half-year revenue was up 6% to a record R59.8bn.

The African logistics business saw operating profit flat as growth outside of SA offset weakness within SA.

The international logistics business grew 3% while the vehicle retail, rental and aftermarket parts division increased operating profit by 0.4%.

The financial services division managed to increase operating profit by 9% despite lower volumes.

While Imperial’s share price rerated over the six-month period leading into the results, the share has shown some signs of recovery post the aforementioned results.

The deep discount now sees the company trading on a forward P/E ratio of less than 9 times, while offering an attractive dividend yield at around 6%.

The P/E ratio shows a significant discount to both the overall market and broader industrial sector, while offering a yield at a premium to both benchmark indices as well.

It is noted by the company that the South African economy – from which the bulk of earnings is realised – is expected to remain challenging throughout the year.

This will keep earnings subdued, although the company is slimming down through the sale of non-core assets and investing these funds to further diversify from its reliance on the domestic markets and into African and offshore operations, which are expected growth areas for the group.

Strategic disposals in the half-year amounted to R4.7bn.

Imperial’s strategy is to grow revenues and profits that are “less susceptible to currency volatility, in order to reduce the group’s exposure to exchange-rate-sensitive operating profits attributable specifically to directly imported vehicles”, it said in its interim results presentation.

In the half-year, revenue not related to vehicles was up 6% to R24.8bn in the six months to end December – reflecting a 15% compound annual growth rate (CAGR) over the past three years – and now contributes 41% to overall group revenue.

Revenue from its foreign operations has shown a CAGR of 25% over the past three years. In the six months to end December, it increased 21% to R24.5bn, contributing 41% of group revenue.

Imperial seems to be defying the gravity of poor economic conditions to show resilience through the tough end of the business cycle through stringent management and the inherent diversification in the space within which it operates.

Far-sighted investors might consider current valuations on the share as an opportunity for longer-term gains, which could gain traction as business conditions improve over time.   

*Shaun Murison is a market analyst at IG

This article originally appeared in the 17 March 2016 edition of finweek. Buy and download the magazine here.

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