The market punished Imperial Logistics for its poor outlook, sending the share down more than 8% by mid-afternoon trade on Thursday despite it increasing interim headline earnings by 24% in the six months to December.
It has been just three months since the group’s JSE listing following the unbundling of the Imperial Group, and one month since the appointment of new CEO Mohammed Akoojee, who reported a 6% rise in continuing revenue (excluding businesses held for sale) to R26.6 billion and flat operating profit of R1.3 billion, with headline earnings up 24% to 300c a share.
Strong results from the group’s African Regions were offset by underperforming consumer packaged goods and healthcare businesses in South Africa and lower results from the automotive and express palletised distribution businesses in the Logistics International unit.
Outside South Africa, revenue grew 10% to R18.8 billion or 70% of group revenue and operating profit grew 5% to R867 million or 65% of group operating profit. African continent operations accounted for 54% and 70% of revenues and operating profits, with the rest coming from Europe and the UK.
Rationalisation and cost reduction
The group said a lacklustre trading environment in South Africa is reflected in reduced volumes “and ongoing competitive and client pressures, particularly in the consumer and manufacturing businesses” and a generally “unsatisfactory performance” was reported, with revenue down 2% and operating profit down 9%. The period was marked by rationalisation and cost reduction and this is ongoing in the second half. Associated costs may not have sat well with investors, Akoojee admitted.
In the rest of Africa, businesses in Nigeria, Ghana and Mozambique performed well while volumes in Namibia and Kenya were under pressure. Logistics African Regions delivered an 18% increase in revenue and 16% increase in operating profit, with the results supported by the inclusion of Namibian consumer packaged goods business CB Enterprises, and solid performances from healthcare businesses in West Africa, where it is the leading distributor of pharmaceuticals in Nigeria and Ghana. The result was also boosted by a 6% weakening of the rand.
“We had a good performance in Africa, which was up 18% – and it was all organic growth,” Akoojee told Moneyweb. “We have seen volumes increasing, and we have an asset-light model, with no big infrastructure and big fleets, so we have been able to convert profits into cash.” Imperial is also largely in pharmaceuticals, which are defensive and have pricing power. He is expecting growth to continue into the second half. “The outlook for the Africa business, despite some challenges, is quite good,” he said.
‘Multinationals are wanting to outsource more – they want to be in Africa, but don’t want in-country positions in those markets, and this is an opportunity for us.’
Economic conditions in Europe and the UK were generally good, and Logistics International grew revenue by 7% in rands but operating profit decreased by 8% as the rand was 3% weaker than the euro over the period. The implementation of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) resulted in significantly lower vehicle production volumes in Logistics International’s automotive business in the first half, and production volumes are recovering, but are still not at optimal levels.
The market seems most worried about the outlook for the full year, when the group expects to report increased revenue, but lower operating profit and headline earnings in line with the prior year.
Logistics South Africa’s results will be affected by lower consumer demand and rationalisation and restructuring costs. African operations will grow, supported by new business, while Logistics International results will be lower due to restructuring costs and weaker performances from the express palletised distribution and automotive businesses.
Akoojee said the WLTP issue “hurt us and it hasn’t gone away”. Management decided to take out costs in South Africa and Europe, and there will be associated costs in the next six months, which Akoojee says the market had likely reacted to. Imperial is taking about 10% of costs out of the South African business and 20% out of the European business, including head office and operations costs. “When you do something of that scale, it does come with once-off costs that hurt you short term, and this might have caught the market off guard. But these are short term.”
Additionally, Akoojee said, the South African economy hasn’t improved and volumes are low. “We had to be realistic about prospects,” he said, but added that the group has set itself up for better returns from 2020. “Results were satisfactory in the circumstances and well explained in terms of action plans, and we are looking at running the business longer term than just the next six months. I am confident what we have done will set us up well for 2020 and beyond.”
The group said its board is looking at its remuneration policy following a low 51.84% vote in favour at its October AGM, but did not elaborate.