South Africa: Counting on Hudaco

Source from:  Business Day (Johannesburg) 14 February 2008 02/15/2008

SURELY, some readers may feel, we should have switched Tiger Brands into AVI as I had just written how good a company the latter is? Why buy Hudaco and switch from the food sector into industrial engineering? It does seem a bit illogical but it's partly explained by the long-standing sentimental attachment we've had for Tiger Brands, rather than on our confidence in the food sector. Don't misunderstand me: when we were constructing the Private Investor portfolio, we plumped on food as a sector that had potential for earnings growth in an inflationary period when consumer spending would be under pressure. If you like, we wanted to invest in the sector for defensive rather than offensive reasons. When we looked at the industrial engineering sector, the attraction was offensive -- the potential for better-than-average earnings growth because of the boom in construction and mining. We focused on two counters, Hudaco and Invicta, and, for a number of reasons, put Hudaco on the buy list. We had already decided that Pick n Pay, which was at the selling and not the production end of the business food chain, was a good mix of defensive and offensive investment strategy. We didn't really need a food producer, but it would, we felt, be crass to ignore Tiger Brands. The company had for so long been one of the bluest of blue chips on the JSE -- as a child I knew that, as Tiger Oats, you could buy its shares on the stock market. In the hypothetical portfolio we built for our (long defunct) newsletter, Tiger Brands was one of the stars when we bought the real holding in the Private Investor portfolio. We had notionally bought shares at R69,50 in 2004 and in just over three years, the share's price was a shade under R190. In September, when we bought the real investment, we paid R188,99 a share for 52 shares, our total outlay being R10035,52. When I reviewed the portfolio, I mentioned we had received a distribution of R232,44c. This was small consolation for the real loss we made when we sold the holding at R138,90 a share, a capital loss of nearly R3000 or 30%. For all we know, the share price of Tiger Brands may now rise -- even faster than Hudaco's -- or Hudaco's share price could fall. Any of the counters in the portfolio could be tainted by skulduggery or suspected skulduggery. And we shareholders won't know until after it has happened. Jean and I have a short list of companies whose shares we wouldn't buy because we either don't like their current or past business practices or present or past associations. In some respects this is prejudice. But it's this kind of prejudice that has kept us away from such companies as microlending banks, holes in the ground (or yet to be dug) that pretend to be gold mines, tobacco merchants, beer brewers and Gold Reef. Tiger Brands was founded in 1921 and was listed on the JSE in 1944. Integrity was a core component of its public image. This component is now all too obviously an illusion. We're counting on Hudaco's reality. Enditem