Share analysis: Imperial Holdings - Logistics

The Company 

Imperial Holdings was established in 1948 as a single car dealership and over the years has diversified into new products, sectors and geographies. The company’s current offering, which emerged after a major restructuring aimed at streamlining the firm in 2008, includes logistics (South Africa, Africa and Europe); vehicle retail, rental and after-market parts (retail of original equipment, manufacturers’ vehicles, car rental and after-market services); vehicle import and dealerships (import and retail of vehicles and after-market services); and financial services (retail of financial products such as insurance and warranties). These divisions contributed 36%, 25%, 25% and 17% to operating profit, respectively, in 2014. The logistics business may be considered Imperial’s core competence; in terms of revenue it is currently the largest private logistics provider in South Africa with around R16bn ($1.38bn) in 2014, and it is also one of the largest players in the German logistics market (around €1.1bn in 2014).

The company had a change of leadership in 2014, with Mark Lamberti taking over from Hubert Brody who was involved in the 2008 restructuring. Lamberti founded Massmart Holdings and served as non-executive chairman of Massmart Holdings and Transaction Capital prior to his appointment at Imperial. He resigned from these positions in April 2014 and March 2014, respectively.

Approximately 74% of Imperial’s operating profit originates from South Africa. It is therefore vulnerable to a slowdown in the South African economy. Furthermore, its vehicle import and dealership business is exposed to exchange rate fluctuations that impact the cost of the imported vehicles; the South African rand has weakened almost 13% since the start of 2014. A less robust exchange rate puts pressure on this division’s margins as retailers are not able to immediately pass on the increase in cost to consumers as the South African vehicle market is intensely competitive.

According to the preliminary results for the year ended June 30, 2015, the group achieved record revenue and operating profit in the 2015 financial year, despite deteriorating market conditions, following a marked improvement in second-half performance and three new acquisitions of Pharmed, Imres and S&B Commercials. The firm’s revenue rose by 7% to R110.5bn ($9.5bn) and operating profit increased 1% to R6.2bn ($535.7m). The acquisitions were particularly important to the full-year results. Excluding these, revenue increased by 3% and operating profit decreased by 4%.

Development Strategy

In addition to reducing complexity in the business, the management team at Imperial is focused on diversifying its business away from vehicle distribution while at the same time focusing on its core competence, logistics. Evidence of this can be seen in the proposed disposal of its insurance business, Regent and the firm’s diversification into the African logistics market. The expansion into the continent is arguably where the most upside lies for Imperial; the company is focused on fast-moving consumer goods and pharmaceuticals distribution and its acquisitions are aimed at attaining a leadership position in selected target markets.

That said, Africa is still small in the overall context of the company and makes up only 8.5% of its operating profit. However, it is worth noting that the logistics business across the continent has grown almost five-fold in the past five years in terms of operating profit. The African business offers stronger potential compared with the more mature logistics business in South Africa, albeit from a lower base. However, despite the promising prospects of logistics on the continent, the focus is likely to continue to be on South Africa itself.