South African company Reunert is experiencing challenges in its US operations due to new tariff implementations.
So said Reunert CEO Alan Dickson last week, in an interview with ITWeb after the company announced its interim financial results for the six months ended 31 March.
Reunert manages a diversified portfolio of businesses in the fields of electrical engineering, information and communication technologies, as well as defence and allied technologies.
It exports products such as circuit breakers and radar systems to the US market through its subsidiaries.
US president Donald Trump introduced the concept of reciprocal tariffs as part of his broader “America First” trade policy, arguing that the US should impose the same tariffs on countries that levy high tariffs on American goods.
After initially imposing a 30% tariff hike on South Africa, the US government reduced the import duty to 10%, with the measure scheduled to expire at the end of July.
“The first impact of US tariffs on Reunert is that global growth is dropping and South African growth will also drop on the back of that. This impacts everybody because when growth is down, everyone is going to get hurt,” said Dickson.
“The second issue that has a direct impact on us is we export about R300 million to R400 million per year to the US. We export radars and circuit breakers to the US through two of our companies.
“At the moment, we are suffering because those tariffs need to be paid. That hurts us, but at the moment, the tariffs have not impacted volumes but they are impacting margins.”
Balancing act
He noted that Reunert is engaging with its customers in the US to figure out how to navigate this situation.
“We are now dealing with customers on that side to try and work out how we are going to work around this to see how much costs we can pass on, as well as costs that we need to take out of our own systems. That’s the reality that we have to deal with.
“We are working with our customers in the US to make sure we don’t lose volumes. We want to keep those customers and continue supplying to them.
The third impact is the defence business, which is completely independent of the global slowdown, as well as what the Trump administration is imposing.
“In fact, the manner in which the administrations have dealt with partners in NATO [North Atlantic Treaty Organisation] and some of the statements being made about defence decisions, it has led to an increase in countries requiring to be more self-reliant and independent on their defence requirements. So, this is actually improving the demand for our defence products.”
Commenting on the recent meeting between president Cyril Ramaphosa and Trump, Dickson said: “I think they did a good job for me as a business person and industrialist. For me, the most important takeout I wanted was to open the doors to manage our trade relationships.
“Our government did a good job in opening the doors. We can see that negotiations are now going on with our American counterparts in terms of trade. I think the risk of us going back to 30% tariffs is somewhat diminished, although we still have a long way to go.
“Our government must make sure we are not overly penalised compared to our competitors in regards to what we export to America.”
Tough times
In the six months to 31 March, Reunert’s revenue decreased by 5% to R6.2 billion (H1 FY24: R6.5 billion) and operating profit declined by 16% to R585 million (H1 FY24: R697 million).
The JSE-listed company declared an interim dividend of 90 cents per share.
Dickson said South Africa is quite a tough space to operate in at the moment. He noted that during the reporting period, business confidence and growth for ICT as well as renewable energy either remained flat or decreased.
“Our ICT and electrical engineering segments were more or less flat but our solar business delivered a nice increase. Broadly, everything was fine but there were four specific things that impacted the results.”
He pointed out that the first of those is Blue Nova because of the weak environment in battery energy storage systems. Reunert last week announced it had disposed of its Blue Nova battery storage business after load-shedding eased in South Africa.
The second, he explained, was a large defence contract that was deferred from the first half of the year to the second half.
Thirdly, he added, the non-recurrence of COVID-19 insurance proceeds received in H1 FY24 negatively impacted the group’s profitability.
“We had COVID insurance that paid out R78 million last year and the last portion of the payment was only R9 million this year. So, there was a net R69 million difference.”
The last matter was the reduced demand in the South African power cable market, he said.
“In our minds, three of these four issues have already been dealt with. The battery storage business will be sold and this should be concluded by the end July, and this means the drag on earnings is gone. The defence contract was delayed but not cancelled, while the COVID insurance was a once-off.
“The only matter that is a continuing issue is the challenge with our cable business, but we are positive of having a good second half.”
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