Anthony Clark: Getting down to brass tax

Invicta seems to have decided to settle with Sars, and once this is done the share price may rise fast

Invicta Holdings, a piece of the Christo Wiese empire, has had an unfortunate month. It has had the ignominy of close inspection of its tax affairs, with the SA Revenue Service (Sars) circling. And the market is not taking kindly to this.

Sars has concluded that Hudaco’s leveraged 2007 BEE structure was a scheme designed to avoid tax.

Invicta, I postulate, has taken a commercial position rather than acting on principle, and has decided to settle and put the matter behind it.

It may believe it has done nothing wrong. On principle it could have chosen to tackle any Sars assessment against it, especially as its structure was audited and approved by Sars for many years without quibble.

But after a long board deliberation ahead of the release of the 2018 results, as well as discussions with its auditor and an independent counsel, Invicta decided to raise the provision for the tax to R550m.

Its decision to have a more pragmatic view is a sound move, and one I have advocated to Invicta in past discussions: “You may think you are right. But with a millstone around your neck dragging you down . . . just settle, swallow it . . . and move on.”

Many will recall rival Hudaco’s Sars issue. After a Sars announcement and the posturing of the company’s management on principle, Hudaco’s share price was mauled for years, and this despite commendable results in a difficult environment.

The initial Sars “slap on the wrist” quickly escalated, as ever more grinding media headlines hit. More slaps followed; at one stage the company was faced with a R1.9bn assessment after interest and penalties were added to this.

In 2015 Hudaco eventually settled for R312m, having already provided Sars with payments totalling R120m.

It was one of the largest Sars fines since Nampak’s R250m in 2007 and businessman Dave King’s R706m in 2013.

The effect of Hudaco’s “commercial decision” was swift. Almost a year’s earnings had been forked out to Sars, but despite this the market heaved a sigh of relief and added more than R900m to Hudaco’s market capitalisation. Its share price has not looked back since. That brings us to Invicta. I believe it is in talks with Sars and that its management wants this matter to be resolved sooner rather than later.

Do I believe R550m is enough? No, personally I don’t.

What we have yet to get is the Sars assessment and rand amount. This will generate the usual front-page headlines and probably weaken the already low Invicta share price.

It is certainly within the company’s means to pay a little more if needed; it sits with R858m in cash.

I’d venture an opinion that the settlement between Sars and Invicta will be for about R600m.

I can’t see Sars wanting a protracted legal fight that would take years in court when Invicta has already put aside a fair pot of money. But I can see Sars asking, as with Hudaco: “Please, sir, may we have some more?”

If the amount is about R600m I can’t see Invicta management wishing to enter a legal fight over an additional R50m either. The sum may stick in its craw, but I believe it will probably pay up.

I’m betting that the second that Invicta discloses it has settled with Sars the share price will run. With a stated NAV of R46.91 I can easily foresee the current discount of -28% being materially narrowed and the share price going back to R45. This would add a chunky R1.2bn to Invicta’s market capitalisation.

This should be more than enough to keep many stakeholders happy — even after the eventual Sars payment.

My recommendation is to wait for a “bad headline day”, which could knock Invicta’s shares closer to R30. I would absolutely be a buyer on a Sarsled recovery and the subsequent market’s sigh of relief. ●

“I can’t see Sars wanting a protracted legal fight when Invicta has already put aside a fair pot of money