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

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

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

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