Attractive industrial mix
Still bearing up well, but new deals may add flavour
WHEN IT COMES TO mid-cap industrial conglomerates (or mini-conglomerates, if you will) it seems professional investors mainly home in on Argent or Hudaco. We think Constantia-based Invicta Holdings (which has a slightly superior market rating compared to Hudaco and Argent) is a company that might warrant more serious market attention – presenting some solid organic growth prospects as well as a strong possibility of some interesting corporate action.
Currently Invicta – 67% owned by directors (including retail tycoon Christo Wiese, who holds 34%) – comprises distribution operations that span the industrial, mining, agricultural, automotive and construction sectors. The products range from ball bearings to golf carts and tractors to tiles.
But there’s a potential balance issue despite the diversity of operations. The truth is that Invicta currently relies heavily on the contribution from its Bearing Man division, which supplies bearings and transmission products throughout Africa. In its financial year to end-March 2007 Bearing Man’s business should still account for just more than 50% of group turnover.
That means Invicta should probably have to look at bolstering its agricultural, automotive and construction activities.
The group has a robust balance sheet with plenty of gearing capacity, and cash flow from operations has traditionally been strong. But the group is now renowned for splurging its capital. CEO Arnold Goldstone notes: “We’re aggressive in dreams and aspirations but conservative in cash flow management.”
Goldstone says Invicta did try to stick to one major corporate event each year. “It’s difficult to handle two or three transactions a year… so every 18 months we’ll do a deal.” It’s probably in the latter two categories – especially building supplies –where Invicta will seek out new opportunities.
Goldstone concedes that Invicta – aside from the odd bolt-on acquisition – won’t be able to pursue any meaningful corporate action in the bearings market. Any sizeable deal will also attract the attention of SA’s competition authorities, with Bearing Man already holding around 30% of the bearings market.
On the agricultural side, Invicta last year
The truth is that Invicta currently relies heavily on the contribution from its Bearing
acquired New Holland SA – adding a sister brand to its core CASE agricultural machinery distribution business. Bedding down and extracting synergies from the New Holland operations will no doubt preclude any new agricultural activity at Invicta for the foreseeable future.
The possibility of new competition from Chinese players in the construction equipment supplier segment would probably also mean Invicta – which holds some viable niches in backhoe loaders, wheel loaders, skid steers and excavators – may keep clear of any new opportunities in that increasingly competitive segment.
Shifting into other niches in the automotive business could be an option, but ever since the sale of Engineparts in 2004 the feel- ing is that Invicta is content to ply its trade in the niches that its Autobax (specialised automotive and motorcycle parts and accessories) division serves.
It seems clear that Invicta may well be laying a foundation for assembling a building supplies division with an emphasis on retailing. At year-end 2006 the group acquired 60% of Cape Town-based tile retailer Tiletoria – a deal that was struck on a rather nifty 5,5 times price:earnings multiple.
While Tiletoria comprises only one outlet in Paarden Eiland, Goldstone reckons there’s huge potential for national expansion. One can reasonably expect it to open one or two new branches in bigger urban areas over the next 12 to 18 months.
Invicta has retailing experience through Bearing Man outlets, and the import-based distribution experience in the group will also come in useful when expanding the tile business.
However, the big question at this point is whether Invicta will look at other acquisitions in the building supplies market. Whether Invicta – which has stressed its cautious approach to deal-making – has the balls to make a large building supplies acquisition in the league of Cashbuild (which Wiese ironically controlled via Pepkor some years back) or Italtile seems unlikely.
More likely is that Invicta would scout for smaller opportunities that would complement the existing Tiletoria division and make for (relatively) easy integration.
Finweek has previously speculated that Invicta might turn its attention to struggling Absolute Holdings (market capitalisation: R7,4m), which owns several tile retailing outlets in the Cape and Gauteng. That could give Invicta a bigger footprint by rebranding the existing Absolute outlets.
Would a more diverse building supplies specialist such as Buildmax – which isn’t exactly pulling sentiment despite returning to profitability – also fall under Invicta’s gaze?
Or could an opportunity pop up at PSG’s burgeoning private equity flank, where Wiese has some pals (and a rather large equity interest) nowadays?
Christo Wiese – holds 34%.