Times are tough but it’s too early to give up hope

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

In­victa, once a firm mar­ket favourite, has dived to a 6 p:e, all but a third of its level 15 months ago. It is a de­r­at­ing that should alert small-cap bar­gain hun­ters.

In­victa is not alone in its rel­e­ga­tion to ex-growth sta­tus. Pun­ish­ment has also been dished out to Hu­daco, and oth­ers, by in­vestors run­ning scared of in­dus­trial com­pa­nies per­ceived to be held ran­som by the do­mes­tic econ­omy.

Not that the go­ing is easy. In­victa CEO Charles Wal­ters is the first to con­cede this. “We are fac­ing the per­fect storm,” he says.

In­victa’s two core divi­sions, Bear­ing Man Group (BMG) and Cap­i­tal Equip­ment Group (CEG), find them­selves hit by this storm. BMG is tak­ing a buf­fet­ing from the man­u­fac­tur­ing and min­ing slump and the drought has hit CEG, SA’s largest agri­cul­tural equip­ment dis­trib­u­tor.

Wal­ters says: “Con­di­tions are worse than we ex­pe­ri­enced dur­ing the [2008-2009] re­ces­sion. I see this con­tin­u­ing for 18 to 36 months.”

In­victa is not wait­ing to be over­whelmed. “We are right-siz­ing as needed and cut­ting costs,” says Wal­ters. Re­flect­ing this, In­victa’s cost of sales lifted a mere 0.2% in the six months to Septem­ber.

Un­der tough con­di­tions In­victa is “hold­ing up well,” says chair­man Christo Wiese, who, with a 36% stake, is In­victa’s big­gest share­holder. “Our half year re­sults were no train smash.”

How­ever, the re­sults fol­lowed a ma­jor cap­i­tal re­struc­tur­ing con­cluded in early 2015 and were po­ten­tially con­fus­ing. The cap­i­tal re­struc­tur­ing saw a R1.5bn spe­cial div­i­dend paid and R2.25bn raised through a rights is­sue which upped the num­ber of shares in is­sue by 45%.

The jump in is­sued shares left In­victa’s in­terim head­line EPS (HEPS) look­ing, as Wal­ters puts it, “like a disas­ter” at 34% down year on year. “Pro­vid­ing a more re­al­is­tic take on re­sults, nor­malised HEPS were down a far lower 7%.

The rights is­sue was ex­e­cuted at twice In­victa’s cur­rent R38/share and, net of the spe­cial div­i­dend, bol­stered its bal­ance sheet by R750m. It helped re­duce net gear­ing from 38% to 22% of share­hold­ers’ funds. Wal­ters says In­victa is work­ing to cut debt.

It po­si­tions In­victa to make a size­able ac­qui­si­tion at a time when, as noted in its in­terim re­sults pre­sen­ta­tion, many BMG com­peti­tors are “dis­tressed and in­creas­ingly des­per­ate”.

But In­victa is likely to con­fine it­self to mod­est ac­qui­si­tions, of which BMG com­pleted three at a cost of some R100m dur­ing the six months to Septem­ber.

Big­ger things could be in store off­shore. In­victa’s ob­jec­tive is to earn more than 50% of prof­its off­shore by 2020, against some 11% at present. The big­gest con­trib­u­tor is Sin­ga­pore-based Kian Ann, one of South East Asia’s largest dis­trib­u­tors of earthmovin­g equip­ment parts and diesel en­gine spares.

An ini­tial 75% was ac­quired in Kian Ann in 2012 for R1.36bn with the re­main­ing 25% mopped up in Oc­to­ber 2014.

“Our tim­ing was wrong. The com­mod­ity cy­cle was start­ing to turn down [in 2012],” says Wal­ters. “Earn­ings have not met our ex­pec­ta­tions but un­like many of its com­peti­tors, Kian Ann is prof­itable. We are also tak­ing steps to di­ver­sify Kian Ann away from its tra­di­tional mar­kets in China, In­done­sia and Malaysia.”

In­victa re­mains on the hunt for an off­shore ac­qui­si­tion that will move the group’s earn­ings nee­dle. When it comes it will prob­a­bly be funded through a for­eign sec­ondary list­ing.

What In­victa first needs is a solid ac­qui­si­tion to take to for­eign in­vestors. Wal­ters says: “We are hop­ing for pos­i­tive news soon.”

If it comes, In­victa will go to the ap­pro­pri­ate stock mar­ket. “It could be Sin­ga­pore, Hong Kong or even Lon­don but is un­likely to be a US mar­ket,” says Wal­ters.

While there is lit­tle doubt that In­victa will re­port an­other poor set of num­bers in its full year to March, to write it off as ex-growth would be fool­hardy.

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