Best left on the shelf as econ­omy floun­ders

Financial Mail - Investors Monthly - - Analysis - An­thony Clark

Ask most JSE stock mar­ket wags about bell­wether stocks and they would tra­di­tion­ally men­tion Afrox, Hu­daco and In­victa — com­pa­nies whose prod­ucts and ser­vices en­sured that the en­gines of the min­ing and man­u­fac­tur­ing sec­tors kept hum­ming.

All three stocks for many years were con­sis­tent per­form­ers and de­liv­ered good re­turns to share­hold­ers.

How­ever, over the past years that link­age has been bro­ken as the do­mes­tic econ­omy fal­tered. It’s been tricky for in­dus­trial con­glom­er­ates to adapt. In­victa’s head­line earn­ings peaked in March 2015 at 609c a share and have tanked since then to the 126c recorded in the 2019 fi­nan­cial year. The share price, which traded as high as R104 at the start of 2015, fol­lowed earn­ings lower to re­cently reg­is­ter a new low of R17.70. The share has re­cov­ered to R21 at time of writ­ing

Ex­ac­er­bat­ing In­victa’s earn­ings trou­bles was a sim­mer­ing tax con­cern over a BEE structure that the group un­der­took nearly a decade ago.

The com­plex structure al­ways drew the scru­tiny of the mar­ket, de­spite In­victa in­sist­ing that the ar­range­ment was tax com­pli­ant.

Af­ter pro­longed ne­go­ti­a­tions, it set­tled with the SA Rev­enue Ser­vice in Septem­ber 2018 for R750m. This led to the de­cline in earn­ings into 2019 as a pro­vi­sion was made for part of the set­tle­ment. The devel­op­ment also led to a post­pone­ment of div­i­dends as In­victa looked to con­serve cash.

The mar­ket’s con­cern over work­ing cap­i­tal and in­ven­tory was cer­tainly not aided by the large set­tle­ment.

Steven Joffe, a former enX and Gold Reef Casi­nos ex­ec­u­tive, has been ap­pointed CEO af­ter the de­par­ture of Arnold Gold­stone.

Joffe is an In­victa out­sider, and will have to work over­time to re­gain mar­ket con­fi­dence and kick-start a stalled com­pany in a mori­bund econ­omy.

At the re­cent AGM it was clear that In­victa has bat­tened down the hatches with cost­cut­ting ef­forts – trim­ming head­count and culling low­er­mar­gin prod­ucts. But In­victa will still have to bat­tle the weak econ­omy in all its key op­er­at­ing seg­ments.

With lit­tle do­mes­tic in­vest­ment in new man­u­fac­tur­ing or min­ing ca­pac­ity, In­victa’s cash­strapped cus­tomers will prob­a­bly make do with or mend ex­ist­ing equip­ment. This will not drive In­victa’s rev­enue or prof­its higher.

In­victa car­ries a R2.3bn mar­ket value – a far cry from five years ago when the com­pany was worth over R10bn. This is a nearly 80% value wipe­out.

By com­par­i­son, coun­ter­mates Afrox and Hu­daco are both ahead 10% on a five-year share price per­for­mance.

De­spite In­victa bounc­ing off 52-week lows, IM sees no cur­rent com­pelling ar­gu­ment that ma­te­rial or mean­ing­ful earn­ings re­cov­ery is com­ing in the next 12 months.

So un­til some green eco­nomic shoots are clearly vis­i­ble, In­victa is best left on the shelf. In terms of in­dus­trial plays, IM prefers the di­ver­si­fied na­ture of Hu­daco in the pre­vail­ing eco­nomic un­cer­tainty. ●

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