TRADE of the MONTH

Invicta and Hudaco shares deserve closer scrutiny

“Hudaco was the type of stock you could put into any portfolio or pension fund and sleep well at night. The group was solidly structured operationally

IM first recommended Invicta Holdings in a review in April 2020. In a special feature, written with editor Marc Hasenfuss, IM picked stocks for really rough times.

At the time of writing then, Invicta was trading at 600c, having been as low as 351c during the JSE Covid selloff in March 2020. How the mighty had fallen.

This industrial blue chip in retail tycoon Christo Wiese’s empire had unravelled due to poor economic conditions, rising debt as well as a longrunning spat with the SA Revenue Service, which eventually led to a huge R750m penalty being negotiated.

Some may remember that Invicta, at its peak of R122 a share, had a market valuation of R10bn. At its March 2020 worst, Invicta was worth just R500m.

Invicta’s key businesses are involved in supplying parts, spares and components to industrial and mining segments. The group also holds an interesting agricultural and construction equipment distributorship business as well as offshore interests via Kian Ann in Singapore.

Admittedly, Invicta was never going bust. But there was much market swirl on asset sales — and even a rights issue — to solve the company’s worrying debt problems.

IM recommended Invicta as the new CEO, Steven Joffe, formerly of Gold Reef Casino Resorts and enX, took over, in the belief that a new executive broom would clean up the business — with an emphasis on reducing Invicta’s huge debt pile and improving its operational performance.

The market and shareholders had long bemoaned slack inventory turn and iffy working capital management.

Last March the stock looked a sitter if investors could look through the negativity surrounding the company. Considerable reassurance could be taken from a NAV of more than R35 a share.

Joffe has not sat on his hands. Noncore assets, in the form of surplus property and agricultural equipment assets, were sold.

Working capital has improved and a tighter operational focus now permeates the company. More will surely come.

Debt has also fallen, alleviating what could have been a damaging rights issue.

A recent Sens seemed to suggest an exit of Kian Ann (Invicta paid R1.36bn for it in 2012). If a deal materialises, it could see a fat windfall come Invicta’s way. At the time of writing, Invicta was in spitting distance of its 52-week high, having shown a one-year share price return of 193%.

IM’s short for April, Hudaco, has also fared well, increasing by 44% over the same period.

Hudaco, a mid-cap blue chip, was always viewed (like industrial gas business Afrox) as a bellwether stock on the health of the SA economy. But the industrial segment of the local economy has been pretty sickly for a good number of years now.

Hudaco carries 250,000 items in its inventory in what is a 100-year-old business. In short, it supplies “widgets”.

Over the years, as mining declined in SA, Hudaco’s management judiciously reduced its sector exposure, and through many bolt-on acquisitions moved towards more of an industrial and consumer products-focused business.

This was absolutely the right move and allowed Hudaco to produce solid — if slightly pedestrian — financial results and maintain decent dividend payments.

Hudaco was the type of stock you could put into any portfolio or pension fund and sleep well at night. The group was solidly structured operationally and conservatively managed, plodding along fastidiously and never really letting shareholders down.

Hudaco’s 2020 financial results — as well as the recent AGM — indicated that there were some tentative green shoots and the worst seemed to be over for the local industrial sector.

The mining sector has turned perky and business activity is running harder on global demand for hard commodities. This ensured mining companies maintained and repaired their equipment.

In addition, consumers were still spending on automotive aftermarket parts, power tools and fasteners.

IM likes Hudaco and Invicta, and would not be averse to holding both stocks in an industrial portfolio.

But for this feature IM had to evaluate which counter had the greater likelihood to outperform the other.

IM believes Invicta will continue to shine. The financial 2021 results are due soon. Any positive updates on lowered debt, resumption of dividends as well as possible share buybacks — given that the counter today trades at a discount to NAV of 45% — would continue to power the stock.

Hudaco will also continue to recover. The group is also considering higher dividends and perhaps a share buyback. Acquisitions, on the other hand, are probably off to (higher) private company valuations.

To IM, there is just greater uplift in market sentiment and further share price recovery in Invicta, given its low base — especially in terms of its smashed earnings in the previous financial years. ●