Arnold Goldstone: Focused on the basics. Picture: TREVOR SAMSON
Arnold Goldstone: Focused on the basics. Picture: TREVOR SAMSON

It’s high time Invicta made a reappearance. Once a firm market favourite, the company has largely faded from investors’ radars over the past two years.

Now, signalling what could be a return to form after two disappointing years, Invicta roared in, in its latest year to March reporting period, to lift revenue from continuing operations by 9.5% to R9.6bn and operating profit — excluding foreign exchange movements — by 34% to a record R1.05bn.

Headline EPS (HEPS) were up 37.3%.

It was more than good going by a group whose primary customers are in the hard-pressed manufacturing and mining sectors served by its Engineering Solutions Group (ESG) and what was, until recently, the drought-stricken agricultural sector served by its Capital Equipment Group (CEG).

Invicta showed that, through sound management, tough challenges are not insurmountable. "We focused on getting the basics right," says Invicta CEO Arnold Goldstone, who has led the company for 17 years.

Warren Jervis, manager of the Old Mutual Small and Mid Cap Fund, has high praise for Goldstone. "He has proved himself to be a superb manager," says Jervis. "Overall, Invicta’s management team is remarkably capable."

It took a capable management team to drive the ESG division’s 10.5% rise in revenue to R4.67bn and operating profit 18% to R480m in Invicta’s latest year. "They beat the odds," says Goldstone of SA’s largest supplier of engineering consumables, equipment and spares.

ESG’s performance reflects the initial benefits of a project launched in 2014 to streamline ESG’s supply chain. A key element was the shifting of ESG’s core Bearing Man Group (BMG) unit’s head office and inventory from Durban to Johannesburg, completed in 2016.

Also completed was ESG’s new R350m, 93,000m² BMG World facility adjacent to Transnet’s Johannesburg container facility.

It has enabled 10 of BMG’s warehouses and workshops to be consolidated into one facility.

The benefits of supply-chain streamlining were evident in Invicta’s latest year with a R430m (22%) reduction in inventory. It helped boost operating cash flow 130% to R1.35bn.

There is more to come. The main benefits of BMG World will come through after September, when new warehouse management and demand forecasting systems become fully operational, says Goldstone.

The CEG division, SA’s largest tractor and combine harvester distributor, also beat the odds in the past year to up revenue 10.5% to R4.96bn and operating profit 30% to R470m. Reflecting a stronger second six months, operating profit at the interim stage was 21% up.

"The results were way better than I expected," says Jervis. They were indeed, in a market in which the SA Agricultural Machinery Association (Saama) reported an 11.2% fall in tractor sales and a 14.4% fall n combine harvester sales in 2016.

Goldstone attributes CEG’s solid showing to stringent cost control and a change in focus from new equipment to spares sales.

On another positive note, Saama reports a stabilisation of tractor sales and a 12% rise in combine harvester sales in the first five months of 2017.

Invicta will soon be exiting the building materials sector it first entered 10 years ago.

"It will remove a management distraction," says Jervis.

Invicta’s exit from the sector means it will sell its Building Supplies Group (BSG) division to Steinhoff Doors & Building Materials in a R732m deal still subject to competition commission approval.

"BSG is not giving us the returns we want," says Goldstone. Based on the latest year’s results, the sale of BSG means Invicta will shed annual revenue of R1.9bn but only R108m in operating profit.

The sale of BSG will take cash on Invicta’s balance sheet to about R1.8bn and halve net debt to equity to about 14%. It puts Invicta in a strong position to pursue what has long been its strategy of
supplementing organic growth with bolt-on acquisitions.

Invicta closed four acquisitions valued at a combined R142m in its past year. More are coming.

"We will acquire more businesses at what are now very attractive ratings for us," says Goldstone. "It is all part of building our base."

Though Goldstone is noncommittal on a current-year growth target, he confidently says: "We will continue to do well."

Underlying his confidence are more benefits flowing from BMG’s supply-chain streamlining, plus boosts from a more stable agricultural sector and, potentially, bolt-on acquisitions.

They should make Invicta capable of HEPS growth of around 13%-15% in its current year, a pace that would put it on a very modest forward p:e of 10.

The big prize for Invicta would be an SA economy back on a sound growth path.

When that will be is a matter of conjecture. But, as Goldstone notes: "With a tailwind we would be positioned to boom."

For patient investors it makes Invicta, which is controlled by Christo Wiese, a share to accumulate on price weakness.

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