Invicta: bloody, but unbowed
Invicta was once JSE mid-cap royalty. But with a rights offer looming, new CEO Steven Joffe faces a tough task
The market is expecting a destructive grind at industrial products group Invicta, with its shares scuttling down to levels last seen in 2006.
Once the darling of the JSE’s industrial segment, Invicta spooked investors last week with its admission that it was evaluating a number of strategic initiatives — which could include asset sales and a rights offer.
Recently appointed Invicta CEO Steven Joffe — who earned a formidable reputation in the gaming sector before emerging as a prime mover in the remake of the old Austro Group into industrial conglomerate enX — says the quickest way to ease the company’s heavy gearing will be to sell off assets.
The catch, however, is that whatever assets Invicta can peddle are unlikely to fetch top dollar.
Joffe admits: "There are no easy deals."
Invicta’s timing, then, could hardly be worse — though only the most optimistic punters might have believed the once mighty firm could trade its way out of its current predicament.
A big slug of Invicta’s problems, outside the moribund local economy, stem from a larger-than-expected tax settlement of R750m with the SA Revenue Service (Sars).
This was linked to a complicated empowerment investment arrangement put in place about a dozen years ago.
The settlement — even though staggered over a handful of years — has strained Invicta’s balance sheet.
In the interim period to end-September, the group forked out a hefty R154m in finance costs. Contrast that to net cash flows of about R255m (or 236c a share), which suggest plans to review capital allocation might mean trading conditions have tightened markedly over the past 4½ months.
Outside the local economy, Invicta’s Singapore-based engineering consumables group Kian Ann is also struggling, suffering — in parts — from complications around the Chinese economy.
As for Invicta’s restoration plans, these won’t be easy to execute quickly.
The most likely outcome is a rights issue, hardly ideal if you consider that the ruling share price of R14.50 reflects a monstrous discount to the last stated tangible NAV of R35 a share.
Joffe won’t commit to too much detail about Invicta’s restructuring effort, but Small Talk Daily analyst Anthony Clark reckons a "R500m-plus" rights issue could be on the cards.
Ironically, Invicta held a successful rights offer at R69 a share about five years ago when it raised over R2.2bn in fresh capital, though a chunk of this was subsequently "paid back" to shareholders via a generous special dividend.
What Joffe will say is that major shareholding entities associated with retail tycoon Christo Wiese are likely to support management in whatever decision is taken.
The FM is also aware of increasingly audible whispers that Invicta’s collapsed market value could attract predators eyeing an easy asset strip.
Clark says with Invicta’s market capitalisation now less than R1.5bn (as opposed to more than R8bn less than five years ago), it was unlikely that Wiese would entertain rival bids for the business.
"He’d surely rather chip in and try to rescue and rehabilitate and extract value from assets, though I’m sure many private equity players and rivals salivate at the thought of cutting up Invicta and extracting the value that management has been unable to undertake in the past years."
Speculating on assets Invicta could put up for sale is a tricky exercise, as outside its Bearing Man core none of Invicta’s many businesses would raise substantial proceeds for debt culling.
One possible outcome cited by Clark could involve Invicta’s Northmec agricultural supplies hub.
He speculates that Case New Holland (CNH), the parent and owner of the international brands, may not be totally comfortable with Northmec, which owns the rights to CNH’s Case brands.
Clark believes any sale or part sale of Northmec to CNH, given the positioning of that business in the SA agricultural landscape as the only material competitor to John Deere, would surely involve a healthy payment to Invicta — perhaps as much as R800m — for the loss of distribution rights.
Joffe stresses Invicta would prefer to get its plans away sooner rather than later. "We are right in the middle of discussions at the moment."
While the market’s prognosis is dire, Joffe has, especially in his tenure as CEO of Gold Reef Resorts, shown an ability to overcome stacked odds.
A willingness by the new CEO to grasp the nettle without too much hesitation will be critical, ahead of the release of what probably won’t be inspiring full-year numbers to end-March.
Invicta is an interestingly priced option in the industrial sector on a longer-term recovery, and strictly for investors with nerves of steel.