Charles Walters. Picture: RUSSELL ROBERTS

Charles Walters. Picture: RUSSELL ROBERTS

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Invicta Holdings: Trending warily

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Invicta Holdings, one of SA’s fastest-growing industrial businesses over the past decade and a half, will find it a grind to re-engage its growth engines over the short term.

Fundamentals, especially in SA and elsewhere in Africa, are still looking brittle for the industrial supplier. It has a wide range of operations, from engineering consumable parts and technical products to the industrial and mining sector, agricultural equipment and parts, construction equipment and parts as well as tiles, sanitaryware and building supplies.

Invicta’s offshore presence, mainly through Singapore-based engineering supplies group Kian Ann, probably won’t compensate for local trading woes.

Of course, trading cycles do turn and those investors willing to bank on a long(er)-term recovery in the local economy might regard Invicta as a stock to accumulate at current levels. The share price at the time of writing — if normalised earnings are estimated at 700c/share — suggests Invicta offers good value for patient, stoic investors.

The share is trading at less than half the R123.12 high seen in late 2013 — though investors do need to factor into the equation a large R20.24/share special dividend paid in February 2015.

But there will need to be evidence of growth traction before sentiment sparks again.

The performance priorities outlined by CEO Charles Walters for the 2017 financial year include growing revenue and earnings by 12% and, at the same time, controlling overhead costs and working capital levels. Reassuringly in these tremulous times for industrial suppliers, the operating cash conversion rate has been set at 75%.

Invicta also needs to complete, on time and within budget, an expansion project at core subsidiary Bearing Man Group (BMG).

This is aimed at fattening the operating margin at BMG, which is the biggest single contributor to the revenue line, to above 10%.

Walters also highlighted the continued expansion of an African branch footprint and the further expansion of the South-east Asian branch footprint.

While it’s understandable that management are emphasising inward-looking efforts on margin protection, cost efficiencies and working capital optimisation, the sense remains that Invicta still has a bigger picture firmly in its sights.

In his annual review, chairman Christo Wiese stresses the group’s strategic focus is to generate cash and to deploy this in making sound acquisitions that diversify revenue streams geographically.

He says Invicta aims to have 50% of its revenue and profits generated from non-SA sources by 2020.

Wiese reckons the difficult times in the economic cycle will present opportunities for meaningful acquisitions at reasonable valuations.

"Invicta management will continue to build on the strengths of the current businesses in the year ahead and cautiously seek value-accretive, strategic acquisitions."

Wiese envisages, by 2020, an international parts distribution business with annual revenues of R25bn (2016: R10.2bn). Of this, half will be sourced from international markets. The operating profit target has been set at R2bn (pencilling in an operating margin of more than 8%) and bottom-line profits of R1.25bn (based on an attributable profit margin of more than 5%).

A major offshore acquisition could be a game changer, with Invicta’s stout balance sheet able to support a sizeable transaction. The Kian Ann acquisition, which took Invicta into markets in the Far East, has been somewhat underwhelming. The timing was, in retrospect, poor. But Kian Ann does at least create a decent foothold for expansion into the region.

The fact that Invicta has repeatedly made clear its intentions to secure an international listing (most likely the London Stock Exchange) underlines just how serious the company is about global expansion.

Of course, there are many market pundits speculating on how Wiese — who speaks for close to 40% of Invicta — might nudge the company when it comes to corporate action.

Wiese is a major shareholder in Stellar Capital Partners, an investment company with a controlling stake in industrial supplies conglomerate Torre.

Torre, to all intents and purposes, is a mini-Invicta, boasting a diversified range of industrial supplies to various sectors. It is not yet apparent if Wiese sees merit in pressing for a "merger" between Invicta and Torre or shifting Invicta closer to Stellar — which also holds a significant stake in electronics manufacturer Tellumat and is in the throes of buying out security technology group Amecor.