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 cost-cutting efforts – trimming headcount and culling lower-margin 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 cash-strapped 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, counter-mates 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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