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Invicta falls victim to the times

EPS down by almost half as economic downturn, particularly in the company’s core industries, eats into profits.

Invicta Holdings’ results were dampened by headwinds in each of the markets it operates within. It’s agriculture business was affected by the worst El Niño drought on record, while an 18% year-on-year decline in the mining sector has seen things take a turn for the worse for its businesses in that sector as well. Similarly, the apparent de-industrialisation of South Africa has not helped its engineering work either.

“They are weak results but are mostly reflective of markets they trade in,” says AlphaWealth portfolio fund manager Keith McLachlan. “You have a situation where their volumes were down but their pricing – because obviously you’re importing a lot of the equipment and selling into each of these industries – have offset that to some degree, but revenue excluding acquisitions was flat.”

The company that manages assets of almost R15 billion recorded a 17% drop in operating profit to R846 million for the year ended March 31 2016. Meanwhile earnings per share were down by almost half to R3.91 per share, compared to R7.42 per share the previous year. But this was largely due to a rights issues, wherein the number of shares in issue increased by 44%, or 33 million shares, diluting the company’s ownership. Although the CEO Charles Walters says this will not be happening again anytime soon.

Walters says the company did almost everything within its power to mitigate the impact of the headwinds it faced.

“I think we did well in terms of managing the controllables,” says Walters. “That’s the gross profit margin, which we believe we did reasonably well to improve, considering the circumstances. The second thing we did was manage our costs where, if you exclude the acquisitions and the one-off costs related to BMG’s restructuring of the supply chain, we’ve managed to keep costs flat year-on-year, which is quite an achievement considering we gave increases and that staff is up to 68% of our cost profile.”

He also says the company didn’t carry out any wholesale retrenchments, although it has downsized certain aspects of the business. Also, the company’s executives have taken no salary increases for the second year running.

It has also gone a long way to managing working capital, which is mainly inventories. The company’s products are all imported and have a dollar-, euro- or yen-denominated cost structure yet, despite the significant depreciation in the rand, inventories were up 8%.

Nevertheless, the company still fell victim to the times.

Says Mclachlan: “I would hesitate to use the word ‘victim’, because a good business should be able to navigate its way through literally any environment. But Invicta is a good business, and this was a particularly perfect storm for it to trade through. Despite its market cap, its reach is quite wide. It is still operating close to optimum levels considering the environment. We are just feeling the reality of what’s happening on the ground in South Africa.”

Invicta’s share price dropped by 2.26% on Tuesday, closing at R47.50 per share.

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Not too long ago it was sitting at R100, maybe it is a buying opportunity now?

Perhaps. Depends on how long you think the current headwinds will last for. But the company is certainly making the right moves to come out this slump on top

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