South African based industrial group, Invicta Holdings, today published its results for the six months ended 30 September 2024. The group grew revenue by 2 per cent whilst headline earnings per share declined by 14 per cent, impacted by the strengthening of the rand against major currencies. With the group’s strategy focused on expanding offshore, it has become more reliant on the major foreign currencies and it says that the forex adjustment reflects that relationship. CNBC Africa is joined by the CEO of Invicta, Steven Joffe.
South African based industrial group, Invicta Holdings, today published its results for the six months ended 30 September 2024. The group grew revenue by 2 per cent whilst headline earnings per share declined by 14 per cent, impacted by the strengthening of the rand against major currencies. With the group’s strategy focused on expanding offshore, it has become more reliant on the major foreign currencies and it says that the forex adjustment reflects that relationship. To discuss these results, I'm joined by CEO of Invicta, Steven Joffe. Steven, welcome to Power Lunch Southern Africa and thank you for your time. The group's performance is significantly impacted by forex adjustments and I want to unpack that but before we do, I'd like to have a look at the operational performance. Now operating profits was up by 11 per cent before the exchange movements. Can you just take us through the key drivers behind the growth in core operations? So, strategically, for the last few years, we've tried to build a business which derives about 50 per cent of its net profit outside South Africa and we've been very successful with the strategy. In the current period, specifically after the election and the establishment of the GNU, the rand really strengthened remarkably. At the beginning of the period, one dollar would buy you around 18.96 rand and at the end of the period when we should report, one dollar bought you 17.22 rand. It's a nine per cent depreciation. Now, that rand strength we saw against many different currencies and our businesses, being foreign, need to be translated into rand and that strength of the rand affected all those translations. Notwithstanding that, we achieved a 11 per cent increase in operating profit and a seven per cent increase in sustainable operating profits but that was at those lower exchanges and there are so many different factors that you speak about. I would say that probably the biggest one is the high interest rates which are prevalent throughout the world in all the markets that we operate in, creating pressure on the consumer and making it more difficult for them to spend money. If we unpack the forex impact a bit more, how are you managing foreign currency risk which obviously now becomes a bigger risk in your business and are there any hedging strategies that you have in place to mitigate large losses going forward? Our strategy is whatever we buy in South Africa, we take forward exchange carbon and before the election, we were very diligent to make sure that our strategies were fully implemented. What happened was with the election and the establishment of government on national unity, the rand substantially increased and that resulted in some of these losses. I think our strategy was sound and we will carry on with our strategy of hedging. On the topic of strategy, obviously your significant strategy is on expanding offshore. In what markets or regions do you see potential for growth and is your plan to expand into new markets or to deepen your penetration in existing spaces? We're going to deepen our penetration where we operate but especially now with the election of Donald Trump in America, we're going to have a lot of potential for growth. Donald Trump in America, I think there's going to be quite a lot of infrastructural development taking place in America and businesses like ours have a big opportunity to supply spare parts into that market. We're quite keen right now to identify American opportunities. What gives you confidence in your offshore strategy? I'm sorry, can you repeat that? What gives you confidence in your offshore strategy that this is what you want to do and this is where you're growing to come from? I think our businesses in these offshore jurisdictions are growing really rapidly and they continue to grow rapidly. We've got quite an established management team now and we're quite confident to continue deploying capital with this management team. Revenue grew by 2%. In light of the current market conditions, do you see that as a strong performance and where do you see future growth coming from? South Africa started very tough for us in the month of April and right until the election, we had very tough trading conditions in South Africa with a lot of our customers holding back on big capital items until they knew the outcome of the election. Those factors influenced us. What we've seen since the election is things are rapidly improving and I think you could see better revenue growth in the next six months. There were several disposals and acquisitions in the period under review. Can you share with us what is in your M&A pipeline going forward and how do you prioritise acquisitions and disposals in your portfolio? We're just trying to drive the higher return on net operating assets all the time and it's something that we focus on a lot and what we're looking for is businesses that generate a lot of cash. If a business doesn't meet our threshold of generating cash and deriving a higher return on net operating assets, we tend to cycle that business out. It's just a combination of assessing where we are at the time and looking for new opportunities to grow our own and cash. You've touched on cash there and it leads us into my next question. You have R734 million cash on hand. How are you planning to deploy these funds? Is it along the lines of acquisitions, debt reduction, reinvestment into the business? What is the strategy there? Our net debt in South Africa is still over R1 billion and we want to be able to deploy over R1 billion and we want to bring that down to about R500 million by the end of the year. We've got two big things that are happening. Number one is we sold a big warehouse in Singapore for R63 million and we intend to declare a dividend of around R40 million out of Singapore. That together with our traditional trading should be able to deliver like a R500 million reduction in net debt by the end of the year. We are at a point now where our debt levels post those two events are probably at the right level where we wouldn't want to reduce much further. We really are in the business now of looking for creative acquisitions and we'll continue to look for the remainder of this year. One of the highlights of the period was the redemption of all your preference shares for a total of R703 million with a view to unlock value for ordinary shareholders. Talk us through the thinking behind this. How does this decision impact the company's capital structure? I think this is a huge development for our company. It's something we've been focused on for many years and we're very fortunate to be able to have done it. So the preference shares, there were 6.9 million preference shares in existence that cost us R703 million to redeem them. Roughly those preference shares would pay the preference shareholders prime plus 108 percent. So let's call it 12 percent per annum. So those preference shares were costing us R80 million per year and we have to fund that each year. By not having that obligation any further, we think we'll be able to increase the dividends to ordinary shareholders over time. So we think it's a very positive development for ordinary shareholders. Right, yeah that does sound indeed like a good strategy for unlocking shareholder value. Then just before I let you go, looking ahead, what are some of the major risks and uncertainties that you anticipate going forward and how are you looking to navigate these? So I think the biggest unknown for us for the next while is the impact of the Trump presidency. So I think while our American-based businesses have a big opportunity to supply into the infrastructure build, the rest of our businesses, specifically our factories in China, we have to be wary of these import tariffs. Currently we pay 25 percent tariffs on what we import from China into America and that probably is our biggest unknown. Now in our group, anticipating the additional tariffs, we have built a factory in Japan where we think we are able to supply America from. But this is an unknown for us and we don't yet know if Mr Trump will sanction or levy tariffs on these factories. So all these things are uncertain at this stage. Stephen, thank you for those insights. We'll hold it there for now. We look forward to talking to you again at your next reporting period. That was Stephen Jaffe, CEO of Invicta Holdings.
Theme: Impact of Currency Strength on Invicta Holdings' Financial Results
South African-based industrial group, Invicta Holdings, released its financial results for the six months ending on September 30, 2024. The company experienced a 2% growth in revenue, but headline earnings per share took a 14% hit due to the strengthening of the rand against major currencies. This impact was largely attributed to the group's strategic focus on expanding offshore, making it more reliant on major foreign currencies. CEO Steven Joffe joined CNBC Africa to discuss the results. Joffe highlighted the operational performance, noting an 11% increase in operating profit before considering exchange rate movements. Despite challenges posed by the stronger rand, the group managed a 7% rise in sustainable operating profits. Joffe pointed out various factors influencing the results, including high global interest rates affecting consumer spending. Addressing foreign currency risk, Joffe outlined a hedging strategy and emphasized the importance of continued diligence in risk management. The company's expansion strategy revolves around deepening penetration in existing markets and capitalizing on growth opportunities in the United States post-election. Joffe expressed confidence in offshore growth, citing rapid expansion and a strong management team as key strengths. Financially, with R734 million in cash on hand, the company aims to reduce net debt by half by year-end, focusing on acquisitions and debt reduction. Noteworthy was the redemption of all preference shares, totaling R703 million, signaling a commitment to unlocking shareholder value. Looking ahead, Joffe highlighted uncertainties around the Trump presidency, particularly potential import tariffs impacting operations in China. Despite challenges, the company remains agile, having established a factory in Japan to mitigate risks. The outlook includes a focus on improving revenue growth in the coming months. Joffe underscored the company's commitment to navigating uncertainties and leveraging growth opportunities to drive sustainable performance.
"Our businesses in these offshore jurisdictions are growing rapidly and they continue to grow rapidly. We've got quite an established management team now and we're quite confident to continue deploying capital with this management team."
Invicta Holdings, South Africa, Steven Joffe, financial results, currency strength, revenue growth, offshore strategy, foreign currency risk, acquisitions, debt reduction, shareholder value, uncertainties, Trump presidency, import tariffs