Six-bagger Invicta CEO expects same profit trajectory in next five years

Invicta’s share price fell back a little this morning after the release of financial results for the year to end March 2014. Analysts are a little concerned at the group’s decision to release CEO Arnold Goldstone from operational duties to spearhead a mission to grow the non-SA share of profits from the current 22% to 50% within five years, preferably sooner. It’s a rational reaction to shares which have risen six-fold in the past five years. Expecting that to continue is the stuff of dreams. But in Goldstone and his chairman Christo Wiese, Invicta possesses as good as any team to fulfil those dreams. In this fascinating interview, Goldstone takes us deep into Invicta’s thinking, his close relationship with Wiese and why he believes the next five years will be as good for the group as the last five. – AH 

ARNOLD GOLDSTONE: I’m outgoing in the sense that I’m no longer going to be CEO.  I’m handing that baton over to Charles Walters who is currently the COO of our BMG division. So he steps up to the plate when he’s found a replacement for himself at BMG.  It’s a bit of a cascading effect, so no rush from our side.  It’s a transition that’s gradual, will be orderly, and when everything is settled then I’ll move on to become a full-time Deputy Chairman and in that capacity, look at acquisitions and the non-operational side of our business.

ALEC HOGG:  An Executive Deputy Chairman, which means you’re going to work every day?

ARNOLD GOLDSTONE:  Unfortunately, yes.  No, not at all.  I love working.

ALEC HOGG:  You can see that though, in the performance of the company.  I just pulled out some numbers of the past five years.  Five years ago, the share price was R20 – today it’s now over R120.00, so it’s up six-fold in five years.  Part of that is the improved PE ratio where the market has rerated you by two-and-a-half times, but the other part of it has been the bottom line.

ARNOLD GOLDSTONE:  Absolutely.  If you look at our earnings per share, our compounded annual growth rate in our earnings per share over the past ten years has been of the order of 16 to 18 percent.  That gives you a sense of the underlying activity, so it’s not a type of one hit wonder, making acquisitions and hoping that everything comes right.  We are active managers of our business.

ALEC HOGG:  But what happened five years ago – what started turning things around?

ARNOLD GOLDSTONE:  I think we just had a renewed enthusiasm in our business.  We actually set about setting ourselves very tangible targets for five years as it happens, and we achieved them in under two years, which kind of shocked us in a sense.  It’s the old story.  If you galvanise yourself into action and you have a very clear strategy and focus…  It’s not that we didn’t have one before, but suddenly it was clearer and I guess we had the right sort of energy as a group.  We started achieving a lot faster than we had anticipated.

ALEC HOGG:  What caused that to happen?  What caused you guys to sit down and say ‘let’s have some goals’?

ARNOLD GOLDSTONE:  As a management team, we’ve matured over the past few years as opposed to me being a one-man-band in a sense, prior to that.  I have very good support executives around me and I think the combined energy caused us to – as we do every year – sit and strategise.  Somehow, we galvanised ourselves into a very clear focus.  You mustn’t forget that this was after the Global Financial Crisis, and that does focus the mind.  One thing about our group is that we thrive when conditions are challenging.

ALEC HOGG:  And it is…you’re in an unsexy industry, engineering.  Your whole sector is in panic at the moment because of the potential NUMSA strike. Yet you’ve managed to deliver and you’re still excited about going to work every day.

ARNOLD GOLDSTONE:  Absolutely.  When we have headwinds, it gives us an opportunity to look inwardly, to streamline our business, and trim the sails so to speak, as well as to find opportunities.  People get into trouble in these types of markets and interestingly enough, not so much in the markets, but it’s when markets recover.  Suddenly, they find they’ve run out of cash because they haven’t managed their working capital cycle properly.  They’ve survived through the tough years and that gives us incredible opportunities.  We survive.  In the tough years, we make less money.  That’s really, what it boils down to.  In the good years, we just make more money.

ALEC HOGG:  Christo Wiese is your Chairman?

ARNOLD GOLDSTONE:  Yes.

ALEC HOGG:  He’s a great entrepreneur in South Africa, well known for Pep, Shoprite, and many of his other investments, but Invicta must be one of his most satisfying.  How much of a role does he play with you?

ARNOLD GOLDSTONE:  He and I share the same floor of offices, so he’s at the one end of the corridor and I’m at the other.  I have quite a lot of contact with him and in that way, he is a guide and a mentor in a sense.

ALEC HOGG:  You say ‘quite a lot of contact’.  Do you see each other every day?

ARNOLD GOLDSTONE:  Not every day because I travel a lot, and he’s also out of office quite frequently, but I would say probably once a week our paths cross.  Normally, it’s the downtime.  It’s in the early evening when dust settles and markets are cooling down – so six in the evening – when we’ll sit and have a bit of a chinwag.  Those are valuable times.

ALEC HOGG:  What do you talk about?

ARNOLD GOLDSTONE:  We talk about life and we talk about principles and philosophies of running businesses – not necessarily, what’s going on in our business.  He has vast experience and being an entrepreneur, he views the world slightly different to let’s say, a corporate would. He gives great insight into life in general and business life, in particular.  From that point of view, he’s not involved but he’s a useful mentor to have.  He obviously attends our board meetings.  We have five to six board meetings per year, but he’s up-to-date on most of the happenings in the Group because of the contact that we have, but he doesn’t get involved in the day-to-day running at all.

ALEC HOGG:  Let’s say you have a bolt-on acquisition in one of the subsidiaries: would you bounce it off him during those downtimes?

ARNOLD GOLDSTONE:  Oh yes, sure…certainly, if it’s material, I would bounce it off him.  If it’s not material, I would just mention it to him that we’re buying x, y, or z.  Generally speaking, he’s happy to leave it over to the executive team.  I think that’s his strength and I don’t speak only about us here, but I speak to his other successful companies.  He has surrounded himself with good people and that’s really been the key to his success.

ALEC HOGG:  How’s your relationship with him going to change now that you’re no longer going to be running the business?  Presumably, you have more of that downtime.

ARNOLD GOLDSTONE:  Oh, that’s exactly what I want.  I want more thinking time and I want to have the opportunity to travel the world, spend time researching markets, and not running from one to the next, the way I would while being an executive.  I think my relationship with him will actually deepen in a sense, because I’ll have more opportunity to spend a bit of time on acquisitions and possibly, bounce them off him a little bit more.  My role in the Group has been operational as well as strategic until now, and I think as businesses mature, so one needs to have people focusing on operations only, and people focusing only on acquisitions.  Of course, there is a crossover because you don’t want the acquisition team to make acquisitions that fall over operationally.  With the background that I have – and I’ve been there for 14 years, Alec – it’s time for me to move on, to be quite frank.

ALEC HOGG:  Well, you know every part of the business and you know what could add value to it.  I guess one of the big stories of Invicta that is unusual to other companies in South Africa is that you went to the East. You opened up in Singapore and you are, in fact making a success of that.

ARNOLD GOLDSTONE:  Yes.

ALEC HOGG:  Where did that come from?

ARNOLD GOLDSTONE:  Well, we’ve been dealing with the East as buyers out of China, Japan, and Southeast Asia for 25, 30 years.  We are Japanese suppliers, going back to the early 1960’s, so we have a long relationship with Asia, if you want.  We understand the cultures.

ALEC HOGG:  Do you speak the languages?

ARNOLD GOLDSTONE:  No, we don’t, but we have good interpreters and agents that work with us.  We understand how to operate. In China you operate differently to Japan for example, as you would differently to Singapore or Thailand etcetera.  We are comfortable dealing with Asia.  What (Singaporean subsidiary) Kian Ann did was present us with an opportunity to acquire a business that gave us access the other way around, where we’d be selling into Southeast Asia as opposed to buying from Southeast Asia, and gave us a business that isn’t directly involved in manufacturing. 

We are not really manufacturers at heart.  We are traders. 

Although it’s an engineering business (the product we’re selling), we are traders, so it suited our profile.  In addition, we knew the Kian Ann business because one of our companies in South Africa (ESP), which sells spare parts, had been buying from Kian Ann for many years so they had a business relationship. We were comfortable on all fronts, Kian Ann was listed, and as part of our process for doing research for target acquisitions, we looked first at listed companies.  There were two listed companies that we looked at.  The one rebuffed us and Kian Ann were happy to welcome us after we’d presented our credentials and started negotiations with them.  They weren’t for sale, but we approached them.  It was a family-owned listed business and our timing was probably right.

ALEC HOGG:  Your relationship has strengthened.

ARNOLD GOLDSTONE:  It has strengthened.

ALEC HOGG:  Did they benefit from your involvement?

ARNOLD GOLDSTONE:  I’d like to think so.  Yes, they have because running a family-owned business is very different, although it was listed and all the governance was correct.  It’s a very different strategic mindset to running it professionally.  Family businesses tend to employ family members, not because they are the best people for the job, but they are the most trusted people for the job.  Often, you have people – and it hasn’t necessarily applied in this case – but in family businesses that are not necessarily, the best suited for that particular position.  Coming in as a professional investor in a sense, has enabled us to look very objectively at the different management roles and the growth opportunities.  Family business sometimes – and I think maybe Kian Ann was there – stagnate because they feel comfortable.  It’s almost like a pension fund.  They’re very comfortable to just plod along, and do what is necessary to trickle along.  Whereas, when you’re a true listed company (as we are), you’re ambitious.

ALEC HOGG:  Many other examples…  One that jumps out at me is Famous Brands, which was run by the family.  They then brought Kevin Hedderwick in, and now look at them.

ARNOLD GOLDSTONE:  It’s transformed – absolutely.

ALEC HOGG:  Arnold, looking ahead: the set of financial results that you put on the table today, which is for the year-to-end March 2014, revenues are up strongly but the margins are being compressed.  The headline earnings are actually reversed, but you say normalised headline earnings are up 15 percent.  I don’t want to go into those details at this point, but is it now getting to the stage where this company’s starting to look a little ‘ex-growth’?  The share price is up six-fold as we said at the beginning of the interview, in five years.  The PE ratio has gone from five to over 13.  You seem to now perhaps, have fulfilled your potential…or not?

ARNOLD GOLDSTONE:  No, I don’t believe we’ve fulfilled our potential at all.  If you look at the markets that we service, South Africa…  Whatever product we sell, represents less than one percent of global turnover.  Our big suppliers who supply us…we account for less than one percent of their sales.  If you look at South African GDP in the world context, you’ll probably find it’s about one percent, so there’s 99 percent out there that we as a Group are not accessing yet.  Secondly, we may go through periods where the markets determine the extent of our growth.  In this case, the South African market is tough, so we say ‘well, we don’t expect to have stellar growth in the next while, but we run our businesses the way we always have, and don’t rely only on organic growth’.  We are acquisitive by nature, although we’re conservative in the way we run our businesses. We therefore focus on the generation of cash.  We focus on making the profits, but we look for those opportunities and I think that’s where the strength lies for the Group.

ALEC HOGG:  So it’s the next kicker, and that’s part of the whole restructuring: you going into a more strategic role, to go and look for acquisitions?

ARNOLD GOLDSTONE:  That’s exactly right.  We’re looking for the game changers.  The bolt-on’s are always good because they bolster your business and they improve your base.  That’s what we’ve done.  If you look at revenue up 38 percent this past year, that’s a nice big base.  Sure, our margins are a bit under pressure, but those are circumstances.  The Rand hasn’t been in our favour.  Competition has increased a little bit in the country because of the circumstances.  When people get into trouble, they start trading – what I call irresponsibly – because they want to get cash, especially the smaller players.  We’ve been through these cycles many times.  We’re not panicking.  For us, it’s more important to focus on making sure our business delivers the best value product to our customer and look for the opportunities.  Nothing changes. 

Invicta in five years’ time is likely to have the same trajectory as it’s had in the past five years.  However, if you said to me ‘what’s the share price going to be next week’, I wouldn’t be able to answer that one.

ALEC HOGG:  Well, value investors would have jumped in five years ago, but as value investors normally do: by now, they’d be stepping back a little bit.  You’re saying ‘don’t count us out yet.  We have the same trajectory coming in five years, but perhaps on a different plane’.

ARNOLD GOLDSTONE:  That’s what I think and my question to anybody who sells Invicta is ‘what are you going to invest in as an alternative?’ If you want us to look at it as a relative game, I’m not saying Invicta’s necessarily the best investment globally, but I think it’s a safe investment.  We operate in the production side of the economy and if one buys the macro picture that the world population is growing, continues to consume, will want to consume, and is an aspirational population then all the products we supply feed into that mass of growing humanity.  Does that translate into an upside for us in the next six months?  No, I don’t think so.  I think markets in South Africa are against us at the moment – or conditions – but it has to come right.  Once the mining has settled down, everything is back to normal and China starts picking up a little bit, or the States picks up more, or Europe picks up more, demand for commodities automatically follows.  That’s really the market that we’re operating in and I’m confident.

ALEC HOGG:  So we can hear.  Arnold Goldstone is with Invicta.