Invicta Holdings’ Next Growth Phase is International Expansion

Interview with Arnold Goldstone, Executive Deputy Chairman of Invicta Holdings

South Africa is not developing its manufacturing base, the mining base is also stagnating. So unfortunately, investment in the industrial/manufacturing sectors in South Africa is not happening. As a result, slowly but surely we are de-industrialising. To be active in those sectors in South Africa is a challenge. It doesn’t mean that South African industry is dead, it just means that we need some sort of incentive and government framework, one that will encourage the development of industry/manufacturing and mining. That will largely revolve around things like labour legislation that will allow flexibility and enable us to be competitive with the rest of the world. We need tax and investment incentives, not only for South Africans but for anyone who wants to invest in these sectors in South Africa.

To what extent are these factors prompting Invicta to look beyond the borders of South Africa for growth of its core businesses?

Basically we’ve been forced to do so. Historically, going back five years, our group had taken a very conscious decision not to look beyond the borders of South Africa, because we had not saturated our markets in the country. We had got to the point where we were fairly dominant in our industries, but it was very difficult to grow significantly since there were competition commission restrictions in place which meant we had to look abroad. Of course, that opened up a whole new horizon because in the industries we were operating in, South Africa generally represents about 1% of world activity within that particular field, although this was to a lesser extent the case in the mining industry. I’m talking about motor manufacturing, agricultural activity and so on here. Suddenly we had a wonderful opportunity. Our investors want us to sustain our historic compounded growth rate and it was a compelling imperative for us to start looking abroad, it was as simple as that.

Do you believe that Invicta is now at a stage where small South African acquisitions only hold limited potential to boost earnings?

Absolutely, there isn’t anything of that nature that can be great earners for us. They are bolt-ons that increase the base and they help to grow steadily, but they’re not the big dial movers.

So the next big growth phase for Invicta has got to be international?

It could be Africa, by international we mean non-South Africa. That is unless we go into a different industry activity or sector in South Africa, which is not always the wisest thing to do. Traditionally everybody always says: “Stick to your knitting!” – which is what we tend to want to do.

Traditionally everybody always says: “Stick to your knitting!” – which is what we tend to want to do.

Do you feel you have the necessary cash and management resources for this move?

Experience tells me that cash is never a limiting factor. What is more difficult is finding the opportunities, and then having the management to exploit them. While we are obviously limited to the size of our balance sheet, cash isn’t really the restriction. If we found a wonderful chance tomorrow that required us to double our shares in issue and the size of the company overnight, I have no doubt that the investors would follow. It’s human resources that are the problem here.

How debilitating has labour unrest been to the South African mining industry?

Very! It’s not only the labour, it’s also the legislative environment in which mines find themselves. We are not directly involved with mines, we supply them with shovels, so to speak, but labour in South Africa is not generally flexible enough. Therein lies the problem, whether we’re talking about mining or manufacturing. It’s very difficult to compete on a global level. Also, encouraging investment in South Africa requires the right legislative framework to govern labour, amongst other things.

Your acquisition of Singapore’s Kian Ann Engineering underlines Invicta’s expansion strategy. To what extent do international markets represent sound growth opportunities, and, specifically, how will you leverage your Asian holdings to accomplish this?

As I mentioned earlier, South African activity equals 1% of global activity. So naturally there is a big opportunity for us beyond our borders. The first challenge is dealing with different cultures; even if a particular country speaks English, there’s still a cultural difference. The second challenge is to have the capital to be able to grow a global business from a South African base. That takes time, because there are exchange control restrictions in South Africa for a start – making the acquisition requires exchange control approval, raising capital requires exchanges control approval, so there’s a lot of red tape to get the ball rolling. Kian Ann represents a wonderful opportunity for us because they are already global suppliers. They focus on Southeast Asia with 80% of their business in this area. This gives us a great springboard into the challenging Asian environment. They also have the potential to grow in the rest of the world, which is where we can add value. Kian Ann has been a good experience for us as well as a chance, although we all know that Asia has slowed down over the past four to five years, which presents its own set of issues.

Invicta is focusing on diversifying its business geographically and has taken the strategic decision to become a more global player. Other than the Asian markets, which other countries feature most heavily in your expansion plans?

We’ve tended to focus our acquisitions on emerging markets, as they present the best value for us. Although prices have been high until now, the growth opportunities in our particular industries still aren’t so great in the developed markets. Take Europe as an example. All our peer companies that are listed in Europe have struggled in the market.

How erratic are the markets serviced by your group, and how likely is it that the prospects for the coming financial year are muted?

We are not necessarily going to acquire businesses in Europe or in the States, but we are certainly intending to sell into those markets or possibly undertake joint ventures or amalgamations with companies that are already operating there. Our view is that the sectors which we service as a group and as Kian Ann in particular are all under stress globally, so we have to look beyond Southeast Asia for our Kian Ann operations.
With the exception of our building supplier products, which have their own particular big growth opportunity back home and in the rest of Africa, the commodity cool down has affected all of our  businesses, so we are facing challenging normal cycle-type conditions globally in our mining, industrial activity, manufacturing activity, agriculture, and earth-moving and construction machinery sectors.

This requires a different sort of management approach, you have to look at cost structures and ensure that you are getting to see your customer and so on and so forth. But as with all things, these markets do rebound, and by then we will have developed the relationship that we need to get better business or buy companies that are in the same industry as ours. So it’s not necessarily a negative, it does force you to look inward and make certain that you are operating as efficiently as possible.

How’s your off-shore listing project developing?

The new listing would be a step towards raising capital for our global activities. Because we are subject to South African regulations, however, progress has been somewhat slow. We have been working on this for two years and have done what we can. It has now been in the hands of the authorities for the past five months, so it’s a bit of a waiting game. We have applied to be granted permission for a listing abroad in an appropriate exchange, which would also depend on where we see our growth opportunities, and that changes from time to time. Kian Ann was listed in Singapore, for example, but when we acquired it we de-listed as it was questionable whether the Singapore stock exchange was the best market for us to raise capital. We have already had discussions with AIM in London as a starting point, but they indicated to us that our market size is on the cusp of being too big and we would therefore only just qualify. That’s still a possibility, though, and one of six different exchanges we have looked at, ranging from the Western world through to Hong Kong. Where we land will all depend on the future opportunities. 

How do you view your government’s overall commitment to infrastructure expenditure?

It’s recognized that infrastructure is necessary for growth in a country and the desire and intent to develop it is there. However, resources are limited and I’m looking forward to what our newly/re-appointed Finance Minister Pravin Gordhan has to say about this in around one month’s time. My view is that government is not committed enough to the expenditure that is necessary to develop the economy in South Africa properly.

Just this morning we were in the greenfield Saldanha Bay development zone, where they have quite big infrastructure plans. Do you see that as an encouraging development?

It would be, providing there’s funding for it and if the government were to display serious intent to really give the economy a boost by saying: “Let’s create incentives for infrastructure and investment” or: “We need to make labour far more versatile, so let’s remove all the restrictions on labour which make it so inflexible in South Africa.”

Do you think they’ve really got a shot at developing an oil and services hub in Saldanha?

We certainly have the engineering capability in the country, so I would probably say yes. But when you’re a global oil platform owner you look not only for engineering services but also for continuity and the best value for money when repairing a site, and I’m not sure that we qualify for that at the moment, unfortunately.

Lastly, as a proudly Capetonian company, what would be your closing remarks to our international audience about the specific trade and investment opportunities here in the Western Cape?

Well, I can start by saying that the Western Cape is the most attractive place to live in South Africa in my opinion. It is so beautiful – you have the sea, you have the sun, you have the mountains, you have water all around you. We also have fairly well-served air links. I have lived here in Cape Town ever since I started with Invicta more than twenty-five years ago, and I have spent a lot of time in aeroplanes as a result. Cape Town offers quality of life while at the same time not neglecting the ability to grow businesses.

What do you say to those who regard Cape Town’s as just a ‘weekend city’?

Anything is possible with all its electronic communication links to the rest of the world. And to get anywhere globally from Cape Town is not difficult. It might need a hop through Johannesburg, but there are international connections from South Africa to various parts of the world, so it’s possible to get to wherever you want to be overnight. And unlike Johannesburg, Cape Town is not centred purely on wealth creation. There are other activities, such as tourism and lifestyle. They say if you are a strong swimmer and you like swimming hard, in Cape Town you are swimming against the stream generally, but in Johannesburg you are swimming with the stream, and that’s the subtle distinction. But there’s no reason why you shouldn’t make a lot of money. Look at the top business people in South Africa – many of them live in Cape Town, this is the centre of asset management. It shouldn’t be a restriction living here, but if you want to service the GDP heart of South Africa, 70% of our GDP is produced in the Gauteng area, no matter what activity you’re talking about. You need to have a presence there if you are an active business participant in South Africa, although it’s not impossible to run businesses from the Western Cape. In fact it’s very nice to be based here.

Aside from the natural splendour and innate beauty of the place, it’s obviously much more competently administered than some other locations. This must help to make it a suitable operating environment?

Yes, that certainly is my perception. I travel round the country weekly, so I get a view of the major centres in South Africa as well as the rural areas, where the infrastructure is frankly shocking. Roads have potholes, many of the smaller towns don’t have water, local administration is falling apart, whereas the Western Cape is very well run in my opinion. It has its challenges, there’s no doubt, but I think it’s probably the best run municipality in the country, and you can get results here. Transferring property within our group, for example, is infinitely more efficient in Cape Town than it is in Johannesburg. Our experience of merely trying to get rates clearance certificates there is a nightmare, as is conveyancing. It’s almost a contradiction: Johannesburg is the economic power house of South Africa, but it lacks the infrastructure to support it. And there doesn’t seem to be a will to improve it unfortunately, whereas in the Western Cape it was always very clear that people are interested in getting the provincial governmental activities as efficient as we can. So it’s a pleasure doing business here.

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