In another blow for investment tycoon Christo Wiese, industrial supplies conglomerate Invicta Holdings — in which he is the biggest shareholder — issued a shock update on Friday highlighting potentially costly tax liabilities.
Wiese’s fortunes have been battered over the past 18 months by accounting scandals at retailer Steinhoff International. He holds a 37.5% stake in Invicta, worth about R1.65bn.
The update, issued after the market closed on Friday, pencilled in an 81% drop in headline earnings from continuing operations to 90c a share (last year it was 466c a share).
Invicta’s earnings crunch was caused by the raising of a large additional tax provision of R400m on financial structures dating to its empowerment arrangement under Humulani Investments about a decade ago.
The market marked down Invicta’s shares by about 25% over the past three months. But the tax provision caused a stir among investors. Invicta releases its results on Monday and there should be a push at its investor presentation for more detail on the tax matter.
Vunani Securities analyst Anthony Clark said the trading update was both positive and negative for shareholders.
He said the additional tax provision suggested that Invicta directors acknowledged some form of tax impropriety.
On the positive side, Clark said the provision of R550m created some certainty on the tax liability.
He said that the share price of industrial supplies giant Hudaco had endured several years of uncertainty when it was embroiled in a prolonged battle with the South African Revenue Service (SARS) over the tax treatment of an empowerment scheme.
Invicta and Steinhoff
Several market watchers said there would be an inevitable comparison between Invicta and Steinhoff.
Clark said both companies enjoyed low tax rates, used complex financial structuring and had a penchant for acquiring assets at modest earnings multiples with a view to achieving strong turnarounds.
In commentary accompanying the trading update, Invicta directors noted stakeholder and market commentary over the potential tax consequences of certain (unspecified) transactions several years ago. These matters were referred to by Invicta’s independent auditors in their 2017 annual report.
According to the annual report, Invicta has a R3.4bn loan with Serec Capital bearing interest at 11.73% compounded quarterly and a fixed repayment date in August.
The company also has an investment with Gryphon Financial Engineering in the form of preference shares that are redeemable in August.
The annual report noted the tax legislation was highly specialised and complex.
"Accordingly, there is significant judgment involved in determining the tax treatment for these instruments."
Invicta said that SARS had requested information on the Serec and Gryphon structures, and that its directors were negotiating with SARS to settle the matter.
The annual report indicated that Invicta had raised a tax liability of R150m. Although the trading statement showed that an additional provision of R400m had been raised for tax matters, the company’s directors reiterated that — based on advice — the transactions were tax compliant.
The directors said uncertainty about the tax matter was hampering Invicta’s ability to use equity to fund expansion.
They said a pragmatic solution that provided certainty was preferable to potentially protracted and costly litigation.
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