Newsflow influences investor perception. In this section, we will try make short comment
and opinion on worthy newsflow items, both local and international.
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Thursday 23 December 2004
Trend Micro wins Hotmail away from McAfee
Hotmail, Microsoft's world leading Internet email offering, with over 190 million users, has
selected Trend Micro for antivirus scanning and cleaning protection for its users.
Trend Micro, a "big 3" gorilla in the antivirus space is better known for serving the enterprise
market. This deal shows that Trend is serious about the consumer market too, an area where
Symantec is dominant.
JSE-listed ERP.com is the exclusive Trend Micro distributor for sub-Saharan Africa.
As we pointed out in an IT Security thematic report recently, South African IT companies
representing international products need to keep on top of international developments and select
their products carefully. If their products go out of favour internationally, it won't be long
before local customers select others.
We believe the deal from Trend Micro bodes well for ERP.com, since it symbolises Trend's
ambitions for the consumer market too. Perhaps we could see ERP.com signing similar Trend Micro
deals with local ISP's in the future...
3Com buys TippingPoint for USD 430 mln
Earlier this month, we learnt that global networking player, 3Com will acquire TippingPoint for
USD 430 mln. TippingPoint is a small niche US-based company with around 125 employees, which has
developed a leading Intrusion Prevention Appliance that is highly rated by Gartner. It
has yet to post a profit which signals to us that 3Com is buying it for its technology and skill.
The deal shows the overlapping of the networking and security spaces. Integrating TippingPoint
into 3Com's networking gear will enhance their ability to deliver secure, converged networks to
the enterprise market. Security needs to be taken a step further as voice is increasingly carried
on data networks. Security solutions for these applications need to be high-speed and robust in
nature.
ERP.com is an exclusive distributor of TippingPoint locally. Although we have not
yet confirmed this with management, we believe the 3Com deal would end ERP.com's relationship with
TippingPoint. In any event, this would probably only be slightly negative, since TippingPoint is
currently a very small part of their business.
Friday 17 December 2004
Oracle buys PeopleSoft for USD 10.3 billion - is this worth it?
This deal consolidates the top-tier ERP space into two "gorillas". It will now be
dominated by SAP and Oracle. Oracle has traditionally been strong at database development
but has faced stiff competition in the ERP arena. PeopleSoft had strengths in the human
resources component of ERP but has over the years offered a fully fledged and competitive
ERP suite. Oracle and PeopleSoft together could be a formidable combination, but both have
suffered in the interim because the hostile takeover took almost 2 years. Going forward, we are
of the opinion that SAP will continue to lead with Oracle/PeopleSoft in a distant second place.
South African IT Services players have been concerned about this takeover and clients have chosen
to delay their Oracle or PeopleSoft implementations, or switch to SAP. We have seen
ERP.com's decision to focus on SAP only, going forward. On the flip-side, the deal opens
up new opportunities for IT companies to represent the newly merged Oracle/PeopleSoft
combination. But we think SAP will still dominate by far. We estimate SAP has a South
African top-tier market share of around 75%. Globally, we believe it is in the region of 60%.
For the last 4 quarters, PeopleSoft had revenues of USD 2.7 billion and net income of USD 79 mln.
The purchase price puts it on a trailing 12 month PE of 130. Oracle currently trades on a
PE of 25 times. On the face of it, the valuation looks way too high - but time will tell.
Symantec to acquire Veritas for USD 13.5 billion - watch this space
This is an exciting deal since it represents the marriage of IT security and storage.
Symantec is a world leading antivirus and IT Security services player. Veritas is a leading
storage software player. In our opinion, if the products of the two can be synergised, the deal
would give Symantec a unique offering. Availability of information is critical for most
enterprises. The two companies have been providing this, but from two different angles, namely
security and effective data storage.
The deal will probably excite local IBM hardware and Symantec security player, Faritec.
Datacentrix is also a Symantec reseller and a strong HP storage player. The deal should
bring new opportunities to these companies.
For the last 4 quarters, Veritas had revenues of USD 1.9 billion and net income of USD 461 mln.
The purchase price puts it on a trailing 12 month PE of 29, which sounds fair for a
software developer on NASDAQ. Symantec currently trades on a PE of 37 times.
Sprint to merge with Nextel, valuing Nextel at USD 36 billion
The deal represents further consolidation in the US mobile operator space. Sprint/Nextel
will become the third largest mobile operator in the US. A challenge will be for them to
merge their two different standards for cellular telephony. Sprint uses CDMA, while Nextel
uses iDEN, a proprietary Motorola standard.
The space has consolidated from 6 to 4 players. They are now as follows:
1. Cingular/AT&T wireless - 47 million subscribers
2. Verizon - 42 million subscribers
3. Sprint/Nextel - 38 million subscribers
4. T-mobile - 16 million subscribers
For the last 4 quarters, Nextel had revenues of USD 12.8 billion and net income of USD 3.1 bln.
The valuation puts it on a trailing 12 month PE of 11.6, which is reasonable. As of Q3 2004,
Nextel had 15.3 mln subscribers. The valuation yields a market value per subscriber of USD
2353.
By comparison, MTN's market cap of ZAR 67 bln and 11 mln subscribers (Sep 04) yields a
value of ZAR 6091 per subscriber. At a ZAR/USD of 5.73, this translates to USD 1063,
which is less than half of that paid for Nextel subscribers. Although this is a simplistic
comparison, it highlights the discounts on mobile operators in emerging markets.
Tuesday 14 December 2004
FrontRange "4-month" interims - appears on track
We attended a video-conference in Johannesburg yesterday of the FrontRange interim results
presentation, which was held in Cape Town.
The company has changed its year end from June to April, leaving an awkward 4 month reporting
period to October 2004. This makes comparison fairly difficult.
Nevertheless, comparing with the corresponding 4 months last year, the results look good.
Revenue was up 10% to USD 24 mln, with a healthy 24% increase in license revenues, the key driver
for any software company.
The GP margin increased to 76.4%, approaching the group's target of 80%. Other operating
costs were reduced further, leading to an EBITA profit of USD 0.4 mln versus a loss of USD 1 mln
last year. The main cut here is in sales and marketing, which was 43% of revenue, down from 52%
for the same period last year.
Cash flow from operations was marginally negative, compared to a positive USD 2.5 mln the
previous year. We suspect this was from working capital movements. We notice that creditors
were down by USD 2 mln from June. The balance sheet remains in good shape with no debt,
around USD 21 mln in cash and a healthy USD 16.5 mln of deferred revenue (revenue that will flow
in the future).
It was difficult to ascertain from the presentation the exact progress made on FrontRange's ambitious
product strategy. There were breaks in the transmission which was unfortunate.
In speaking to management after the presentation, a NASDAQ listing is still on the cards.
They believe however that they need at least two more quarters of good results before they can
start the filing procedures.
If all goes well, we forecast that HEPS of USD 4.4 cents is achievable for the year to April
2005. At an average rate of ZAR 6 to the USD, it translates to ZA 26.5 cents per share. At
yesterday's close of 450 cents, this puts FrontRange on a forward PE of 17. While this is
too "rich" for a South African JSE context, it would be quite low for the NASDAQ.
For those investors with an appetite for risk, we would recommend FrontRange as a
speculative investment with a view to a NASDAQ listing in the medium term.
Monday 6 December 2004
Proposed regulations look good for VANS
ICASA has published proposed VANS regulations to implement the minister's liberalisation
announcement in September that VANS can carry voice traffic from February 2005.
Some background: After the minister's announcements, key questions that remained "up in the air"
were as follows: Can VANS provide their own telecoms facilities? Will VANS be able to
interconnect with incumbent networks? Will VANS have their own numbering plans?
The proposed regulations, which are up for public comment for the next 14 days answer all of the
above questions IN FAVOUR OF VANS:
- VANS may self-provide
- VANS have the right to interconnect with incumbents
- VANS have the right to apply to ICASA for their own block of numbers
Simply put, if the regulations go ahead, then VANS should be able to compete more effectively
against Telkom using VoIP services.
This is good news for VANS, such as Didata's Internet Solutions, MTN's Network Solutions,
UUNET, Gateway and DataPro. It is also good news for corporate consumers of VANS services.
It is bad news for Telkom.
Thursday 25 November 2004
UCS results - Acquisitions mask a difficult second half
Yesterday, we attended the UCS annual results presentation for the year to September 2004 in
Sunninghill.
Overall, it was a strong set of results, driven largely by the acquisition of the Affinity Logic
retail solutions business. Group revenue was up 59% to ZAR 486 mln. (Organic growth was
3%.) The Group EBIT margin declined to 5.2% from 6.1% last year. HEPS grew by 21%
to 11.9 cents per share. It was also assisted by a low tax expense and a restatement downwards
of last year's HEPS from a new accounting policy to consolidate the staff share incentive scheme.
Of concern to us is the decline in group margin. Although the restructuring into two
distinct entities (a software business and a solutions business) has gone according to plan,
management explained that some major projects were delayed in its software business, which
impacted the overall margin. This would also explain the sluggish organic growth rate. Nevertheless,
annuity revenue remains strong at 58% of total revenues.
Cash flow from operations was a healthy ZAR 40 mln. The group repaid around ZAR 23 mln of debt,
leaving the balance sheet strong. The group has around ZAR 5 mln of debt and ZAR 51 mln of cash.
Management explained that the internationalisation drive of their retail packaged software was
going slowly. A key distribution partnership was signed in Saudi Arabia which will act as
a channel for the Middle East. The group is currently assessing other major global regions of
suitable partners. UCS has also established a world-class software manufacturing facility in
South Africa. The intention is to be an outsourcing facility for international software
development.
Going forward, we are of the opinion that UCS will have a challenging year. We calculate
that revenue actually declined by 2% when comparing the 2nd half to the first half of this year.
Furthermore, we calculate that their EBITDARE margin (before interest, tax, dep, amort, R&D and
exceptionals) declined significantly in the second half. It was 18.9% in the first half and
14.5% in the second half. We know that both of these declines can be attributed to the delays
of large projects in the software division. There is a contingent tax liability of around
ZAR 20 mln, which still has to be decided on. UCS has a very low tax rate and depending on the
outcome of the contingency, its assessed tax losses could be used up much sooner. As a result,
we feel there is a fair amount of forecast risk for the coming year.
Without further acquisitions, we forecast a 5% revenue growth and an improvement in the EBITDARE
margin to 18% from 16.7% this year. We have increased R&D expenditure to 2003 levels and have
continued with the low tax rate from the past. This translates to HEPS growth of 11% to
13.1 cents per share, putting UCS on a forward PE of 12.
We feel this forward PE is higher than the average for the sector and a bit high for the expected
growth. However, we point out that UCS does have significant retail software intellectual property
and there is potential for it to be internationalised. At current levels of 155 cents, we believe
UCS is fairly valued. We would be holders.
Tuesday 23 November 2004
Paracon results - IT upturn evident, margins still under pressure
Yesterday, we attended Paracon's annual results presentation for the year to September 2004 at
their offices in Randburg.
Overall, it was a good set of results, driven by a turnaround in the previously loss making
Solutions division. Group revenue was up 6% to ZAR 366 mln. The group EBITDA margin improved
substantially to 6.5% from 4.7% last year. HEPS grew by 40% to 5.9 cents per share.
The core resourcing segment grew its revenues by 11% to ZAR 298 mln. ZAR 15 mln of this was from
acquisition, leaving organic growth at 6%. However, its EBITDA margin declined slightly
to 7.5% from 8% last year. (It was 7.5% at the interim stage too.) While management are confident
of an uptick in IT resourcing spend for the coming year, they maintain that margins continue to
be under pressure.
The Solutions business contributed a positive EBITDA this year of ZAR 1.7 mln, compared to
a negative ZAR 2.5 mln last year. This was achieved through a focus on smaller, more profitable
projects.
As always, the group continued to be a strong cash generator for the period, with ZAR 21
mln of operating cash flows. The balance sheet remains in good shape, with no debt and ZAR 105
mln of cash on hand.
Going forward, factoring in the Time Quantum Cape acquisition for a full year and the Faritec
contracting acquisition which did not contribute this period, we estimate revenue will grow by
31%. (7% organic) We forecast a slight decline in EBITDA margin to 6.4%. For the year to
September 2005, we forecast HEPS growth of 16% to 6.8 cents per share.
At yesterday's close price of 100 cents, our forecasts put Paracon on a forward PE of 14.6.
If one strips out the ZAR 105 mln cash and the after tax interest earned next year, we derive a
forward "core PE" of 13.5. We feel this is too high compared to the rest of the sector.
Although the group is a strong cash generator and is well positioned, arguably as the leading IT
resourcing company in South Africa, we would not recommend that investors buy the share at
current levels.
ICASA briefing on minister's telecoms liberalisation announcements
Yesterday, we attended an ICASA briefing on the much talked about liberalisation announcements
of September 2004. Overall we felt it was positive for liberalisation.
ICASA conveyed its views on the announcements and outlined a plan of action to get the
regulations in place by February next year.
After the colloquium last month, there were many unanswered questions. Critics questioned whether
the liberalisation announcements would have the desired effect. Yesterday's briefing showed us
that ICASA is determined to get "the show on the road".
Critical factors that would allow VANS to compete using VoIP include whether or not they will
be able to interconnect with incumbents, get their own numbering plan and whether
or not they can self provide. ICASA appears determined to make all these happen by
formulating a new interconnect framework and including VANS in a broad numbering plan. They
explained that their interpretation of the minister's announcements was that VANS were allowed
to self provide.
Friday 19 November 2004
MTN interims - The Nigerian "printing press" continues
Yesterday, we attended MTN's interim results presentation for the six months to September 2004
in Sandton.
Overall, the results were solid, driven by a strong performance in Nigeria and a further
improvement in the EBITDA margin in South Africa. Group revenue was up 22% year-on-year
to ZAR 13.7 bln. Group EBITDA was up 29% to ZAR 5.6 bln, with the overall group EBITDA margin
up to 40.9%. Adjusted HEPS was up 34% to 166 cents per share.
In Nigeria, the "printing press" continues. Subscribers grew to 2.6 million. As of
November, the 3 million mark was reached. Management are confident of reaching their original
target of 3.5 million by March 2005. It was disappointing however that its market share has
dropped to 44% from around 50% in March. Nevertheless, MTN Nigeria grew revenues by
65% and EBITDA by 55% in local currency (Naira) terms. The ZAR strength reduced these growth
figures in Rand terms to 38% and 30% respectively. MTN Nigeria now contributes 33% of group
revenues, 42% of group EBITDA and 47% of group PAT. With demand still outstripping supply and
ARPUs remaining strong, MTN Nigeria should continue its strong performance into the future.
In South Africa, moderate subscriber growth was achieved to 6.9 million. Blended
ARPU declined year-on-year by 10% to ZAR 187 per subscriber per month leaving revenue up 15% to
ZAR 8.2 billion. A continued focus on controlling costs has led to the SA EBITDA margin
improving to 32.8% from 30% for the year to March 2004.
Operating cash flows were strong at around ZAR 3 bln. The Nigerian network rollout
continued with an outflow of around ZAR 3 bln. MTN expects to spend a further ZAR 4 bln to
March 2005. Nevertheless the balance sheet remains in good health with around ZAR 3.9 bln in
cash and ZAR 3.6 bln in debt.
Going forward we believe an adjusted HEPS of around 340 cents is achievable for the full year to
March 2005. For the next 12 month period to September 2005, we believe that 385 cents is
achievable. This gives MTN a forward 12 month rolling PE of around 8.6, which is attractive.
We maintain our BUY recommendation with a 6-month price target of ZAR 40.
Addendum: MTN versus Vodacom (as of September 2004)
Now that both Vodacom and MTN have reported results for the six months to September 2004, we
have compared the two briefly below.
In South Africa, Vodacom is dominant with 11.3 million subscribers vs. MTN's 6.9
million. Vodacom's revenue is also much bigger (ZAR 12.4 bln vs. ZAR 8.2 bln). Vodacom used to
have a higher EBITDA margin, but MTN has improved theirs recently. MTN's SA EBITDA margin is
32.8% vs. Vodacom's 31.7%. The growth profiles of the two are very similar at around the 15-17%
mark for revenue.
The rest of Africa (RoA) component is a different story altogether. For Vodacom, it
makes up only 8.6% of revenue (ZAR 1.2 bln). MTN's RoA makes up 40% of group revenue at a large
ZAR 5.5 bln. RoA revenue growth rates are similar between Vodacom and MTN (around the 30% level in Rands),
but both were impacted by the strengthening Rand.
At the EBITDA level, Vodacom's RoA segment makes up only 6% of group EBITDA with an EBITDA
margin of 18%. This is still being impacted by the loss making fledgling Mozambique operation.
For MTN, RoA contributes around 52% of the group EBITDA and has an EBITDA margin of 53%.
MTN's African strategy has paid off. In our opinion, MTN is far better positioned for
long-term growth, however it does carry more risk than Vodacom.
Thursday 18 November 2004
Didata results - its a margin game - sell for now
Yesterday, we attended the company's annual results presentation for the year to September 2004,
at their campus in Bryanston.
Overall, it was a pleasing continuation of the turnaround we saw at the interim stage to March.
Revenue was up 18% to USD 2.5 bln. (13% in constant currency terms). Although still very
"thin", the EBITA margin improved from a negative 0.7% last year to a positive 1.1%. After
exceptional losses of around USD 48 mln, the group posted a net loss of USD 38 mln compared to a
loss of USD 420 mln the year before.
The services contribution did not improve. In fact, as a percentage of total revenue,
services declined to 38% from 40% last year. Management did concede that product margins came
under pressure, but that it was compensated for by better services margins.
There was a pleasing turnaround in the African operations (including South Africa). In dollar
terms, revenues grew 22% to USD 445 mln. Its operating profit margin more than tripled from 1.5%
to 6.2%. Also, the USA operations turned around nicely, making an operating profit of
USD 4.6mln compared to a loss last year of USD 17 mln.
The key for Didata going forward, in our opinion, lies in improving its EBITA margins.
Their earnings are very sensitive to this. Management believes they will improve the margin from
the current 1.1% level, and felt that 4-5% was achievable over the longer term.
However, our modelling shows that if margins can be improved to 2% for 2005, then the forward PE
is 21. At 3%, which we think is achievable, the forward PE is still high at 14. At 4%, the
forward PE is 11 and at 5% it is 8.
A forward PE of 8 to 10 sounds fair in South African terms. This would imply Didata achieving a
4% to 5% EBITA margin next year, which we doubt will happen.
Although the group has definitely shown a positive turnaround and this seems set to continue, we
believe that the shares are still too expensive at current levels to justify the expected
margins. We recommend that investors sell for now.
Didata closed yesterday at 345 cents and has a market cap of ZAR 4.6 bln.
Wednesday 17 November 2004
Telkom's proposed 2005 tariffs - net neutral to revenues
Yesterday, Telkom announced its proposed tariff changes for 2005. Should they be approved by
ICASA, they will come into effect from 1 January next year.
On balance, the changes are net neutral to Telkom's revenues. Reductions in national
long distance and international tariffs are compensated for by increases in local tariffs,
subscription and installation charges.
National long distance tariffs are DOWN by 10%. These calls make up 12% of Telkom's
fixed line revenues for the interim period to September 2004. International tariffs are DOWN
between 45% and 50%, depending on the destination country. These calls make up only 4%
of Telkom's revenues.
However, local calls are UP by 5.5%. This represents 18% of revenues. Also,
installation and subscription charges are UP on average by around 6.2%. This portion
represents 17% of revenues.
Telkom claims its tariff changes would result in a slight increase in its revenue of 0.2%. Our
calculations show a small reduction of just under 1%. Either way, its fairly neutral.
The new tariffs will benefit those that make extensive use of long distance and international
calls. They also decrease the potential savings that many expect from VoIP competitors next
year.
Tuesday 16 November 2004
Telkom interims - The Goliath gets leaner
We attended the Vodacom and Telkom interim results presentations yesterday in Midrand for the
six months to September 2004. Overall it was a good set of results, driven once again by further
cost cuts in the fixed-line segment.
Group revenue was up 7.4% to ZAR 21.5 bln. EBIT was up 14.8% to ZAR 5.2 bln.
(The EBIT margin improved to 24% from 22.7% at the March year-end.) HEPS was up a
healthy 60% to 537 cents per share, also helped by lower interest charges.
The fixed-line segment showed lacklustre revenue growth of 2.5% to ZAR 15.7 bln.
However, it managed to cut costs further, increasing its EBITDA margin to 41.8% from 40.8%
at the full year. This came from lower bad debts, better optimisation of its properties, less
fees paid to Thintana and further reductions in its vehicle fleet. The key question is "How much
longer can this continue?" Management are of the opinion that the EBITDA margin can improve
by a further 1% each year for the next 2 to 3 years. This may be possible, but we point out that
the magnitude of the cost cuts is reducing. For the full year to March, the "controllable
costs" were cut by around ZAR 700 mln. For this 6 month period, we calculate a
figure of ZAR 182 mln.
Management's opinion on the potential loss of market share to competition (SNO and VoIP players)
remains unchanged. They believe they could lose up to 10-15% over a five year period.
Vodacom continued its strong performance but saw pressures in its SA margins and had
difficulties with its fledgling Mozambique operation. The South African operation dominated the
results. It contributed 91% of Vodacom's revenues and 94% of its EBITDA. In SA, subscribers
grew by a massive 33% year-on-year to 11.3 million. Management considers the probability of
entering the Nigerian market as "reasonable", but felt that this would have to happen within
3 to 6 months if they wanted to become dominant there over time.
Telkom group produced ZAR 5.6 bln of operating cash flow. Interest bearing debt was reduced to
around ZAR 15 bln from ZAR 17 bln in March. The group has ZAR 3.1 bln of cash on hand. But
current liabilities still exceed current assets. In fact, the current ratio (CA/CL)
worsened compared to the full year at March.
Factoring in the improved margins of the fixed-line business, our current DCF valuation of
Telkom Group has increased from ZAR 85 to ZAR 91 per share. At current levels of ZAR 93.30, we would not
be buyers of the share.
Friday 12 November 2004
Telkom price control regime to be more stringent
ICASA is considering changing the regime which regulates Telkom's price increases. They have
published a 56 page document on their Web site, outlining the proposed changes.
Some background first. Telkom's prices are regulated in the absence of competition to prevent price
increases from getting out of hand. The current regime in place limits the overall basket of
services to an increase of CPI less 1.5%. Furthermore, there is a restriction that no single
service may increase by more than CPI plus 5%.
We have looked at the proposed changes and on balance, we believe they are more stringent on
Telkom.
Interestingly, ICASA is of the opinion that significant competition to Telkom in the near future
is unlikely and believes that continued regulatory intervention is necessary. It believes that
the new price control regime should be in place until December 2008.
In a nutshell, the proposed changes are as follows:
CPI less 1.5% becomes CPIX less 4% - The use of CPIX instead of CPI is more lenient for
Telkom. If one takes the annual CPI and CPIX figures over the past 4 years, CPIX has on average
been 1.3% higher than CPI. However the change to 4% makes it far more stringent overall.
The requirement that no single service may increase by more than 5% in real terms is still in
force. However, ICASA proposes excluding certain services from this rule. It appears from
the document that among other things, business calls will be excluded. The idea is that
competition will occur for the exclusions making them no longer necessary to regulate. On balance
this relaxation could provide Telkom with the means to make up some of its lost revenues.
ADSL has been included in the basket
It is proposed that calls to mobile phones are excluded from price control - the argument
here is that Telkom's prices for these calls are driven to a large extent by the interconnection
fees charged by the mobile operators.
ICASA is inviting industry comment and will be having public hearings on the 13th and 14th of
December. It expects the new price control regime to be in force by 15 January 2005.
Wednesday 10 November 2004
Lets not forget Telkom's tariff increases
All the media attention has been on Telkom's pending BEE deal and the potential positive effects
it may have in removing an overhang of Thintana's stock.
However, lets not forget that we are expecting Telkom to announce its 2005 tariff increase
soon. The basket of prices is not allowed to increase by more than CPI less 1.5%, but we will be
watching closely to see which prices go up and which go down, in anticipation of VoIP competition
next year. The rate increases should be announced on Monday.
Cisco Q1 results - what's all the fuss about?
With all the fuss of late on the reduction in margins for sellers of Cisco equipment such as
Didata and Datatec, we thought it would be useful to see just how well or poorly Cisco is
doing...
In its latest quarter to October 2004, Cisco's sales grew by 17% (year-on-year) to USD
6 bln. Its gross profit margin was 67%, compared to 69% a year ago. Its EBIT margin
was up healthily to 30% compared to 27% a year ago. Net Income rose 29% to USD 1.4 bln.
If one examines how they got their EBIT margin higher (as if 27% wasn't enough ;-), we see that
sales and marketing costs as a percentage of sales declined from 21% a year ago to 18% for this
quarter. We believe that rebates to resellers and distributors are contained within this item,
explaining some of the pressure on companies like Datatec and Didata.
It was a good result, but CEO John Chambers is still cautious for the future , saying
that "lumpy" router sales will continue. Routers contribute 21% of Cisco's revenues, switches
43% and services 16%.
Cisco is betting its future growth on Internet telephony, home networking and security.
To this end it announced customer wins with the Bank of America, which will be installing 180,000
Cisco IP phones throughout America and with Ford, for 50,000 IP phones throughout Michigan.
Cisco closed down by 1.1% yesterday to USD 19.75. It has a market cap of USD 134 bln and is on a
PE of 28.
Friday 5 November 2004
November results previews (TKG, DDT, MTN, SPS, PCN, UCS)
In November, 6 technology companies that we follow will be reporting results. Here are the dates
of their presentations and a brief overview of what we'll be looking out for.
15 Nov - Telkom/Vodacom - interim results to September 2004 (presentation)
Telkom has already announced that HEPS will be 50-70% higher. We have no doubt that the major
factor is going to be further cost cutting in its fixed-line business - not revenue
growth. But we doubt this margin improvement can continue much longer. For the year to March 04,
Telkom cut around ZAR 700 mln in "controllable costs" improving its group EBIT margin from 17%
to 22%. For Vodacom, we expect a continued solid performance, dominated again by its
South African operation. Perhaps we'll get further clarity on Vodacom's plans to pursue the
Nigerian market. Telkom closed yesterday at ZAR 85, is on a PE of 9.5 and a DY of 1.3%. Its
market cap is ZAR 47 bln.
17 Nov - Dimension Data - full year results to September 2004 (presentation)
At its interims to March 04, Didata showed a profit for the first time in many reporting periods,
with pleasing improvements in the US and African regions. Lets see if the newly appointed CEO
and CFO can continue the momentum. We will be watching out for the impact on margins from
Cisco business, which we saw negatively impacting Datatec last month. We will be hoping for
revenue growth in constant currency terms (it was flat for the interims). Lastly, we will
be looking for an increased contribution from services as opposed to product business,
something which Didata has been trying to do for years. At their interims, the product sales
contribution remained unchanged at around 58% of revenues. Didata closed yesterday at 337 cents
and has a market cap of ZAR 4.5 bln.
18 Nov - MTN - interim results to September 2004 (presentation)
MTN has announced that HEPS will be 30-45% higher. We are confident that its Nigerian operation
will be the star performer again. We expect strong subscriber growth to around 2.6 million,
especially since connection fees have been reduced. We also could see further improvements in
the South African EBITDA margin, which improved from 27% to 30% for the full year to March
04. Hopefully, we will get a chance to meet the new South African MD. We also seek to gain
further insight into MTN's expansion plans in Africa and the Middle East. All round, it should
be a solid performance. MTN closed yesterday at ZAR 33.06, is on a PE of 12.4 and a DY of
1.2%. Its market cap is ZAR 55 bln.
18 Nov - Spescom - full year results to September 2004 (SENS only)
We will be looking out for progress internationally, especially in the US and Europe with
their internally developed information content management software, eB. However, we do expect the
performance to be negatively impacted by the stronger Rand. We would like to see an
increase in the annuity type business, something which management is working on. At the
interim stage, large working capital requirements led to negative operating cash flows. We would
like to see this reverse for the full year. Spescom closed yesterday at 166 cents and has a
market cap of ZAR 131 mln. It is on a PE of 2.9.
18 Nov - Paracon - full year results to September 2004 (SENS only)
We know HEPS will be 30-40% higher as per the company's recent trading update. We believe it
will come mainly from the containment of the poor performance from its non-core solutions
division. We expect a continued healthy performance from Paracon's main resourcing division.
We will be looking closely at the resourcing segment's EBITDA margin, which declined to
7.5% at the interim stage from 8% to September 2003. We should also get an idea of Paracon's
plans for its ZAR 108 mln cash pile. Paracon's shares have risen sharply by around
50% over the past 4 months to close yesterday at 90 cents. It has a PE of 17.8 and a DY of
2.8%. Its market cap is ZAR 357 mln.
22 Nov - UCS - full year results to September 2004 (presentation)
UCS, the dominant retail software and solutions company in South Africa is undergoing
restructuring to reorganise its business into two parts, a software business and a
solutions business. Key for us in these results will be to see that the EBIT margin recovers,
showing that the reorganisation is bearing fruit. The group's EBIT margin declined slightly from
6.1% last year to 6.0% at the interim stage in March. Also important will be to see good organic
revenue growth. UCS closed yesterday at 155 cents, and is on a PE of 12 and a DY of 2.5%.
Its market cap is ZAR 371 mln.
Monday 1 November 2004
Pinnacle management meeting - undervalued growth
We recently met with Pinnacle founder and CEO, Arnold Fourie and executive director,
Takalani Marago-Tshivhase.
Pinnacle is a fast-growing hardware and software distributor. Its range of own branded and
self-assembled Proline computers are the 3rd largest in South Africa with around 8%
market share.
Our investment thesis is simple. The share looks undervalued, given the growth prospects and
the quality of the operation. We recommend the shares to investors at current levels. (It
closed on Friday at 48 cents.)
For further insight, read our Pinnacle management
meeting note in our IT section by clicking here.
Thursday 28 October 2004
Datatec interims - margins get worse - sell
We attended Datatec's interim results presentation to analysts in Sandton yesterday.
Overall, the performance was disappointing, with a decline in profit margins. Revenue
was up 11% to USD 1.25 bln. (6% in constant currency terms.) The group EBITDA margin declined
from 1% at the full year to 0.8%. While EBIT was turned positive, the EBIT margin was a tiny
0.2%. HEPS turned positive to 0.1 US cents per share.
Datatec's woes come from its main division, Westcon, an international distributor of
networking equipment. Westcon contributes around 84% of group revenues. Its EBITDA margins
halved from 2% at the full year to 0.9% for this period. Management ascribes this to
one-off setbacks, problems in its European operations and continued downward pressure on
margins from the sale of Cisco equipment. Cisco made up 57% of the Westcon sales mix. Gross
margins from the distribution of Cisco are around 7% currently. Management feels that margins
can only improve if there is a significant pick up in demand relative to supply, or if dramatic
innovation returns to their product range, most of which is largely mature and commoditised.
Datatec's plans to list Westcon on NASDAQ have been temporarily suspended.
Cash flows from operations were negative. Despite this, the group is in a net cash
position of around USD 100 mln with a healthy balance sheet.
Going forward, we believe the key for Datatec lies in improving its margins. The question
is, to what does its margin have to increase to, in order to justify its current share price?
Assuming a fair PE of 10, our modelling suggests that Datatec would need to improve its EBIT
margin to 1.4%, given its current share price of ZAR 10.30. The EBIT margin is currently at
0.2% and we doubt the group will reach 1.4% in the near term. With a push, they may be
able to reach 1% for the full year, which would put them on a PE of 16 - a bit too rich.
For these reasons, we would recommend that investors sell their shares at current levels.
Friday 22 October 2004
ICASA colloquium - Can the spirit be carried through?
We attended ICASA's colloquium held in Bryanston on Wednesday and Thursday this week. In the
interests of broad consultation and regulatory transparency, our regulator aimed to solicit
opinions from the industry on the minister's recent telecoms liberalisation announcements.
Both days were very well attended with around 500 participants. All stakeholders were present
including incumbent operators, VANS, USALs, PTNs, equipment manufacturers, network integrators,
consultants and law firms. The two day session took the form of separate working groups for
each major area of the announcements, followed by feedback sessions to the whole group.
As could be expected, much was debated and many opinions were raised. A common thread was a
divided opinion on the interpretation of the minister's intentions. While the VANS were
fighting for their piece of the pie, the incumbents were trying to defend their turf.
It was felt by many that in order to make the liberalisation a success, the VANS operators
need to be allowed to interconnect with the incumbents and have their own numbering plan.
Naturally, the incumbents were opposed to this, arguing that the VANS license itself has not
changed and that incumbents were the only ones allowed to provide public telephony.
Other key issues were the extent to which facilities could be self provided by the mobile
operators and whether or not VANS could also self provide.
ICASA now has the tough job of implementing the minister's intentions with a set of regulations.
Whether this can be completed before February 2005 remains to be seen. In any event,
ICASA needs to be commended for its consultative approach. We hope that the full spirit of
liberalisation is carried through to the final regulations.
Issues discussed and documented at the colloquium will be available for download from the ICASA
web site by Monday. ( www.icasa.org.za )
Wednesday 20 October 2004
MTN VoIP seminar - VoIP won't benefit all
Yesterday, we attended MTN Network Solution's VoIP seminar in Sandton.
The now famous "liberalisation announcements" from our telecommunications minister on 2 September
have legalised Voice over Internet Protocol (VoIP) from February 2005. VoIP will allow businesses
to communicate more cheaply and will generate new revenue streams for Value Added Network
Service providers (VANS) and ISPs. The telco industry, and particularly the data players have
never been this excited before, frantically trying to determine how they're going to claim their
stake of the VoIP pie.
The seminar was very well attended (around 300 people). MTN Network Solutions is a tier-1 ISP
and is 60% owned by mobile operator MTN. The seminar was well worth attending and definitely
appears to have increased their mind share in the market.
A key message was that uncertainty still prevails on many of the minister's announcements.
Questions that still need answering (regarding VANS) are as follows: What about number plans for VANS?
Can VANS interconnect with incumbent networks? Will VANS have any regulated obligations?
We also learnt that VoIP won't necessarily benefit all businesses. MTN NS is of the
opinion that businesses which make extensive use of international calls and those having large
branch networks spread throughout the country will benefit the most from VoIP savings. Their basic
modelling suggests that the costs to implement VoIP will exceed the savings for SME-type businesses.
For mid-size businesses, VoIP will be a "maybe" and for large corporates it should be a
"no-brainer". Another important issue in justifying the investment in VoIP equipment is that
one shouldn't use the current Telkom call rates to calculate potential savings, since these
tariffs will decline.
ICASA colloquium kicks off today
ICASA, our telecommunications regulator is responsible for implementing the recent "liberalisation
announcements". While the minister's policy changes are quite clear at a high level, the
"devil is going to be in the detail". The success of the intended liberalisation will depend
quite heavily on how the policies are implemented.
To this end, ICASA is holding an open two-day colloquium which commences today. Their aim is to
consult with the industry before implementing the policies. ICASA's approach is commendable.
We will be attending both days and will no doubt be communicating key outcomes in due course...
Thursday 14 October 2004
Spescom DataVoice deal wins
Spescom has recently reported a number of impressive deal wins from its leading voice recording
business, DataVoice. The first is a ZAR 10 mln sub-contract deal with Alcom Matomo as part
of its SAPS Gauteng digital radio rollout. Another deal was with SA Home Loans for its customer
call centre. And yesterday, Spescom announced a deal with the National Ports Authority (NPA)
for six of its commercial ports. It will be deployed by Transtel.
Storing voice communications digitally and being able to retrieve them easily offers huge benefits
in certain industries and applications. The trend is growing.
DataVoice's voice recording solutions have been developed locally. Its intellectual
property resides with Spescom. Spescom has a September year end. We expect its results to be
announced some time in November.
AOL's vote of confidence in RSA's two-factor authentication
AOL has chosen RSA's SecureID authentication solution to roll out its PassCode
offering. What this means is better security for AOL customers. In addition to using a username
and password to log on, customers can now carry a RSA security device, without which access to
AOL will not be granted. This is done via a unique password generated every 60 seconds on the
RSA device, which has to be keyed in by the customer when logging on.
This form of "two-factor authentication" is typically only found in Internet banking
applications and secure remote access for corporate mobile users. International analysts are
saying that the move by AOL bodes well for the concept of "two-factor authentication" to be
used in other areas.
The local beneficiary of all of this is SecureData, an ERP.com
subsidiary, which is the distributor for RSA Security products in sub-Saharan Africa.
Lets see if SecureData can sell this concept to the likes of M-Web...
Friday 8 October 2004
Jasco interims - diversity paid off
Yesterday, we attended the Jasco interim results presentation for the period to August 2004.
It was held at their offices in Woodmead.
Revenue declined slightly by 4% to ZAR 122 mln for the six months. There was a healthy
improvement in the group EBIT margin to 7.6% from 4.4% at the full year. A HEPS of 7.4 cents
per share was reported. Positive cash flows from operations were shown (around ZAR 4 mln)
and the balance sheet is healthy.
Jasco's Telecoms division had a significant improvement in its margin, driven by an
increased contribution from the higher margin TeleSciences business. Although revenue for the
division remained flat at ZAR 72 mln, it appears well positioned going forward.
Jasco's manufacturing operation, Special Cables,put in a solid performance. Revenue
grew by 20% to ZAR 34 mln. A large portion of its business comes from the manufacture of
components for domestic appliances, such as fridges and stoves. Consumer demand in this area
was strong and should continue for Jasco's second half, which includes the December
festive period.
A problem area is Jasco's security division, Multivid. It provides camera-based security
surveillance products to a wide variety of large customers. Revenues were down 23% to ZAR 15 mln
and it just broke even at the operating profit level. Jasco hopes to turn this division around
by addressing management problems and re-energising its sales and marketing efforts.
Going forward, for the year to February 2005, we believe that Jasco should be able to achieve a
HEPS of around 16 cents per share. We believe this is a fairly conservative estimate, since we
have not factored in any improvement in the Security division. At 140 cents, JASCO is on a
forward PE of around 9.
Since we initially commented on the company in July, the shares have risen a massive 55% from
90 cents. In our opinion, there is still some upside, but we doubt the same performance will be
repeated over the short term.
Thursday 7 October 2004
Altech interims - focused and determined
Last night, we attended the Altech interim results presentation for the six months to August
2004, held in Sandton.
Overall, there was an improvement, driven by strong growth and higher margins. Turnover
grew by an impressive 35% to ZAR 2.6 bln. A key feature was the increase in group EBITA
margin to 9.4% from 8% for the full year to February 2004. HEPS grew 10%, impacted
by higher tax charges and reduced investment income. As usual, the group continues to be a
strong cash generator with a solid balance sheet.
We now turn our attention to the operational performances of Altech's core divisions, which
collectively contribute around 88% of group revenue and 92% of group EBITA.
AUTOPAGE performed exceptionally well. We calculate a revenue of ZAR 1514 mln and an
EBITA of ZAR 108 mln. The EBITA margin of 7.1% is an improvement from 6.7% for the year to
February. The long-term margin locking agreements with the mobile operators seem to be paying off.
We calculate that total subscribers grew by 9% from February 2004 to around 612k (420k contract
and 192k prepaid). 30k contract and 22k prepaid subscribers were added for the period. Although
growth is slowing, its still healthy. Going forward, Autopage will increasingly rely on other
activities to augment its revenues. These include least cost routing, the sale of Sentech's
broadband wireless products, Internet services and voice over IP.
NETSTAR continued to be a reliable performer. We calculate a revenue of ZAR 177 mln
and an EBITA of ZAR 36 mln. The installed base of vehicle tracking units now sits at
320k which would appear to be a small improvement from the 307k reported in February 2004.
However in discussions with management, we discovered that this figure has recently been restated
downwards to account for inactive units. Nevertheless, Netstar's EBITA margin increased from 17%
(Feb 04) to a strong 20% for this period.
UEC, Altech's set top box export operation, had a good performance operationally, but the
reported numbers were disappointing. We calculate a revenue of ZAR 344 mln and a small
EBITA of ZAR 10 mln, translating to a margin of 3%. This is down from the 5% level in
February 2004. According to management, most of the work has been done to make UEC competitive
at ZAR 6.5 to the dollar, but the reported results were tainted by losses on forward cover
contracts under AC133. Excluding these losses, UEC's EBITA margin would have been 7%. It is
still a long way off from the 21% margin in Feb 03. Nevertheless, UEC will continue to be
susceptible to the fluctuating Rand.
NAMITECH, recently acquired by Altech, was a star performer. It contributed significantly
to the group. We calculate a revenue of ZAR 358 mln and an EBITA of ZAR 78 mln.
Its margin is an incredible 22%. NamiTech manufactures prepaid cellular vouchers and sells SIM
cards to the mobile operators. It is the dominant player in this area in southern Africa. For
the banks, it also manufactures personalised plastic cards and prints cheques. Considering the
mobile growth expected on the African continent, this business has huge growth potential. It
also has numerous synergies with other Altech companies.
We had the opportunity of meeting Steve Sidley, who has recently been appointed to head
up Altech's Multimedia and IT segments. He gave a presentation on convergence within the Altech
group, which was informative. He highlighted that in various "communication chains", Altech was
involved in most of the links. We believe his appointment bodes well for the group.
Altech expects the proposed Econet joint venture to be finalised soon. We are not clear at this
stage as to when the Econet numbers will be incorporated into the Altech group. Econet's 12
month historic numbers are: Revenue of USD 200 mln and PAT of USD 20-25 mln.
Going forward, we believe Altech will continue to perform well. Excluding the Econet joint
venture, our forecasts for the year to February 2005 are as follows: Revenue growth of 39%
to ZAR 5721 mln, EBITA growth of 59% to ZAR 530 mln (margin=9.2%) and HEPS growth of 22% to
371 cents per share.
Although the Econet joint venture increases the overall risk profile of Altech, we believe it
will improve the group's growth profile. Going forward, after Econet is included, we believe
the group should be able to achieve a 3-year forward compound annual growth rate in earnings
of 20-25%.
At 3695 cents, Altech shares are on a PE of 11.7 and a DY of 3.9%. Our growth projections
without Econet put it on a forward PE of 10, which is attractive. Combined with the above
average earnings growth which we believe the Econet deal will bring, we would recommend the share
to investors.
Tuesday 5 October 2004
October results previews
In October, 5 technology companies that we follow will be reporting results. Here are the dates
of their presentations and a brief overview of what we'll be looking out for.
6 Oct - Altech - interim results to August 2004 (presentation)
We will be looking for an overall improvement, largely driven by a turnaround in the
UEC "set top box" operation , which was impacted in the last set of results by the strong
Rand. Also, this period should see a contribution from the recently acquired NamiTech business
of around ZAR 50 mln in profit. We expect a continued buoyant performance from Autopage and
Netstar and will be paying close attention to the Autopage profit margin, which increased to
6.7% for the full year. We also hope to gain further insight into developments regarding the
recent Econet venture. Altech shares have risen some 15% since the Econet venture was
announced to 3700 cents. It is on a PE of 11 and DY of 3.9%. Its market cap is ZAR 3.9 bln.
7 Oct - Bytes Technology Group - interims to August 2004 (SENS only)
We have been warned of an expected substantial increase for this interim period, which we
suspect will be largely driven by a continued turnaround in BTG's UK operation.
Furthermore, management's efforts to improve efficiencies should result in an increased group
operating margin, which was 7.1% for the year to February. We expect a solid performance
from BTG's South African operations, particularly the Xerox and NDS businesses. We aim to gain
further insight regarding progress made with expansion into the rest of Africa and the pending
CS Holdings acquisition. BTG closed yesterday at 666 cents and has a market cap of ZAR 1 bln.
It is on a PE of 9 and a DY of 3.3%.
7 Oct - Jasco - interim results to August 2004 (presentation)
The company has already given positive HEPS guidance of between 6.5 and 7.5 cents per share,
owing to improved trading conditions and a more stable Rand. In addition to improved
revenues, we will be looking for increased margins in Jasco's telecommunications and
security businesses, which, for the year to Feb 2004 were 7.8% and 3% respectively. We would
also be keen to hear that progress has been made regarding the growth of annuity-type business.
Since we initially commented on Jasco 3 months ago, its shares have risen 40% to 125 cents.
It has a market cap of ZAR 87 mln and is on a PE of 3.7
7 Oct - DataPro - pre-listing presentation
DataPro is a tier-1 ISP with a good track record. It will be listing soon on the ALT-X. The
company stands to benefit tremendously from the recent relaxation of telecoms
policies which among other things, will allow for the provision of voice over IP
services. DataPro will be reverse listing into CASEY and then transferring to the ALT-X in
mid October. For the six months to Feb 2004, DataPro had revenues of ZAR 37 mln, a net profit of
0.8 mln and operating cash flows of ZAR 4.5 mln.
12 Oct - Altron - interim results to August 2004 (presentation)
The group stands to gain from improved performances in its Altech and BTG subsidiaries. The
performance of Powertech has been hindered in the past by a quiet telecoms sector, which
we believe will also be the case for this six month period. Activity in the telecoms sector should
pick up in the future if the SNO emerges and should benefit from telecoms policy relaxations.
Altron closed yesterday at 1290 cents and has a market cap of ZAR 1.3 bln. It is on a PE of
8.7 and has a DY of 4%.
27 Oct - Datatec - interim results to August 2004 (presentation)
We will be paying close attention to the EBITDA margin of its major subsidiary, Westcon
which declined to 1.97% for the year to February. The group is currently loss making, and is
highly sensitive to Westcon's margin. Westcon is a global distributor of network equipment and
contributes around 78% of Datatec's revenue and the majority of its EBITDA. Furthermore, we would
like to see Datatec's Logicalis and Mason services businesses return to
profitability. We also hope to gain further insight into the timing of a potential
international listing of Westcon. Datatec closed yesterday at 1050 cents and has a market
cap of ZAR 1.4 bln.
Thursday 30 September 2004
AST results - Turnaround in the making
Yesterday, we attended the AST annual results presentation for the year to June 2004 at their
offices in Samrand.
AST has been restructuring itself over the past 16 months. Management have previously stated
their intention to return to profitability by June 2005. Based on the results yesterday, we
believe that the turnaround is progressing according to plan.
Revenue was down 21% to ZAR 1735 mln. Excluding the effect of disposed businesses, it
was down 8%. There was an encouraging improvement in all profit margin lines. EBITDA
margin improved from 0% to 6%. EBITA margin turned positive to 1.2%. However EBIT is still a
negative ZAR 80 mln. The headline loss was lessened from ZAR 62 mln to ZAR 13 mln.
Cash flow from operations was improved to a positive ZAR 36 mln. Although the balance sheet
is still not healthy, it has improved over the year. Total debt is around ZAR 327 mln with cash
on hand at ZAR 84 mln. Current liabilities still exceed current assets.
The restructuring process has led to the disposal of certain businesses, impacting revenues.
It is disappointing however, that excluding the disposals, revenue was still down 8%.
Nevertheless, the headcount has been reduced by 17% to around 2900. The associated salary
bill has declined by 15%. Together with other cost cutting efforts, profitability is improving
as evidenced by the improved margins.
Furthermore, significant deals were announced at the results, the full details of which will be
available over the next few weeks. Firstly, the conversion of around ZAR 107 mln of debt
into equity. This will improve the balance sheet. Second, the announcement of a BEE deal
with Gijima that could result in Gijima owning 30% of AST. And lastly, an undisclosed
agreement with SARS has been reached which removes the uncertainty around contingent tax
liabilities that has loomed over AST for quite some time. In our opinion, all three are
positive for AST.
One of AST's top clients and partners is ABSA. AST's DTS business is a JV with ABSA, which owns
30%. This business has a large outsourcing contract with ABSA to manage their distributed
IT infrastructure. Management are confident that the pending investment by Barclays plc into
ABSA will not affect their outsourcing contract.
Going forward to June 2005, our modelling suggests that a HEPS of 30 cents per share is
achievable. Our main assumptions include no revenue growth, an improved 9% EBITDA margin
(removing the once-off ZAR 48 mln restructuring charge) and a positive 4% EBIT margin. We have
not factored in the debt to equity conversion or the Gijima BEE deal.
At 72 cents, AST trades on a forward PE of 2.4, which is attractive.
For investors with an appetite for risk, we would recommend AST shares as a speculative
investment at current levels.
Wednesday 29 September 2004
Datacentrix interims - a superb performance
Yesterday, we attended the Datacentrix interim results presentation for the 6 months to August 2004.
Overall, it was a surprisingly impressive performance. Revenue was up 13% to ZAR 450 mln.
The EBIT margin improved dramatically to 7.6% from 5.6% in the comparable period last
year. HEPS came in 30% higher at 14.9 cents per share.
Cash flow from operations was a healthy ZAR 37 mln. The group's cash pile now sits at around
ZAR 147 mln and there is no debt.
For Datacentrix, 90% of its revenue is dollar linked. The company sells hardware and
software at the Rand equivalent of a dollar price. In dollar terms, revenue was up by 34%.
This is a truer reflection of the business activity, which is clearly buoyant. According to management,
the majority of this growth came from the sale of high-end servers and a pickup in software
licensing. Nevertheless, the Rand appreciated by 15% explaining the reduced Rand revenue growth
of 13%.
The increased EBIT margin was a key feature in these results, being the major factor in
driving HEPS up by 30%. After discussing this with management, three areas are worth highlighting.
First, around 80% of the company's operating expenses are fixed. This means that as
volumes increase, the margin improves with economies of scale. Second, gross margins did increase
slightly in this period owing to better buying power. And lastly, there was a slight change in
the overall revenue mix, with a higher contribution from higher margin services business.
Going forward, for the full year to Feb 2005, we would expect a similar performance.
At the revenue line, the underlying dollar growth should remain at around the 30% level. With
the "Rand appreciation effect" working its way out the system, we should see Rand revenue
growth of around 15%. We believe margins will remain at current levels or perhaps, as our
modelling suggests, even increase slightly with further economies of scale. We believe headline
earnings growth of around the 30% level is achievable for the full year.
At 225 cents, Datacentrix is on a PE of 9.3 and a DY of 3.1%. Its market cap is ZAR 459 mln.
Our growth projections put it on a forward PE of 8.3, which we believe is attractive.
Furthermore, stripping out its ZAR 147 mln cash pile from its market cap and the after tax
interest earned, we calculate a forward PE for its "core business" of around 6 times.
We believe that Datacentrix is a good investment at current levels.
Tuesday 28 September 2004
Compu-Clearing results - growth will be a challenge
Yesterday, we met with the company's financial director, Costa Efthymiades to discuss their
results for the year to June 2004.
Revenue was up a moderate 8% to ZAR 35 mln. Although still healthy, the EBIT margin
declined slightly from 23% to 22%. Disappointingly, HEPS came in flat at ZAR 16
cents per share. Nevertheless, the group continues to be a healthy cash generator with cash
flows from operations of ZAR 8 mln. The balance sheet is strong with virtually no debt
and around ZAR 22 mln of cash on hand. To this end, a large total dividend of 18 cents per
share was declared. (8c ordinary and 10c special)
Compu-Clearing's main source of income is the rental of its specialised software on a
per-transaction basis to freight forwarders, customs clearing agents and airline cargo handlers.
They dominate the South African market with around 70% market share.
Discussing the 8% revenue increase, management felt that overall shipment volumes had increased.
Although Compu-Clearing's market share is high, some new customers had also been signed up.
An annual price increase in line with Producer Price Inflation also assisted. However, the
strong Rand affected some of their clients' profitability which hindered their
propensity to spend more with Compu-Clearing.
Margins were impacted by small losses made in their fledgling operation in the US and an
increased headcount to improve service levels locally.
Going forward, management believe that growth could come from their international expansion
in the USA and synergistic software acquisitions locally.
Management are proceeding cautiously with the US business. It did not contribute materially to
the results this year. Compu-Clearing's systems have recently been accredited by Customs USA.
This is a milestone step forward and positions them well for rolling out their "model" in the
US market.
In its current state, we believe Compu-Clearing will struggle to show good growth. It
already dominates the local market and it could be some time before the US operation
contributes more meaningfully. Going forward, we would look for revenue growth of around 10%.
However we believe EBIT margins cannot be sustained at current levels and will decline in the
year ahead. We would expect earnings growth of around 5% in the coming year.
At 168 cents, Compu-Clearing is on a PE of 10.5 and a DY of 11%. We feel that the share is
fully valued at these levels and would encourage investors to wait for details on potential
acquisitions before investing.
Tuesday 21 September 2004
EOH results - another star performance
We attended the presentation of EOH's annual results to July 2004 held last night in Rosebank.
It was a star performance which bettered our expectations. Revenue was up 69% to
ZAR 300 mln and HEPS was up 30% to 43 cents per share. Cash flows from operations were
healthy at ZAR 56 mln. The balance sheet is strong with very little debt (around ZAR 3 mln) and
ZAR 62 mln of cash on hand.
Revenue growth was assisted by the acquisition of Atos KPMG consulting, which has strengthened
EOH's consulting practice. Although segmental breakdowns are not disclosed, we calculate that
revenue would have grown around 25% without this acquisition.
The only negative was the decline in EBITA margin. It dropped from 9.3% in 2003 to 7.5%
for the current year. Management attribute this to the costs associated with integrating the
Atos KPMG acquisition. The EBITA margin has improved slightly from 7.4% at the interim stage
and management are aiming to increase it to prior levels over the next 12 months.
CEO Asher Bohbot is confident that EOH is well positioned to take advantage of the
current uptick in the IT sector. We agree with this.
EOH has grown steadily over the past 6 years into a well rounded IT services player. We
re-iterate that the group has an almost flawless track record in spite of the IT
fallout a few years ago. This is rare. EOH continues to be one of our fundamental top picks in
the sector.
Going forward, we would expect less growth at the revenue line. Also, we expect the company's
effective tax rate to trend upwards toward normal levels. However, there is scope for
improvement in the EBITA margin. All in all, we believe that earnings growth of 20% is
achievable to July 2005.
EOH has a market cap of ZAR 147 mln and is on a PE of 7 and DY of 3.4%. It closed yesterday at
ZAR 2.90. Our earnings growth projections of 20% put it on a forward PE of 5.6 and forward
DY of 4.1%.
We believe EOH is a star investment at current levels and would continue to recommend it to
investors.
For those who are unfamiliar with EOH, please refer to our EOH management meeting note titled
"EOH - a steady pillar throughout the IT storm" - 28 May 2004. It can be found in the IT
section of our Web site. Click here ->
http://www.KaplanEquity.com/it.html and scroll down to the note.
Monday 20 September 2004
SNO at last?
On Friday, our minister of telecommunications announced the intended award of the second network
operator (SNO) license.
However, don't expect a competitor to Telkom anytime soon. The eventual award of the
license by ICASA is subject to certain conditions. First, the entities making up the SNO have to
agree on their proposed shareholding structure. Second, they have to agree on their business
plan. It could be delayed even further based on the outcome of legal battles initiated by the
BEE entity, Nexus.
In our opinion, agreeing on a business plan will be challenging, given the variety of shareholders
in the SNO combined with the fact that a controlling 26% stake is yet to be awarded.
In any event, the show is going on. Our Telecommunications sector is definitely moving forward.
We have only started factoring in market share loss by Telkom for the year to March 2006.
The minister's announcement can be viewed at
http://www.doc.gov.za/Grant_SNO_170904.htm
EOH results this afternoon
We will be attending EOH's annual results presentation this afternoon. We expect them to be
good with earnings growth of at least 20%. We will be looking for a recovery in operating
margins from 8% (at the interim stage) back to the old 10% level. We will also be looking
for further details on their BEE plans.
Thursday 16 September 2004
ERP.com management meeting - the margin masters do it again
Yesterday, we met with ERP.com management to review their results for the year to July 2004.
Overall it was a solid performance. In spite of a flat top line, the key feature was an
impressive improvement in EBIT margin from 17% to 23%. This resulted in HEPS growth
of 24% to 14.2 cents per share.
The margin improvement came from a change in the revenue mix. There was a higher contribution
from the Security business which grew its revenues by 29%.
ERP.com stock has risen 34% since we first recommended it in June 2004. We believe the
share is still a good investment for the longer term and would recommend it to
investors on a 1 year view.
Read our ERP.com management
meeting note in our IT section by clicking here.
Tuesday 14 September 2004
The Telkom Goliath will still stand strong
We took part in Telkom's investor conference call yesterday to discuss the impacts of the
recent telecoms policy decisions to further liberalise the sector.
In a nutshell, our initial views were correct. While the policy changes will no doubt affect
Telkom's fixed-line business negatively, it's not as severe as what some may have thought.
Firstly, the policy changes directly affect only around 10% of Telkom's fixed-line revenues.
This does not imply a loss of these revenues altogether. The negative effects will be mitigated
somewhat by stiff competition from Telkom itself in the affected areas and an overall
stimulation in usage.
Also, one must see the policy changes in perspective. We all expect Telkom to lose fixed-line
market share to the pending SNO anyway. Telkom itself expects to lose between 15 and 20% over
the next 5 years. Our forecast is for a loss of 25% by 2010. In our opinion, the policy changes
could add 5 to 10% to this figure. If we increase our forecast of loss in market share to 30%
by 2010, our Telkom group DCF valuation changes very little - from ZAR 88 to ZAR 85.
Furthermore, there is still a great amount of uncertainty as to how the policy statements
from the minister will be implemented. They still need to be "fleshed" out and turned into
suitable regulations by the Telecoms regulator, ICASA. The impacts on Telkom may further be
lessened if some of the policies are implemented in Telkom's favour.
Prevailing regulatory uncertainties
While the policy changes announced recently by the Minister have injected new energy into the
ICT sector, some of the excitement may be premature at this stage.
The intentions of the policies are fairly clear, but we can now expect a lengthy and heated
process as they are turned into regulations by the Telecoms regulator, ICASA.
In essence, the uncertainties revolve around the extent to which the Value Added Network
Service (VANS) providers can compete with Telkom.
Some of the uncertainties that exist currently are as follows:
- Can the VANS self provide?
- Can the VANS connect directly to mobile operators and other PSTS licensees?
- Will VANS be allowed to offer voice services directly to end users?
- Will Telkom still be subjected to the same pricing regime regulations?
- To what extent can the mobile operators self provide?
Obviously, Telkom would like the answers to the above questions to be "NO". In our opinion,
it would be positive for the country as a whole if some or all of them turned out to be "YES".
Wednesday 8 September 2004
Digicore results - solidly on track
Digicore posted an extremely strong set of results yesterday for the year to June 2004.
We attended the presentation to analysts, held in Sandton.
Revenue was up 13% to ZAR 194mln. Operating profit margins were up from 13% to 15%. HEPS was up
a huge 53% to 12.2c per share, helped by Digicore's share buy back program which reduced the
weighted average shares in issue by 5.5%. Operating cash flows for the period were strong at
ZAR 31 mln. The balance sheet is in great shape. Virtually no debt and around ZAR 46 mln of cash
on hand.
Digicore manufactures tracking units which are installed in vehicles for fleet management and
stolen vehicle recovery applications. Margins were assisted by a stronger Rand, which reduced
the import cost of components. Also, better economies of scale were achieved with around
20,000 units manufactured over the year.
Digicore did not disclose segmentals at this stage, but on balance, their internationalisation
seems to be progressing well. According to management, around ZAR 35 mln or 18% of revenue
comes from the export of units to offshore markets. Europe is profitable and prospects in
the UK look good. Pakistan continues to deliver with Digicore being the number 1 supplier
for stolen vehicle recovery applications. Operations in Kenya, Nigeria and Brazil will
only start contributing meaningfully in the coming year. There have been problems in the
Australasian region. The operation has been restructured and Digicore has no liability
there if it fails.
Currently, Digicore derives most of its business locally, where it dominates the supply
of tracking units for fleet management purposes. Its recent JV with Tracker has enabled
Digicore to take advantage of the stolen vehicle recovery market too, which is gaining
momentum. Going forward however, the company's growth will increasingly be driven by the
export of tracking units into offshore markets. We believe Digicore is well positioned for this.
At a price of 95c, Digicore is on a PE of 7.8 times. We believe "true" earnings growth of
20% is achievable for the coming year. It may even be closer to 30% as the full effects of
the share buyback program take effect. Combined with a dividend yield of 3.2% and a return on
equity for this period of 20%, we believe Digicore is still a good investment at current levels.
Tuesday 7 September 2004
September results previews
September is a busy month. 8 technology companies that we follow will be reporting results.
Here are the salient dates together with a brief overview of what we'll be looking out for.
7 Sep - Digicore - annual results to June 2004 (presentation)
We expect good results from SA's dominant fleet management and vehicle tracking technology
developer. The company did warn that earnings would be more than 30% higher. We will be
looking for progress internationally, particularly with the recent venture into Brazil.
Other offshore markets include Europe, Pakistan and Australia. Also, we expect an update
regarding their proposed entry into the Nigerian market. We also look forward to meeting
recently appointed CFO, Re Voogt. Digicore shares have more than doubled in the past year
to 80c. Mkt Cap is ZAR 174 mln. PE is 8.4. DY is 2.5%.
7 Sep - Venfin - annual results to June 2004 (presentation)
For this investment holdings company, its not about earnings, but rather the underlying net
asset value (NAV) of its investments. We will be looking at new acquisitions and divestments
made in the period. What will they do with the rest of their cash pile? How does
their Alexander Forbes investment fit in for the longer term? We have seen recent strength in
the share price to ZAR 20.30 which, in our opinion, is mainly from the positive effects of last
week's telecoms policy decisions on two of their investments - Vodacom and Didata.
Mkt cap is ZAR 9 bln.
13 Sep - Faritec - annual results to June 2004 (SENS announcement only)
They've warned, so we can expect a loss, but we'll be looking for growth in the IT
managed service components. We need further comfort that the strategy to return to
profitability is working. The share closed yesterday at 26c and has a market cap of ZAR 33 mln.
14 Sep - ERP.com - annual results to July 2004 (SENS announcement only)
ERP.com is one of our fundamental top picks. We expect a continuation of good results
at high margins with earnings growth of at least 20%. We will be looking out for progress
with their African expansion and continued high growth in their IT security business.
We also would like an outlook of how their new BEE partner, BLITEC will add value on the ground
and BLITEC's synergies with ERP.com in the SAP area. Since first recommending the share in
June, ERP.com has risen over 20% to 130c. Its mkt cap is ZAR 224 mln. PE is 8.9 and DY is
3.8%
17 Sep - AST - annual results to June 2004 (presentation)
This is a hot potential turnaround stock. Since we first mentioned AST in June, its
share price has risen 18% to 79c. We will be looking carefully at the results to assess the
timing of a return to profitability. Remember, AST is a substantial business with good
skills and large blue-chip clients. If all goes well, this share could offer huge potential
upside. Mkt cap is ZAR 146 mln.
20 Sep - EOH - annual results to July 2004 (presentation)
EOH is one of our fundamental top picks. We expect a continuation of good results with
earnings growth of around 20%. We will be looking for a recovery in operating margins
from 8% (at the interim stage) back to the old 10% level. At the interim stage, management
ascribed the margin decline to integration costs relating to the Atos KPMG acquisition. We also
could see some announcements regarding an expected BEE transaction. EOH closed yesterday at
290c. Its mkt cap is ZAR 147mln. PE is 7.6. DY is 2.4%.
23 Sep - Compu-Clearing - annual results to June 2004 (SENS announcement only)
Compu-Clearing is one of our fundamental top picks. We expect a continued consistent
performance from South Africa's dominant player in the freight forwarding and customs
clearing software market. We will be looking for maintenance of margins and moderate growth.
We will also look for progress with their expansion into the US market. We may also get
further clarity on their pending acquisition. CCL closed yesterday at 115c. It has a market cap
of ZAR 46mln, a PE of 6.4 and DY of 5.2%.
28 Sep - Datacentrix - interim results to August 2004 (presentation)
Datacentrix is impacted heavily by the ZAR/USD exchange rate. Most of its sales of hardware and
software are dollar linked. Rand strength negatively impacted their full results to February 2004.
We still expect a negative impact from Rand strength for this six month period, albeit lessened.
Nevertheless, we expect the underlying business activity in dollar terms to remain strong,
with growth of around 20-25%. Cash on hand at February 2004 was ZAR 131 mln. If the group
continues with its view that an acquisition is unlikely, we could see some of it being returned
to shareholders. Datacentrix closed yesterday at 240c. It has a market cap of ZAR 490 mln, is
on a PE of 9.5 and a DY of 2.9%.
Friday 3 September 2004
Far reaching Telecoms policy decisions
Our minister of Telecommunications announced late yesterday new Telecoms policy decisions
which, in our opinion, will affect our entire South African Telecommunications sector.
Our views on the new decisions are as follows:
- EXCELLENT news for the consumer. It should drive overall telecoms tariffs down.
- GOOD news for mobile operators (MTN, Vodacom and CellC).
- EXCELLENT news for VANS, ISP's and all telecom providers OTHER than Telkom.
- BAD news for Telkom's fixed line business in the short term - but should result in an
overall stimulation of the sector over time. This will lessen the effect for Telkom in the
longer term, if they can position themselves correctly.
There were 7 new policy decisions in total, 6 of which come into force as of 1 February 2005.
We will discuss two of them below with our expected impacts on the various stakeholders.
Self provisioning for mobile operators as from 1 February 2005
This will allow MTN, Vodacom and CellC to use any telecoms infrastructure, including their own,
to carry GSM traffic around the country. Currently they are only allowed to use Telkom or the
non-existent SNO.
The major beneficiaries here are the mobile operators, which spend a large amount on Telkom
leased lines to interconnect their base stations. Although this is on average only around
2-4% of their total operating expenditure, they will be able to reduce this cost by seeking
alternatives or setting up their own infrastructure. This will help their EBITDA margins,
going forward.
It is negative for Telkom's fixed line segment. For the year to March 2004, it earned
ZAR 909 mln from the leasing of circuits to mobile operators. (3% of total fixed line revenue).
This will probably decline over time as mobile operators make other plans. Telkom will probably
also have to drop prices to keep contracts in place. Overall, the news is negative for Telkom
group, since the positive effects on Vodacom mentioned above are diluted by their 50%
shareholding.
We expect this to have positive effects on providers of telecoms equipment. They will
seek to offer the mobile operators alternative solutions to Telkom on some of their leased
circuits.
Voice traffic can be carried by VANS as from 1 February 2005
This will allow any Value Added Network Service provider to carry voice traffic on their
data networks. This was prohibited before.
This effectively legalises Voice over IP (VOIP) and will have far reaching positive
effects for the country as a whole. It will no doubt lead to a plethora of new voice
services and products from many providers (that have a VANS license), other than Telkom.
There is a strong case for VOIP when making international calls, where the service can be
offered much cheaper than traditional channels, because the carrier network is the public Internet.
Software and compression technologies have evolved to the point that an international voice call
over the Internet is of a similar quality to traditional channels. One could also argue that in
some cases VOIP makes sense for national long distance calls too. (i.e. JHB to Cape Town)
This is extremely good news for the business consumer. We believe that the cost of
international telephony will decline. We would not be surprised if, for example, a data
provider such as The Internet Solution starts offering international voice calls at a fraction
of the price of Telkom's rates. It will put downward pressure on Telkom's international prices
too.
This is very good news for all VANS. It opens up new revenue stream possibilities.
It is net negative for Telkom's fixed line segment. They will probably see a decline in
their international minutes and have downward pressure on their international tariffs. It could
also affect some of their national long distance business. For the year to March 2004, Telkom
earned ZAR 1.3 bln from international calls which is only 4% of their fixed-line revenue.
National long distance is much bigger for Telkom - ZAR 3.8 bln or 12% of fixed-line revenues.
Thursday 2 September 2004
Mustek results - the Rand went the wrong way
Leading PC manufacturer and component distributor, Mustek, released its annual results to
June 2004 yesterday.
On the surface, the results appear poor with revenue down 10% to ZAR 2.7 bln, operating profit
down 47% to ZAR 114 mln and HEPS down 39% to ZAR 0.73 per share. However, this was attributable
solely to the strengthening Rand. Mustek's underlying fundamentals are solid.
Despite a very strong operational performance with unit sales increasing by 19%, the average PC
selling price declined by around 25% (the amount of Rand strength compared to last period). This
explains the drop in revenue.
Furthermore, Mustek reported a ZAR 107 mln loss from foreign exchange forward cover and
derivative instruments which it uses to protect itself from ZAR/USD fluctuations.
(PC components are sourced internationally at dollar prices and sold locally in Rand terms.)
According to management, they were advised to protect against Rand weakness. Instead, the Rand
strengthened and huge losses were incurred.
Currency issues aside, the group performed consistently well. Without the above
mentioned loss, we calculate HEPS would have grown by around 23%. Cash flows were strong and
the balance sheet remains healthy.
In our opinion, the key drivers for PC demand in South Africa should continue to be strong.
Mustek will also benefit from its recently concluded BEE deal with SAFIKA. Furthermore, we
expect the group's fledgling operations in Brazil, Kenya and Nigeria to contribute more
meaningfully in the coming year.
Going forward, we have no doubt that Mustek can perform well to June 2005 with an underlying
"true" growth in profits of around the 15-20% level. Without this year's forex losses
which have dented earnings severely, the reported growth could be substantially more than that.
Given Mustek's PE of 10.7, large dividend yield of 6.4% and healthy growth outlook we continue
to believe that the share is a good investment.
Altech/Econet - deal looks promising
We attended the Altech presentation to analysts yesterday concerning the deal recently announced with
Econet. Most encouraging was the presence of many Altron executives including CEO Robbie Venter
and Chairman Dr Bill Venter as well as Econet executives including CEO Strive Masiyiwa.
If anything, we are now slightly more positive on the Altech/Econet venture for the
following reasons:
- We gained a better understanding of the Papua New Guinea asset, which appears
attractive. It's a fixed and mobile license with a guaranteed monopoly for 7 years in a country
with a population of 5.2mln. It already has 100k subscribers and does a revenue of USD 85 mln
and a PAT of USD 15 mln. The 51% stake was purchased for USD 45 mln.
- The potential synergies between Altech's businesses and Econet became more apparent. For
example, Autopage could become an Econet service provider in various countries. NamiTech could
supply pre-paid vouchers and SIM cards. There are also potential benefits for Altron businesses.
- From speaking to various Altech executives, they do appear to have done the due diligence
process thoroughly.
Our concerns at this stage are as follows:
- Although the deal will cost Altech USD 70 mln, it is unknown how much additional cash
will need to be injected in the coming years. Firstly, operations that perform well, will
require further capex for expansion. Also, more cash may be required if the stake in Nigeria is
increased from the 5% level.
- It is unknown how Altech/Econet will proceed with the recently awarded mobile license in
New Zealand. If a network is built from scratch, it will probably require further funding
at some point. If they decide to go the "virtual network operator" route using Autopage's
skills, then this asset will require less cash but will probably make less profit in the longer
run.
Overall, the deal looks good. If Altech can manage it effectively, it will bode well for
their longer term growth strategy.
Thursday 5 August 2004
MTN - competition is hotting up
We took part in MTN's investor conference call yesterday on their subscriber numbers
and ARPU disclosure for the quarter to June 2004. It was a good opportunity to ask
questions and gain further insight.
Overall, there were no major surprises - good subscriber growth in all markets, coupled with
gentle ARPU declines.
In South Africa, contract subscribers grew by 3.1% for the quarter to 1.2 million,
with ARPU declining 2% to ZAR 585 per user per month. The contract market is becoming
more competitive and MTN ascribes this ARPU reduction to lower monthly subscriptions on
their contract packages. Contract subscriber acquisition costs (SACs) have risen around 20% from
ZAR 2200 to ZAR 2700. (For comparison purposes, Vodacom grew contract subs by 6.8% to 1.5mln
with ARPU almost constant at ZAR 633)
South African prepaid subscribers grew by 3.7% to 5.3 million, with ARPU declining 6%
to ZAR 98. MTN says the main reason for this decline is the change in the prepaid traffic mix.
More calls are migrating to off-peak times, which have lower tariffs. Prepaid SACs remained
unchanged at the ZAR 150 level. (Vodacom grew prepaid subs by 9.2% to 9 mln, but ARPU declined
by 12.2% to ZAR 79)
Overall, MTN's market share in South Africa has remained unchanged at 38%. MTN is still
confident of a minimum EBITDA margin in SA of 30% for the full year to March 2005,
despite the competitive environment and in particular, the increased contract SACs.
In Nigeria, subscribers grew by 10.7% to 2.2 million, with ARPU declining 6%
to USD 48. Subscriber growth was well behind initial expectations and market share declined
from around 50% to 47%. MTN ascribes this to their high connection fees (which carried a
30-40% premium to competitors) and insufficient network capacity. To this end, they have
reduced connection fees (to around 5000 Naira or a 15% premium to competitors) and have
accelerated their network rollout by appointing additional contractors. Current marginal
ARPU in Nigeria is around the USD 40 level. MTN is sticking to its original target of 3.5
million subscribers in Nigeria by March 2005. In our opinion, this is a tough challenge.
Going forward, we will be keeping an eye on the competitive situation in South Africa and
in particular, MTN's resulting EBITDA margin. Also, we would be looking for an acceleration
in subscriber growth and re-capture of market share in Nigeria. MTN will be announcing
their interim results to September 2004 on 18 November.
We maintain our view that MTN is a good investment. We have a 1-year target of ZAR 38 per share.
MTN JSE stats (4/08/2004) : Mktcap = ZAR 46 bln, Share Price = ZAR 27.70,
PE = 10.5, DY = 1.5%
Acronyms
ARPU - Average Revenue Per User - This is an industry term used by operators worldwide
to disclose the average spend on their network on a per user basis. It encapsulates both the
tariffs charged and the extent of usage.
SAC - Subscriber Acquisition Cost - Also an industry term which refers to the cost of
acquiring a new subscriber. It includes items such as phone subsidies, commissions to service
providers and distributors and the cost of SIM cards.
EBITDA - Earnings before interest, tax, depreciation and amortisation.
Tuesday 3 August 2004
Faritec management meeting - transformation underway
We recently met with Faritec founder and CEO, Simon Tomlinson.
The company has an interesting mix of well established product businesses and newer
managed service offerings. In the IBM UNIX server market, they dominate in South Africa with around 70%
market share. We like their recent entry into the fast growing IT Security area with
service offerings in the managed security space.
The core hardware business and dominant IBM position carried Faritec through the IT fallout.
The group is now focusing on growing their annuity income service offerings.
While this is going to take some time, evidence of success in certain areas is emerging.
Read our Faritec management
meeting note in our IT section by clicking here.
FrontRange and AST results in August
Just a reminder of results presentations coming up in August:
17 August - FrontRange annual results to June 2004 - Presentation in JHB
23/24 August - AST annual results to June 2004 - Presentations in Samrand and Cape Town
We are also expecting the following companies to announce their results in August:
Business Connexion (Full year to May 2004)
Idion (Interims to June 2004)
Mustek (June 2004)
For more details visit our events calendar
by clicking here.
Thursday 29 July 2004
Vodacom SA prepaid ARPU is dipping
Vodacom released subscriber and ARPU (average revenue per user) numbers for their quarter to
end June 2004 yesterday.
In South Africa, the numbers tell a mixed story.
The contract base grew by a healthy 6.8% for the quarter to 1.5 mln subscribers with
ARPU remaining almost constant at ZAR 633 per user per month. This is good news.
However, in spite of the prepaid base growing by an even healthier 9.2% to 9 mln
subscribers, prepaid ARPU DECLINED by 12.2% to ZAR 79 per user per month. This would
imply a net reduction in airtime revenues from the prepaid base, which is worrying.
Broadly speaking, ARPU declines come from three things: tariff reductions, lower usage
from existing customers and signing on new customers with lower usage levels. For the
current quarter, we are not aware of any meaningful tariff reductions. So we conclude that the
prepaid ARPU decline comes from lower usage of the existing base and signing on new customers
with lower ARPUs. Its difficult to separate the two factors, but we believe its a combination of
both.
There has been much debate as to where the South African mobile market will eventually saturate.
However we point out that speculating the number of subscribers is a fruitless exercise, without
estimating the ARPU that accompanies it.
Although Vodacom does not disclose the marginal cost per additional subscriber, we estimate it
is around the ZAR 50 per user per month level. We would not be surprised if the additional
prepaid subscribers signed on in this quarter were approaching that ZAR 50 ARPU level.
In the rest of Africa, excellent subscriber growth was posted in all markets. The
reductions in ZAR ARPU were affected by the stronger Rand. In two of the countries (Tanzania
and Congo), the reduction in ARPU was greater than the subscriber growth.
At this stage, we are not altering our Vodacom valuation. We may however look to reduce our
ARPU forecasts at a later stage which would affect the valuation negatively. Our Telkom present
valuation remains unchanged at ZAR 49 bln or ZAR 88 per share.
First contract win for Spescom in Canada
Good news for Spescom which has recorded its first deal win in Canada with New Brunswick
Power. The Canadian utility selected Spescom's leading eB information content management
software solution. The value of the deal was not disclosed.
Tuesday 27 July 2004
Mobile voice is still the killer application in Africa
Globally, and even here in SA, there's a lot of fuss and talk about 3G and high speed data on
mobile networks. The reality is that standard voice is still, by far, the killer application
on mobile networks in Africa. In our opinion it will stay that way for years to come...
To give some perspective on this, we look at the recent numbers for the quarter to June 2004
disclosed by Vodafone, the world's largest mobile operator. Its a useful exercise to keep
an eye on Vodafone since it has mobile operations in almost all areas of the globe.
Looking at Vodafone's various regions, non-voice revenues as a percentage of total
service revenues (for the year to June 2004) are as follows: UK and Ireland: 17.2%, Northern
Europe: 14.3%, Southern Europe: 12.4%, Americas: 3.2%, Asia Pacific: 20%, Middle East and
Africa: 5.2%.
The numbers show that while non-voice revenues are very important for Vodafone in Asia, the UK
and Europe, they are tiny in Africa.
Furthermore, non-voice revenues are broken up by Vodafone into messaging (predominantly
SMS) and data. Messaging is still the major contributor to non-voice revenues in
most of the regions. In the UK and Ireland, of the 17.2%, 15.1% is messaging related. This is
the case in Europe too. In Asia, its the other way around - of the 20% non-voice revenues, only
8.9% is messaging. In the Middle East and Africa, of the 5.2% non-voice revenues, 5%
is messaging related and only 0.2% is data.
Rackspace growing at 60% per year organically
Its always interesting to keep up with what world leaders are doing in the US. Rackspace is a
hosting company that looks to be one of the unlisted leaders in the fast growing hosting market.
Rackspace is five years old (profitable for the last four) and provides hosting services to both
the mid-range and enterprise market. It is currently growing revenues at 60% organically.
It manages over 15,000 servers in total. It offers its clients service level agreements which
include server uptime, security and even uptime on an application level.
According to their president, Lanham Napier, there is an uptick in the IT sector. He says
many previously shelved projects in company IT departments are now coming out of the woodwork.
Interestingly, 25% of Rackspace's new customers are application vendors that want to offer
their applications on a "rented" model. Rackspace believes that software as a service is
catching on. (This is something we commented on in our Utility Computing piece on 23 June 2004)
The company has 440 employees and believes their key differentiator is "fanatical support". In
the US they compete with the likes of AT&T and IBM's Global Services division.
According to Gartner/IDC, the global hosting market is picking up again and is expected
to grow from USD 6 bln in 2003 to USD 20 bln in 2007. (CAGR of 35%)
Lets hope that our local hosting companies take note of what Rackspace is doing in this fast
growing space.
Thursday 22 July 2004
New trends in the ERP space - adapt or suffer
Yesterday, we attended the SAP Netweaver world tour conference in Midrand. SAP used it to
announce the arrival of their new enterprise application platform to partners and end-user corporates.
We picked up some interesting trends in the ERP space.
For those that don't know, SAP is a German software giant that creates software for use
in large businesses. SAP dominates the large corporate space in SA, with what we estimate to be
around a 65% market share. Their client list includes many of the JSE top 100 companies, such as
Anglo American, Sasol, Standard Bank and so on.
Yesterday's conference was attended by the IT decision makers in many of these corporates as
well as the SAP partners. In SA, SAP partners include consulting firms such as
Accenture and Deloitte and IT services companies such as Business
Connexion, AST, EOH KPMG, ERP.com, CS Holdings and UCS Solutions.
According to a Gartner presenter at the conference, the major change happening in this space is
the migration from traditional client-server computing to a services oriented architecture.
Without delving into technicalities, the new architecture direction is supposed to have numerous
benefits for customers. First, it will make it easier to interconnect applications from multiple
vendors. Second, it will allow for flexibility and speed in the creation of new business
applications and last but not least it will reduce the cost for customers to create and
maintain these applications over time.
While SAP has defined their services oriented architecture in the form of their new Netweaver
platform, Gartner expects the other major vendors in this space to announce their platforms in
due course. These are Microsoft, Oracle and IBM.
What this means for our local IT services players is that they will have to become familiar
with the new service oriented architectures defined by the ERP software vendors which they
represent.
It also may mean reduced revenues for those IT Service companies that are not progressive enough
in getting involved with the new direction in this space.
Integr8IT wins global Microsoft award
Good news for unlisted infrastructure management specialist, Integr8IT, which has won the
Microsoft award for the Top Global Small Business Partner of the year in 2004. Apparently
this is the first time a South African company has won the award. This is good news for South
Africa too. It's the IT equivalent of Charlize Theron winning the Oscar ;-)
Another Stellenbosch university deal for Datacentrix
More good news for Datacentrix, which has won another deal with Stellenbosch University.
They will be upgrading the University's Novell and Microsoft software licenses.
Tuesday 20 July 2004
IBM Q2 - numbers look good for SA players
IBM announced its second quarter results (to end Jun04) late last week. Revenue
was up 7% to USD 23.2 bln. Net income was up 17% to USD 1.99 bln. The margin expansion came
from reduced expenses. IBM gave a good outlook for the rest of the year. The stock has
reacted positively in the past few days and closed yesterday at USD 85.30. It is down around 8%
since the beginning of the year. IBM is on a PE of 18 and has a market cap of USD 144 bln.
Although traditionally a hardware company, IBM has over the years, successfully grown a huge IT
services business, which now contributes around 49% of its revenues. Hardware
contributes 32% and software 15%. The divisional performance this quarter was mixed.
Services grew by 7%, hardware by 12%, while software was flat.
IBM is a technology giant which sets many trends that cannot be ignored by the South African
market. More importantly, many of its products are sold and supported locally by our IT
players. Locally listed companies which sell high-end IBM enterprise servers include
DataCentrix, Bytes Technology Group, Business Connexion and Faritec.
IBM's range of servers offer different amounts of computing power and run on different platforms:
Its zSeries (mainframe) sales grew by a large 44% in the quarter (from last year)
driven by customers building their on-demand infrastructures and the launch of a mid-range mainframe
offering.
Sales from the pSeries UNIX servers declined 3%. This is a core focus area for
Faritec, which has around 70% of the pSeries market in SA. IBM says sales were deferred
because of a pending product enhancement.
iSeries (old AS/400) revenue declined by 28%. Unlisted TCM has around 70% of South
Africa's iSeries market. Also, Idion's high availability software was originally created
for this platform (it has since been broadened to other platforms). According to IBM, pending
product enhancements in this area also delayed orders.
xSeries sales grew by 18% for the quarter. These servers are normally Intel/Linux
based. They are sold extensively by Business Connexion's Persetel Q Vector division,
DataCentrix and Faritec.
All in all, we believe the hardware numbers coming out of IBM bode well for our locally
affected companies.
On the software side, IBM's key offerings are in the operating system and middleware spaces.
Brand names include DB2, WebSphere - their highly rated middleware product, Rational and Tivoli.
Its software sales were flat for the quarter.
Thursday 15 July 2004
Chip giants fall on negative outlook
As always with the global tech giants, the stocks react far more to the outlook provided at
results presentations than the results themselves.
NASDAQ listed INTEL, the world's largest chipmaker, reported its second quarter numbers
on Tuesday. Revenue for the quarter was up 18% (compared to last year) to USD 8.05 bln. Profit
more than doubled to USD 1.8 bln. The numbers are outstanding, yet many chip analysts believe
that the chip sector is at the top of its cycle and have a negative outlook for the future.
There were also concerns regarding INTEL's 15% inventory build up and margin outlook for the
rest of the year. The stock fell 5% on Tuesday and over 10% yesterday. It closed at USD 23.38,
is on a PE of 24 and has a market cap of USD 151 billion.
NYSE listed AMD, chief rival to INTEL, reported its most recent quarter's numbers yesterday.
Revenues doubled to USD 1.3 bln. Net income was USD 32 mln vs a loss of USD 140 mln a year
earlier. The company cited strong growth in flash memory chips, which are used in mobile
phones and other portable products. Management expect moderate increases, going forward. AMD
shares were down 5% yesterday and closed at USD 13.57. AMD has a market cap of USD 4.9 billion.
Dimension Data and MTN
Didata has apparently completed a Cisco next generation multi-services solution for
MTN South Africa. It will enable MTN to converge voice and data on its mobile network and
allow for the easy introduction of next generation products and services. MTN expects
operational savings in the medium to long term. The value of the deal was not disclosed.
Business Connexion and Vodacom
Vodacom Mozambique has contracted Business Connexion's QData division to provide
a voucher management system to cater for recharges and PIN generation. The value of the deal was
not disclosed. A similar system is also being developed for Vodacom in Tanzania.
Tuesday 13 July 2004
FrontRange management meeting - poised for growth
We recently met with the company's financial director, Julian Pienaar, who shared some
insights.
FrontRange develops and markets midrange customer relationship management (CRM) and customer
support software. It is one of the few pure international software plays on the JSE.
This is a good story. FrontRange has recently become profitable and has hired a new
experienced American CEO and management team. The focus is now on growing revenues.
Management have defined a new ambitious product strategy, to enable revenue growth. Can it be
executed on successfully? In our opinion, it will be very challenging in light of the
competitive landscape, but if they pull it off and grow license revenues, then the stock
should continue strongly upward.
Read our FrontRange management
meeting note in our IT section by clicking here.
IST potential buyout and delisting
A consortium, led by Ethos Private Equity has announced its intention to buy all the
shares of IST for ZAR 1.80 each in cash and delist the company. It is subject to
Ethos finalising its funding arrangements.
According to IST, the rationale is to more effectively meet its BEE objectives. IST also believes
that it would not require the listing for further capital.
Its a pity to lose a leading engineering technology player from the JSE. Should the deal go
ahead, we wish them all the best as a private company.
Thursday 8 July 2004
JV to develop wireless hotspots in South Africa
M-Web, Didata's Internet Solutions and the Airports Company of South Africa have teamed
up in a joint venture to grow the number of wireless hotspot areas in South Africa. They will
focus on airports, hospitality areas and retail spaces, such as shopping centres. While the
uptake on various pilot projects to date has been slow, M-Web expects growth in the future.
MICROSOFT counting on PC growth in emerging markets
In an email to staff, Microsoft CEO, Steve Ballmer said that the company plans on cutting
costs by USD 1 billion this fiscal year. This is because costs have risen faster than revenues
over the past 3 years, especially in light of more competition from the likes of Linux.
Interestingly, the focus on efficiencies will not require any salary cuts or layoffs.
Ballmer said growth opportunities still remain in emerging markets where it expects the
number of PC users to grow from 600 million to 1 billion in the next six years.
As for its USD 56 billion cash pile, Ballmer said it would either be invested in new
opportunities or returned to investors.
Music downloads growing rapidly
According to the Recording Industry Association of America, record labels did USD 13.2 billion
of sales in 2000. This has declined to USD 11.2 billion in 2003. The main reason is that
certain users no longer pay for songs.
Instead of embracing the new digital medium and the Internet, the content owners have tried to
restrict downloads and protect their copyrights over the past few years - to no real avail. Their
attitude has changed recently and the new industry of digital downloadable music has been born.
According to Jupiter Research, worldwide revenue from music downloads and subscription services
will grow from USD 80 mln in 2004 to USD 1.6 billion in 2008. (CAGR=111%) Many players
are lining up to take advantage of this high growth area.
Firstly, the content sources, i.e. the artists themselves and their record labels will remain unchanged.
Then you get the digital music stores. These are the "shopfronts" which offer music
downloads for a fee. Apple's iTunes is the current leader, but the space is also being contended
by Napster, RealNetworks' Rhapsody, MusicMatch, Wal-Mart and SonyConnect. Microsoft is also
planning their own music store soon. Music can either be downloaded on the PC or on a portable
device for mobile listening purposes. Apple's iPOD leads the "portable device" space
currently, but Sony is entering shortly and we are sure others will follow.
In our opinion, we will probably see the major mobile phone manufacturers incorporating high
volume storage capabilities, which will allow for downloads of music onto cell phones via 3G
mobile networks.
Sony to counter-attack Apple's iPod
Consumer electronics giant, Sony, will launch its new digital walkman, the NW-HD1
in August. The credit-card sized walkman can store up to 20 gigabytes on its tiny hard drive and
will cost around USD 400. Sony claims that its 30-hour battery life and shock protection will
give it the edge over the iPod. Analysts believe Sony's entry into this market was delayed by
considering the cannibalisation effects on its other products like CD players and mini-disc
players.
In our opinion, Sony will probably have an advantage regarding securing the supply of components
for its new device, something which has plagued Apple and led to iPod supply shortages. After
all, Sony was the pioneer of the portable music playing device over two decades ago, with its
cassette walkman.
Analysts also feel that Apple's iPod/iTunes model of paying a dollar a song will be turned on
its head by flat-fee models such as Microsoft's forthcoming Janus software. This will allow users
to have unlimited access to over 500,000 songs, for a flat monthly fee. It will also incorporate
other subscription services such as Napster and RealNetworks' Rhapsody.
Tuesday 6 July 2004
JASCO management meeting - Well established diversity
We met recently with JASCO's CEO, Dr Stuart Robertson.
JASCO is a well diversified electronics and manufacturing company with good potential.
Although the group had a tough year to February 2004, we believe the underlying fundamentals
in each of its business areas are strong.
We like its diversified nature and undemanding PE ratio (around 2.7). The stock has moved
up around 25% in the past three months to 90 cents.
Read our JASCO management
meeting note in our IT section by clicking here.
Thursday 1 July 2004
New US Internet IPOs show healthy appetite from investors
Salesforce.com listed on the NYSE on Wednesday last week. The IPO share price was USD 11.
It rose over 50% in its first day of trading to over USD 17. It closed yesterday at USD 16.07.
Its on a historic PE of 400 and has a market cap of USD 1.6 billion.
Salesforce.com is a leader in the category of hosted software. They host CRM software and
make it available on a rental model from their web site. This is in line with the growing trend
towards "utility computing". Interestingly, locally listed FrontRange has also signalled its
intention to get into the hosted CRM space.
Other recent listings include educational software firm Blackboard and luxury e-tailer
BlueNile.com. Blackboard is up over 25% on the NASDAQ over the past two weeks and closed
yesterday at USD 20.05. BlueNile.com is up over 50% in the past month and trades currently at
USD 37.61. Its on a historic PE of 27 and has a market cap of USD 664 mln.
These recent listings definitely show an appetite from investors for new technology or
Internet stocks. It looks asif this appetite will be further confirmed by the Google.com IPO.
T-Systems SA to offer Telecoms services to corporates
T-Systems SA, traditionally focused on IT Services, is now offering telecommunication services
to large corporates in South Africa. This includes fixed-line, wireless and satellite
communications. It will target the top 300 corporates, especially those with
African/International telecommunications needs. This should beef up the competition for the
likes of Didata's Internet Solutions and Telkom Business.
It has partnered with MCI and Sentech, presumably to make use of Sentech's international gateway.
T-Systems International has also partnered recently with Gateway Communications to make use of
its pan-African network.
T-Systems SA is unlisted, but is part of the European giant telecoms operator, Deutsche Telekom.
It started in SA in 1997 and currently employs some 937 people. Revenues for 2003 were around
ZAR 755 mln.
Tuesday 29 June 2004
AST management meeting - Turnaround potential
We met recently with the AST's CEO, John Miller and group financial director, Marthinus
Erasmus.
AST is a large IT Services business, currently undergoing restructuring to return to
profitability. Although it did not weather the IT storm as well as some of its peers, we have
to point out that it is indeed a substantial business with good skills and
large blue-chip clients.
Based on the success of the restructuring efforts, we believe AST shares could offer huge
potential upside from current levels. This is one to watch...
To find out why, read our AST management
meeting note in our IT section by clicking here.
Thursday 24 June 2004
IT Sector in UpSwing, according to EOH
Yesterday we attended EOH's annual function for its clients at the Caesars convention centre in
Gauteng. It was very well attended (over 500 people). The afternoon included a lunch and an expo.
The expo consisted of over 25 stands, each of which was a different focus area or business unit
within EOH. The idea was to introduce clients to other areas of the group. The theme of
this year's event was "UpSwing", reflecting the company's view that the IT sector on
the whole is experiencing an upturn.
EOH has to be commended - first for the idea, and second, for the overall level of professionalism
of the event. We came away quite surprised with the breadth and depth of IT services within the
group. The mood amongst EOH customers and staff was definitely upbeat.
For those that don't know, EOH is a South African IT Services company. Its core segments are
consulting, technology (mainly ERP systems) and outsourcing. Its fundamentals are
"blue-chip" in nature and the company has an excellent track record. EOH shares have more than
doubled in the past year and are currently at ZAR 3.00 per share. Its market cap is
ZAR 152 mln. EOH is on a P/E of 8.5 and a DY of 2.3%.
Wednesday 23 June 2004
DIGICORE to enter the fleet management market in Brazil
As promised, Digicore has now entered the Brazilian market by concluding a distribution
agreement with DexData. DexData will market and sell Digicore's fleet management technology
in Brazil, a country with a vehicle population six times larger than South Africa. This
is good news for Digicore, which dominates the South African fleet management space with
around 70% market share. Their other offshore markets are Europe, Pakistan and Australia.
Digicore shares have more than doubled since we first met them in July last year. They
have a June year-end and should be reporting annual results in September.
For those that don't know, Digicore designs and manufactures vehicle tracking units
(hardware) fitted into cars and trucks for fleet management applications. They earn once-off
revenue from the sale of these units and on-going income from sharing in cellular SMS revenue.
(SMS is the communication carrier)
Utility computing to drive ASP and Web hosting market
"Gorilla" vendors such as HP, IBM, Oracle and Siebel all have on-demand models for the
provision of their software and services. This means that customers can rent the software as
and when its required instead of installing and maintaining it internally. This phenomenon has
been gaining acceptance quite rapidly over the past 18 months and is expected to fuel the
ASP (application service provider) and Web hosting industries.
Research firm IDC predicts the ASP market will grow from USD 1.6 bln in 2003 to USD 3.5 bln in
2008. This is a compound growth of 17%. Likewise, they expect the related Web hosting
market to grow from USD 5.5 bln in 2003 to USD 10.4 bln in 2008. (CAGR of 14%)
This is good news generally for all Web hosting and ASP companies. Names that come to
mind in South Africa include Didata's Internet Solutions, Telkom Business, DataPro and
AfriHost.com.
Its also a message to software companies that they should be considering an ASP model.
We know that FrontRange intends developing an on-demand model for their CRM software.
Compu-Clearing has offered an ASP model for some time on their freight-forwarding and
customs clearing software.
While the ASP model offers huge advantages to clients in terms of scalability and reduced cost,
many companies still fear losing control over their applications and prefer to keep things
internal.
Who will dominate the "SmartPhone" operating system space?
Mobile phones are becoming more complex and feature rich, especially with the drive from most
mobile operators to promote higher bandwidth data applications. A key question is: who will
dominate the operating system on these mobile devices? The short answer is that it is
still unclear.
Currently, the main players are Symbian and Microsoft. However many phone manufacturers
don't like the cosy relationship between Nokia and Symbian. (Nokia owns a third of Symbian).
Others are concerned that Microsoft will dominate the phone OS space just as they have in the
PC space. So, a number of other rivals are worth mentioning: Linux, Palm and Research in
Motion (RIM).
In an ideal world, developers would develop "SmartPhone" applications for only one or maybe two
operating systems, but are currently spending a lot of time porting applications to multiple
platforms. Who will win? Its unclear, but the winners should emerge within the next two years.
Thursday 17 June 2004
EOH backs off from CS Holdings deal
On Tuesday, EOH announced that it would not be pursuing an acquisition of CSH
any further. In our opinion, it reflects a level of maturity from EOH - in that it is prepared
to walk away from the deal and continue with its core focus areas. Apparently, CSH has numerous
interested parties and has selected a preferred bidder.
SNO could be delayed further - good news for Telkom
SNO 19% BEE shareholder, Nexus is seeking a judicial review from the courts regarding the
process of awarding Two and Communitel a joint 26% share of the SNO. This could delay the
SNO launch further. The news is bad for the South African consumer and good for
Telkom.
Oracle Q4 results - 46% EBIT margin
International enterprise software "gorilla", ORACLE reported its Q4 results on Tuesday. Citing
a steadily improving economy led by the US, revenues for the quarter ending May 04 were
up 9% y-o-y to USD 3.1 bln. Its EBIT margin was an impressive 46%. Net income for the
quarter grew by 15% y-o-y to USD 990 mln. CEO Larry Ellison said - "The market is just
beginning the move to databases and application servers running on grids of low-cost computers
and Oracle is leading the way."
About 80% of ORACLE's revenue comes from software sales and 20% from services. Software revenue
grew 12% for the quarter but services revenue declined by 4%. The company is virtually debt free
and has USD 4.1 bln of cash on hand.
ORACLE shares are trading on the NASDAQ at USD 11.35 on a PE ratio of 24 . Its
market cap is USD 59 bln. Over the past year, ORACLE shares have declined by 16% compared
with a 21% gain in the NASDAQ index.
Friday 11 June 2004
MTN annual results - "The Nigerian printing press"
A while back, in Dec 2001, we published a report (under the name of SG) titled, "Nigeria -
a license to print money". This was after a week's analyst visit to the fledgling operation in
Lagos and Abuja. Yesterday's result was proof that the Nigerian operation is in fact a
"printing press" and is only starting to flex its muscles.
Back to basics : for the year to March 2004, MTN group revenue was up 23% to ZAR 24 bln.
EBITDA was up 44% to ZAR 9 bln with EBITDA margins up a massive 6% from 32% to 38%.
HEPS grew 75% to ZAR 2.64 per share. A dividend of 41 cents per share was declared.
Cash flows from operations grew by 60% to ZAR 8.5 bln. The balance sheet is healthy with a net
cash position of ZAR 1.2 bln (Debt of 4.1 and Cash of 5.3).
In our opinion, the key features of the result were the impressive growth in Nigeria
and the improvement in margins in the South African business.
In Nigeria, subscribers were up 90% to 2 million. In local currency (Naira) terms, revenue was
up 83%. EBITDA margins were up from 39% to 51% and profit after tax was up 170%. The Nigerian
operation has been a huge success story and MTN is still struggling to keep up with the demand.
In Rand terms, the Nigerian operation now contributes around 29% of group revenue, 40% of group
EBITDA and a large 58% of group profit after tax. Management expects between 3 and 3.5 million
subscribers by March 2005.
MTN South Africa improved its EBITDA margin from 27% to 30%, mainly from operational
expenditure efficiencies. They look to improve this further. There were no other major surprises
here.
Looking ahead, MTN will focus on rolling out its Nigerian network as well as seeking to expand
into other markets in Africa and the Middle East. Short of any major devaluation of MTN's
African operating currencies, we believe MTN is a star investment at current levels.
MTN versus Vodacom : to March 2004
Now that both Vodacom and MTN have reported figures to March 2004, we have briefly compared the two
below.
In South Africa, Vodacom is dominant with 9.7 million subscribers vs. MTN's 6.3
million. Vodacom's revenue is also much bigger (ZAR 22 bln vs. ZAR 15 bln). Vodacom also has
higher EBITDA margins in SA (34% vs. 30%), but remember that Vodacom has the Cell C roaming
agreement, which inflates this margin somewhat. The growth profiles of the two are very similar
at around the 20% mark for revenue.
The rest of Africa (RoA) component is a different story altogether. For Vodacom, it
makes up only 6.4% of revenue (ZAR 1.5 bln). MTN's RoA makes up 36% of group revenue
at a large ZAR 8.7 bln. RoA growth rates are similar for Vodacom and MTN (around the 25% level),
but both were impacted by the strengthening Rand.
At the EBITDA level, Vodacom's RoA segment makes up 4% of group EBITDA with an EBITDA
margin of 22%. This is mainly impacted by the loss making fledgling Mozambique operation.
For MTN, RoA contributes around 50% of the group EBITDA and has an EBITDA margin of 51%.
In our opinion, MTN is far better positioned for long-term growth, however it carries more
risk.
Tuesday 8 June 2004
Telkom annual results - driven by cost cutting
Yesterday, we attended the Telkom and Vodacom presentations to analysts for annual results to
March 2004.
Telkom group revenue grew 9% to ZAR 41 bln. EBIT was up by a huge 40% to ZAR 9 bln.
(EBIT margins improved from 17% to 22%.) HEPS was up 175% to ZAR 8.64
per share.
The key feature of the result this year was the incredible improvement in margins in the
fixed-line business. Telkom cut its "controllable costs" by around ZAR 700mln. This came
from reduced materials and maintenance costs, optimisation of properties and a 6% reduction in
their vehicle fleet. However, other reductions in costs were out of Telkom's control and more
"once-off" in nature. These included reduced interconnect payments to international operators
from the strong ZAR and the removal of a provision for the Telcordia dispute. Management is
confident that further cost reductions can be realised. We are of the opinion that cost
reductions will have a lesser effect going forward.
VODACOM (of which Telkom owns 50%) reported a good set of results with no major surprises.
Its South African operation which contributes 94% of revenues grew subscribers by 24% to 9.7
million. Its market share declined from 57% to 54%. ARPUs were fairly stable and EBITDA margins
continue to be under pressure.
In our opinion, long term growth prospects for VODACOM are now debatable, given the
company's recent exit from Nigeria. However, Mr Knott-Craig (CEO) said that the group continues
to explore expansion opportunities on the African continent and may revisit Nigeria in the
future. With MTN doing so well in Nigeria, VODACOM had better get there soon if they want to
stick to their strategy of only entering a country if they can be the dominant player or become
dominant in a short while.
TELKOM generated some ZAR 14 bln of operating cash flow and was able to bring debt
levels down from ZAR 22 bln to ZAR 17 bln. The balance sheet is looking healthier, with
ZAR 3.2 bln of cash on hand. However, current liabilities still exceed current assets.
Factoring the much improved fixed-line margins into our DCF model and adjusting
for the delays of the SNO, we derive a current valuation for the TELKOM group
of ZAR 88 per share.
Friday 4 June 2004
On-line retail sales reached USD 114 bln in 2003
Worldwide on-line retail sales grew by a massive 51% in 2003, reaching USD 114 billion.
This is according to a new report by Forrester Research and shop.org. They forecast a
further 27% growth for 2004 to USD 144 bln.
Although on-line sales make up only 2% of total retail activity, the percentage was as high as
5.4% in some categories, such as travel, computers & accessories and health & beauty.
Encouragingly, internet retailers are becoming more profitable, with Forrester citing
better buying power from economies of scale and reduced marketing costs. Profitability is
expected to improve further in 2004.
Thursday 3 June
ERP.com management meeting - the margin masters
We met last week with ERP.com founder and CEO, Peter Forsyth and CFO, Andreas
Ritzlmayr. ERP.com is a strong IT services player in South Africa. It competes
successfully in the enterprise application and fast growing IT security spaces.
It has clearly mastered the art of high margins, coupled with good growth.
We believe that at current levels, it is a star investment.
To find out why, read our brief note in our IT
section by clicking here.
Tuesday 1 June
Trouble in Nigeria for Vodacom and Telkom
In an announcement made on SENS late yesterday afternoon, Vodacom has ended its 5-year
management contract with Econet Wireless Nigeria. It was signed in April 2004.
This is very bad news in our opinion. Without Nigeria, securing Vodacom's longer-term
growth will be far more challenging. Especially against the success of MTN.
To complicate matters, Willem Swart will be leaving Vodacom to continue as CEO of the Nigerian
mobile operator. Also, Vodacom deputy CEO, Andrew Mthembu, has had his employment contract
"terminated" and strategy director, Robert Pasley has resigned.
The announcement gave no reasons for any of the above. No doubt, speculation as to "what
actually happened" will follow. Vodacom and Telkom are going to have lots of explaining to do
when they report their annual results to March 2004 next week (7 June).
The news is negative for large Vodacom shareholders, Telkom and Venfin. It could
potentially be good news for ALTECH however, given their intention to invest in Econet.
We expect ALTECH to clarify details of this soon.
Good news for AST. ABSA renews its outsourcing contract
AST has announced that ABSA bank has renewed its desktop support services outsourcing
contract until 2006. The deal is worth around ZAR140mln per annum.
This bodes well for troubled IT Services company AST, which is currently undergoing major
restructuring to return to profitability. AST has a June year end and we expect annual results
to be announced in September.
Friday 28 May
EOH management meeting - a steady pillar throughout the IT storm
We recently met with EOH financial director, Antonio Cocciante. EOH is a leading IT
services player in South Africa with an exemplary track record and good prospects.
In our opinion, this company is a star investment.
To find out why, read our brief note in our IT
section by clicking here.
DATATEC annual results - the margin struggle continues
It was a tough year for Datatec. In its results released yesterday to the end of Feb 2004,
revenues were up 14% to USD 2.3bln. Westcon, a distributor of network equipment mainly in the
USA and Europe, and which contributes over 80% of the group's turnover, reported a slight decline
in EBITDA margins from 2.1% to 2%. The group posted an attributable loss of some USD 41 mln.
Cash flows from operations were a negative USD 32mln, impacted mainly by working capital.
Management were upbeat on prospects going forward, citing an uptick in spending in their
major geographies. (This echoes what has been reported generally by the manufacturers such as
CISCO.) Whether this can be paralleled with an increase in margins is far less certain,
in our opinion.
At the presentation, management appeared oddly undecided about the timing of the imminent
Westcon IPO in the US, saying that they would like to post a healthy first quarter prior
to listing. That would only be around July at the earliest.
Wednesday 26 May 2004
Vodafone annual results - no real insight into VODACOM
Vodafone, the world's largest mobile operator, released its annual results to March
2004 yesterday. Revenue was up 10% to GBP 33.6 bln. Margins improved and EBITDA was up 13% to
GBP 12.6bln. Encouragingly, data revenues grew faster, by 25% to GBP 4.5 bln and made
up 14% of total revenue compared with 12% for the prior year. On a proportional basis, the
giant mobile company added 13.7 million new subscribers, bringing its total to 133.4 million
subscribers. The balance sheet looks healthier with net debt improved from GBP 14bln to
GBP 8.5bln.
Unfortunately, little was mentioned about VODACOM, their investment in South Africa.
It is lumped into a category called Middle East & Africa, which includes other Vodafone
interests in Egypt, Kenya and the Middle East. This category only contributed around 1% of
group revenues. Nevertheless, Vodacom did get "one sentence of airtime" in the 40 page result
document: " ...strong customer growth of 24% in Vodacom".
We will have to wait for Vodacom's results on the 7th June...
Tuesday 25 May 2004
ALTECH's NamiTech improves its margins
In NAMPAK's interims to March 2004, which came out on Friday, we caught a glimpse of NamiTech's
most recent performance. This is the specialist card technology business that ALTECH
recently purchased to bolster its IT division.
It is encouraging to see that operating margins before abnormal items were up y-o-y from
10.5% to 12%. NamiTech was only included for 5 of the 6 months in Nampak's interims.
If we extrapolate linearly to six months, NamiTech increased revenue y-o-y by 17% to ZAR 380mln
and operating profit before abnormal items by 32% to ZAR 45mln. This is good news and
bodes well for ALTECH, going forward.
Interestingly, NamiTech had a very busy stand at the FUTUREX 2004 exhibition last week.
The people we spoke to seemed very upbeat about being acquired by Altech.
They appeared genuinely excited about the future within the Altech stable.
Global mobile network capex declined 11% in 2003 (Gartner)
According to Gartner, mobile operators worldwide spent USD 40 bln on radio access, switching and
core infrastructure in 2003. This is down 11% from USD 45 bln in 2002.
Delays of 3G networks was cited as a major reason. Ericsson remained the market
leader with a 26% share, followed by Nokia and Siemens with 14% and 13% respectively.
The outlook for 2004 looks more promising as operators have reduced debt levels and
many have announced increased capex programs.
CISCO to unveil new high-end router to counter Juniper
CISCO will unveil today an important new router, code-named HFR or "huge fast router".
It is expected to improve Cisco's falling market share in the "core router" arena.
"Core routers" make up the backbone of the Internet. Its share of this market has fallen
from 70% in 2002 to 59% currently, while Juniper Networks, its main competitor in this space,
has increased its share from 23% to 34%. Nevertheless, analysts expect Cisco's share of
the high-end router market to continue declining to below 50% by year end.
Friday 21 May
UCS management meeting - a true software pioneer
We recently met with UCS founder and CEO, John Bright and CFO, Dean Sparrow.
UCS is the leader in specialised software for the retail industry in South Africa
and dominates the space.
We like the company and its management and believe that this is one to watch.
To find out why, read our brief note in our IT
section by clicking here.
Good news for GLOTEC's Hyperion software
Hyperion has been evaluated for the second year in a row by the MetaGroup to be the best
business performance management software in its field. Hyperion is a key software offering
from the Business Intelligence division of GLOTEC.
JSE's SRI index
Well done to Altron, Altech, Didata, MTN, Telkom and Venfin who made it into the
new Socially Responsible Investment Index from the JSE. Calculation of the index commences
today.
Monday 17 May 2004
Compu-Clearing management meeting - a good story
We recently met with founder and CE, Arnold Garber and financial director, Costa Efthymiades.
Compu-Clearing (CCL) is the leader in specialised software for the freight forwarding,
customs clearing and airline cargo industries in South Africa.
We obtained insights into the company and believe that this is a good story.
To find out why, read our note in our IT
section by clicking here.
Good news for IDION - the DataMirror hostile bid is over
DataMirror, a competitor of IDION, has sold its 42% share to Venfin and an unnamed institution.
This brings to an end the hostile bid scenario which has plagued IDION for 2 years.
Venfin increased its share from 6% to 35% and an institution took up 13%.
We spoke to management on Friday. They were thrilled with the news. The hostile bid scenario
had impacted management time in the past. This also brings to an end fears that DataMirror
would have disrupted the company by blocking new resolutions attempted by the board.
The new long-term strategic shareholders bode well for IDION which can now continue to
make headway in the high availability space.
DATACENTRIX in a large PC deal with Stellenbosch University
Good news for the IT company, DATACENTRIX which has won a deal to supply 600 HP PC's to
Stellenbosch University. It includes a SLA with ongoing support services.
Datacentrix is HP's largest HP value added reseller in South Africa.
Global digital camera sales unit growth to slow to 39% for 2004
IDC predicts a growth in global digital camera sales of 39% to 69 million units in 2004.
This is down from the 71% growth in 2003. IDC predicts 100 million units by 2008,
which implies a 4 year forward CAGR of only 10%. An IDC analyst cites the growth in mobile
phone cameras as a major cause for the slowdown in dedicated digital cameras. In 2003,
Sony was the leader with an 18% market share, followed by Canon with 16%. Olympus and Kodak
were third and fourth.
Thursday 13 May 2004
DIDATA interim results - now a profitable business
We attended DIDATA's interim results presentation in Bryanston yesterday. Compared to
the corresponding half to March 2003, revenue was up 16% to USD1.2bln. EBITA was
USD 7.5mln compared to a negative USD 14.9mln. Net profit came in at USD 1.4mln compared to a
loss the previous year of USD 420mln.
Overall, there was a pleasing turnaround in previously non-performing geographies with
the US region now profitable and the Africa region recovering from its poor performance in the
previous 6 months. Operating margins were up y-o-y in all regions except Africa. Of
concern though, is the flat y-o-y revenue performance in constant currency terms
(0% growth) and the product split which remains largely unchanged at a high 58% of
revenue.
The balance sheet remains strong and the group has USD331mln of cash reserves.
Newly appointed CEO, Brett Dawson, appears cautious yet confident to continue
the turnaround into the future. Time will tell.
Wednesday 12 May 2004
CISCO Q3 results - rising demand
CISCO reported its third quarter results yesterday, citing a rising demand from
corporate customers for its networking gear. Sales for the quarter were up from the
previous year by 21% to USD 5.62bln. Net profit was up 22% to USD 1.2bln. Cash flows from
operations were up a huge 41% to USD 2.4bln. Cash on hand sits at USD 18.9bln. The
company spent USD 3bln repurchasing shares. The share wavered however, closing slightly down
yesterday as there were concerns about the sales outlook for the rest of the year and the
rising inventories.
We will be attending DIDATA's interim results presentation this morning. The Cisco result is
important with respect to the Didata performance since Didata is a large reseller of Cisco
networking equipment.
USD1.8mln deal for SPESCOM
Good news from IT company, SPESCOM. Its software division has won a USD1.8mln deal with
Network Rail in the UK for an enterprise wide license of its eB software.
The software will be used for content and configuration management. Further contracts to
deploy eB on various projects are expected.
ZAR1.3mln deal for UCS
Retail software specialist, UCS, has won a ZAR1.3mln deal with Massmart's Builders
Warehouse. The deal will see UCS subsidiary, CKS install its UNISOLV point of sale
solution at 5 additional outlets.
Tuesday 11 May 2004
ICT empowerment charter targets
The ICT empowerment charter working group released its third draft yesterday of the charter that
will reshape the ICT sector for the next decade. Some of the key targets are as follows:
- Black equity ownership - 25-35% by 2009, 25-51% by 2014.
- Procurement from black-owned companies - 30-60% by 2009, 50-80% by 2014.
For most of the listed IT companies, the equity ownership target should not pose too much
of a challenge. Most have already announced significant BEE deals in the last year which
are around the 25% level. The procurement targets may be more difficult to meet.
It is interesting to note that the ICT charter working group chairman, Dali Mpofu, is
also a director of Altron, Powertech and an alternate director of Altech.
Thursday 6 May 2004
Altech annual results - UEC hit hard by the strong Rand
On the surface, it appeared an average result with revenue up 2% and HEPS down 12%. However
it was the divisional performance that we were after. We attended the results presentation last
night and obtained the numbers we needed. All divisions performed well , but in Rand terms,
UEC's numbers brought the group down. Altech is well positioned for the coming year.
Read our note on the Altech results in our IT section.
Wednesday 5 May 2004
Altech annual results - a mixed bag
Altech released their annual results to February 2004 yesterday on SENS. We made the point
at their interim stage that it would be tough to grow substantially for the full year.
Indeed, the top line grew by 2% and HEPS declined by 12% to 302 cents per share.
Divisional performance appears to be mixed. While the Telecoms businesses put in a solid
performance, it was the Multi-media and electronics businesses (and in particular UEC) which
brought the overall results down. The strength of the ZAR/Dollar is cited as a major factor here.
The IT division put in a fair performance.
We will be attending the results presentation this evening, where we hope to gain insight into
the performance of Altech's three core businesses; Autopage, Netstar and UEC.
Thursday 22 April 2004
EOH interims - a star performance
Revenue up 66%, HEPS up 23%. Impressive growth from the steady IT Services company.
We attended the results presentation yesterday and gained useful insights.
Read the report back in our IT section.
IST annual results - a turnaround from the interim stage
In our opinion, an encouraging result from the engineering technology player,
considering where they were at the interim stage. We attended the results presentation
yesterday and gained useful insights.
Read the report back in our IT section.
Intel says IT downturn is over
At an Intel conference earlier this week in Barcelona, Pat Gelsinger, the company's CTO,
said that the IT downturn is over for the foreseeable future. He feels that the industry
is poised for sustained growth. An encouraging message from the chip giant.
Monday 19 April 2004
We meet Mustek's financial director, Hein Engelbrecht
Late last week, we met with Mustek's financial director, Hein Engelbrecht at their offices
in Midrand. He shared some interesting insights with us. Read the report in our IT section.
Nokia modifies their initial gaming console
Nokia's original "gaming phone", N-Gage, launched in October last year, was not a huge success.
US sales are estimated to have been only 40,000 units. We commented on this last year and noted
that it was too expensive (USD299). A new device will be launched soon that is cheaper (USD179).
The redesigned N-Gage QD will be Nokia's second attempt at taking on the established
Nintendo Game Boy.
Thursday 15 April 2004
Global chip sector shows solid growth in Q1
Intel, the world's largest chipmaker reported a 20% growth in Q1 revenues to USD8.1bln.
Net profit was up 89%. CEO, Craig Barrett cited an improvement in worldwide IT spending
and growth in their mobile chip business. IDC predicts 18% growth in worldwide chip sales
for 2004.
AMD, their fiercest rival reported a 74% growth in Q1 revenues to USD1.24bln. Earnings
were US 12 cents per share, up from a loss of US 42 cents per share a year ago. The company
cited stronger demand for personal computers.
Texas Instruments, also a chip giant, reported a 34% growth in its Q1 revenues to
USD2.94bln. Its earnings for the quarter were triple that of a year ago. This in spite
of the weakness of its biggest customer, Nokia. The company gave a positive outlook for
the second quarter.
Thursday 8 April 2004
SA's PC market is healthy
According to a recent BMI-T report, PC unit sales increased 13.8% to 872,398 units
in 2003. However, falling prices (together with the strengthening ZAR) led to the value
of PC shipments declining by 12.3% to ZAR6.8bln. We expect the buoyant demand to continue as
users upgrade and take advantage of lower prices and wireless features. This is
good news for names such as MUSTEK and PINNACLE.
WLL operators continue to "niggle" MTN and Econet in Nigeria
In 2001, when MTN launched GSM in Nigeria, a concern was the existence of small wireless local
loop (WLL) operators, which were providing fixed-wireless and limited mobility telephony in
the Lagos and Abuja regions. Since then however, GSM has stormed ahead to over 3
million subscribers by Dec 2003. WLL subscribers are estimated (by EMC) to have grown from
59k in 2001 to only 168k in 2003. WLL operators include Multilinks, Starcomms, Intercellular,
Cellcom and Reliance.
MTN and Econet have rightfully been concerned since WLL operators paid nominal amounts
for their licenses compared to the USD285mln tag on the GSM licenses. Also, the WLL service
is cheaper than GSM. The regulator stepped in a year ago forbidding WLL operators from
acquiring new limited mobility subscribers, but this seems to have been ignored.
Nevertheless, MTN and Econet will compete on value-added services, most of which are
not available on the WLL CDMA networks. Also, CDMA handsets are not as easily available
as GSM, for which there is a burgeoning black market. In our opinion, the WLL operators
will be here to stay and will continue to "niggle", but will not pose a major threat
to MTN and Econet, going forward.
Tuesday 6 April 2004
Datacentrix annual results to Feb 2004 - business activity is pumping
We attended the results presentation to analysts yesterday. Revenue grew 1% to ZAR764mln and
HEPS declined 10% to 20.7 cents. On the surface, the result appears mediocre, however the
underlying business activity was very pleasing. According to management, around 90%
of the company's top line is dollar sensitive. (Hardware and software is bought principally
in dollars and sold, with a profit margin, at a Rand equivalent to customers.) In dollar
cost terms, the activity grew by an impressive 31%. However, the average
ZAR/$ rate strengthened by 27% from 9.98 to 7.27 for the current period, leaving the
overall revenue in Rand terms flat.
The balance sheet is solid. There is no debt and ZAR131mln of cash in the bank.
Cash flows from operations were ZAR28mln. This was negatively impacted (by around ZAR25mln)
because of earlier payment of creditors and a pay down of tax payables.
The company further explained that a large acquisition is unlikely and that cash
reserves would be returned to shareholders over time. To this effect a capital distribution
of 6.9c per share was declared.
Going forward, we believe prospects continue to look positive. Should the Rand remain stable,
we should see growth of around 20-30% for the coming year. DATACENTRIX closed
yesterday at ZAR1.95. Its market cap is ZAR389mln and is on a PE of 9.4.
Thursday 1 April 2004
GLOTEC full year results to Dec 2004 - restructuring continues
These results still include the non-profitable banking software business that has already been
disposed of. On ZAR192mln of revenue, an operating LOSS of ZAR37mln and a net loss of ZAR44mln
was reported. The balance sheet is not healthy at the moment.
If one excludes the banking software segment, GLOTEC would have reported a revenue of ZAR141mln
and an operating PROFIT of ZAR25mln. Its three other segments all performed profitably and
reported revenues in line with what one would expect after their interim stage (to June 2003).
A concern is the stagnant profit in the manufacturing software segment. To June 2003,
this segment reported an operating profit of ZAR4mln. This number has hardly changed to
December 2003.
Restructuring continues in addition to a refinancing of the balance sheet. Can GLOTEC with
its recently appointed CEO turn itself around? We think so, but more time is needed on this
one. GLOTEC closed yesterday at ZAR0.01. Its market cap is ZAR4mln.
Andile Ngcaba and Didata - details aside, this move should reap benefits
Didata SA's announcement of a 25% BEE deal with Andile Ngcaba at its helm
is very good news for the company in our opinion. Mr Ngcaba is capable and has proved himself as
director general of the department of communications. His knowledge of the ICT industry and its
issues, particularly at a strategic level is unquestioned. He is known by the industry as
a "doer" and is undoubtedly very well connected. This bodes well for Didata SA, both in
clinching local deals in the private and public sector, as well as expanding into Africa.
The deal also translates to a 15% BEE credential for The Internet Solution
(DDSA owns 60% of IS), which will assist in its VANS license renewal. Having Mr Ngcaba on
board should also assist IS/Didata in its SNO involvement.
The deal with Ngcaba, "a telecoms heavyweight", is positive for DDSA, particularly with
the convergence of IT and Telecoms, together with voice and data.
DIDATA closed yesterday at ZAR4.21. Its market cap is ZAR5.7bln.
Monday 29 March 2004
Cell C update - good progress from our third mobile operator
Cell C gave a progress update late last week. As of December 2003, there were 1.9mln active
subscribers, up from 1.25mln in March 2003. Cell C claims a market share of 12%.
Contract ARPU (0.3mln subs) has increased from ZAR400 (Mar03) to ZAR409. However prepaid
ARPU (1.6mln subs) has declined from ZAR70 (Mar03) to ZAR62. We chatted to the company
on Friday and they attributed the decline in prepaid ARPU to the strong growth experienced
in this segment. Network rollout is going better than was last reported to March 2003.
The company now has 1552 of its own base stations and carries 60% of its traffic on
its own network. The urban roaming agreement with Vodacom runs to the end of 2004.
Cell C has also upgraded its market size expectations. It now forecasts a total market
of 20mln subscribers by 2008. The company still expects to achieve a 25% market share by
2007.
Pinnacle Technology Holdings interim results (for 6 months to Dec 2003)
An average result overall. There was very little growth in the top line (around 3%).
The company cited a slow down in government procurement of IT infrastructure.
A concern for us was also the decline in operating profit margin from 4.3% to 3%.
PNC closed on Friday at ZAR0.26 and is on a PE of 5.4
Wednesday 24 March 2004
Telkom analyst day - for how long can the efficiency improvements continue?
Yesterday, we attended Telkom's first analyst day which was widely attended by both
the buy and sell side. Presentations were delivered by over 20 key Telkom and Vodacom executives
to give further insight into the group. While the focus was not on financials, key messages
were how Telkom has improved efficiencies over the past two years and that
further improvements are expected. The team was very upbeat about their achievements
and prospects for the future. Some interesting points are as follows:
- Vodacom raised its SA saturation mobile market size expectation from 20mln to around 25mln
- Although Vodacom continues its focus on Nigeria, there is nothing concrete to report on yet.
- Telkom expects EBITDA margins of around 40% by March 2007
- The Capex/sales ratio is expected to be contained in the 12-15% range
- There is still a fair amount of uncertainty on various regulatory issues affecting Telkom
- The SNO is expected some time during 2004.
- Telkom expects to lose between 10-15% mkt share to the SNO in first 3-5 years.
- Further staff cuts (of 7-10% per year) can be expected from a current 33,828 employees
We believe yesterday's trading statement (profits expected to be up by more than 30% for 2004)
has a lot to do with the efficiencies mentioned above. We have no doubt that further
efficiency improvements are possible, but we believe most of them have been carried out
by now. Perhaps the group will rely on this for the next year or two, but thereafter,
the going will get tough, especially with the pending SNO.
Monday 15 March 2004
Gartner predicts global mobile handset sales to grow 11% to 580 mln units for 2004
They cite replacement demand in mature markets and growth in emerging markets.
Growth however is slowing (20% growth in 2003 to 520mln handsets from 431mln in 2002).
While the global growth still looks healthy at a predicted 11% (which bodes well for operators
worldwide), operators continue to seek untapped emerging market opportunities.
Examples are the successful forays of MTN and VODACOM into Africa.
As for market share, Nokia, Motorola and Samsung continued to dominate the top 3 spots with
Nokia at around 35% on 2003 numbers. Interestingly, LG has improved its market share
considerably from 3 to 5% taking the 6th spot. Locally, in SA, Nokia leads with 60%
while LG has around 4% and is aiming higher.
NITEL to improve its billing systems - Good news for MTN Nigeria?
It is encouraging to see Nigeria's fixed-line operator, NITEL in a deal with Intec to
purchase software and systems to improve among other things its billing systems. New
entrant mobile operators in African countries often face difficulties (in the early stages)
in collecting interconnect revenues from existing fixed-line operators. This can and often
does impact the newcomer very negatively financially. NITEL's move in this respect
should bode well for MTN Nigeria in the long run.
2003 Newsflow commentary archive
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