Nastech vs Pinnacle, the similarity between EOH and Dimension Data, and why they’re hopeful, but not shooting out to buy Gijima shares any time soon, the Managing Director of Kaplan Equity Analysts Irnest Kaplan, Alec and Gugu survey and discuss the SA Informations and Communication Technology sector in South Africa in this interview, reviewing its performance in 2014 and scoping out where you should put your money, if you were inclined. -CH
GUGULETHU MFUPHI: Youâre still watching Power Lunch. Irnest Kaplan, the Managing Director of Kaplan Equity Analysts joins us now in the studio to give us a review of the South African Information and Communication Technology Sector, otherwise known as ICT. Irnest, good to have you as always. Letâs perhaps start with the review of 2014 and some surprise winners, when it comes to investments there.
IRNEST KAPLAN: Thanks very much. Yes, itâs interesting. Every year (I donât know why) you pick December as the period, I guess, just because thatâs the calendar year. You kind of look back and you say âwell, which shares did very wellâ and which shares didnât do wellâ and there are certainly some surprises. For example, during the last year, we saw Nastech doing much better than rival Pinnacle. In previous years, Pinnacle had done extremely well. It rocketed ahead and was always the out-performer in that hardware side of the game, and so the surprise was the other way around this year. Then you obviously have companies such as EOH that did very well and continues to do so.
ALEC HOGG: But was it a surprise? Pinnacle hit all kinds of reputational issues.
IRNEST KAPLAN: Alec, it was a surprise in that at the beginning of last year (or before all those reputational issues started), I would not have said that they would have encountered those. From that perspective, it was a surprise. It certainly wasnât a surprise that once they hit those issues the share price was hit, quite hard and hasnât quite recovered. In fact, itâs hardly recovered.
ALEC HOGG: It hasnât recovered at all, but itâs interesting. The guys at 36ONE are really sharp and their tip for the year is Pinnacle. Thatâs the one theyâve put a lot of their effort and clearly, their shareholdersâ funds into. I know you were a big investor there, too. With the share price at R12.00 versus the R24.00 that it started at last year, is it still an exciting opportunity?
IRNEST KAPLAN: Yes, I do think so and Iâll second the view of 36ONE. I think the main reason is that itâs reasonably cheap for what it is and provided there arenât any further scandals, which I donât believe there will be, I think the share will recover quite nicely. Perhaps it wonât shoot up to the R20.00 level in a hurry, but over the course of the next year as the earnings come through, which we hope they will, I think that share will do very nicely. I do think itâs a good bet.
ALEC HOGG: Is the scandal behind them? Has it been settled or is there anything overhanging it?
IRNEST KAPLAN:Â Officially, itâs fully behind them.
GUGULETHU MFUPHI: Exactly. EOH though, is one that you mentioned as a continual good performer. Whatâs the secret behind that company?
IRNEST KAPLAN: I think EOH is an exceptionally well run company with exceptionally good management, and I think thatâs really, the key behind it. It is a people business after all, and theyâve managed to combine good growth in the business (organically) with very good acquisitions in certain niche areas and theyâve done that repetitively for many years.
ALEC HOGG: It reminds me of Dimension Data. Hereâs a story of a share, which, two years ago, was sitting at R30.00. Now, itâs sitting at nearly R120.00 and the market says âthat doesnât matter. Gravity doesnât affect itâ. You remember the DiData story. It was a similar thing â lots of acquisitions and enhancing, and they fell off the bus. Why wonât these guys?
IRNEST KAPLAN: Alec, in a way, youâre right but I wasnât around in the form that Iâm in now, when DiData was going through that period. Iâd just started so I donât have as much detailed insight into what they did and how it differs from EOH. What I will put forward is that I think DiData â one or two of those acquisitionsâŠÂ Firstly, many of those acquisitions are international and they were big.
ALEC HOGG: Toward the endâŠ
IRNEST KAPLAN: Quite a few of them were actually unprofitable businesses or were businesses that they had grossly overpaid for, and I think that in the case of EOH, they make very smart acquisitions in that they donât overpay and they prefer to partner with the business theyâre buying, and give EOH shares as a portion of the payment. Those people then want to do well. I know it sounds clichĂ©, but it really is a win-win situation for many of those businesses.
ALEC HOGG: DiData did the same. They bought small chunks in companies, then they grew that, then they bought a bit more, and then they took them out. They ran at 30 per year for many years but at some point in timeâŠÂ You canât do that indefinitely. The world is not made that way. On the other hand, is it, in the case of EOH?
IRNEST KAPLAN: I donât think so. My caution on EOH generally, (and I am a small shareholder) is that I donât think the next few years are going to be anywhere as easy as the last few. The one argument says theyâre bigger and stronger, so itâs easier for them now to attract new potential targets and move into new markets. On the other hand, as we all know, as a company approaches R10bn in revenue, it becomes more difficult to add on another 30 percent every year. Even if the growth subsides and slows down to a reasonable rate â as long as itâs something above ten percent, I guess â itâs still done incredibly well. I donât think theyâll do as well during the next few years, though.
GUGULETHU MFUPHI:Â Well, if you contrast EOHâs sterling performance with that of Gijima, which clearly needs a lot of assistance from all angles, something just needs to change there.
IRNEST KAPLAN: Yes. Gijima is a company, which Iâve followed for a number of years and the recent news is that the rights offer that the Chairman of Guma and the Chairman of Gijima, Robert Gumede, has actually taken up most of the shares.
ALEC HOGG: Again. Remember, he put R75m in at 75 cents or R80m into 75 cents and it was a negative 10-bagger last year.
IRNEST KAPLAN: Yes. Heâs actually wanted to raise another R100m and Iâm not sure of the exact figures, but it wasnât subscribed very well from the other shareholders. His Guma Group will rocket in their shareholding from the 40âs or somewhere thereabouts, potentially north of 75. I think it gives him an outright majority in that company and it says two things to me. 1) It says that he is very persistent about trying to get things right and 2) heâs determined to get it right, so much so that heâll put his own money into it.
ALEC HOGG: But he did. At the beginning of last year, he put in R75m and he didnât get it right. It went to one-tenth of the share price. Now what tells you that heâs able to do things differently this time?
IRNEST KAPLAN: Nothing really Alec, but if I look at the results, they were improved since that last rights offer so theyâre not great but things are slowly becoming less âworseâ or slightly better. I think the team that heâs putting in place is starting to have an effect. Whether or not this R100m is enough to see them through whatever turnaround they want to do is another question but itâs clear that Robert Gumede is determined to get it right.
ALEC HOGG: Two years ago, R13.00 per share. Today â eight cents. Ay caramba. You really are taking a bet. Take the three of them together, EOH youâre saying âa bit of a concern. Theyâve quadrupled in the last three years. For them to carry on from here is not going to be that easy, but itâs a good company. Pinnacle halved in price in the last year and GijimaâŠwell, I donât know what the percentage is but itâs fractional from where they were three years ago. You seem to like Gijima.
IRNEST KAPLAN: Iâm not implying that I would invest in Gijima right now because I do think the risks are too high. I just think that as an outsider, Iâm not a shareholder. As an outsider, I would just applaud Mr. Gumede for what heâs trying to do and hope that for the sake of the people and some of the projects that heâs doing (because theyâre doing some seriously big projects for corporate South Africa)âŠIâm just hopeful that something good can come of it. Itâs not easy to call and I certainly donât think anyone should be rushing out to buy shares in that company, right now.
ALEC HOGG: R84m market capitalisation and it does a turnover of R1.5bn so if anybody can just get a slight improvement in the margins (and perhaps Robertâs the one who can do it), well, good luck to him. I guess he has big cojones and sometimes, that needs to be rewarded.
IRNEST KAPLAN:Â Sure, I agree with that.
ALEC HOGG:Â But youâd be going with Pinnacle.
IRNEST KAPLAN: Oh yes, Iâd be sticking with Pinnacle and being a little bit cautious on EOH, watching for a potential slow-down. Iâm just worried Alec, on EOH for the purposes of your show, is that the rating is quite high. If they were to slow down to a respectable 15 percent growth at some point, which is very possible. Iâm not quite sure what would happen to that PE rating.
ALEC HOGG: I have two words for you: Dimension Data. That was Irnest Kaplan, the Managing Director of Kaplan Equity Analysts. He says âDimension Data has nothing to do with EOHâ. History repeats itself.
