The world is changing fast and to keep up you need local knowledge with global context.
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: You’re 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. Let’s perhaps start with the review of 2014 and some surprise winners, when it comes to investments there.
IRNEST KAPLAN: Thanks very much. Yes, it’s interesting. Every year (I don’t know why) you pick December as the period, I guess, just because that’s the calendar year. You kind of look back and you say ‘well, which shares did very well’ and which shares didn’t do well’ 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 wasn’t a surprise that once they hit those issues the share price was hit, quite hard and hasn’t quite recovered. In fact, it’s hardly recovered.
ALEC HOGG: It hasn’t recovered at all, but it’s interesting. The guys at 36ONE are really sharp and their tip for the year is Pinnacle. That’s the one they’ve put a lot of their effort and clearly, their shareholders’ 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 I’ll second the view of 36ONE. I think the main reason is that it’s reasonably cheap for what it is and provided there aren’t any further scandals, which I don’t believe there will be, I think the share will recover quite nicely. Perhaps it won’t 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 it’s a good bet.
ALEC HOGG: Is the scandal behind them? Has it been settled or is there anything overhanging it?
IRNEST KAPLAN: Officially, it’s fully behind them.
GUGULETHU MFUPHI: Exactly. EOH though, is one that you mentioned as a continual good performer. What’s the secret behind that company?
IRNEST KAPLAN: I think EOH is an exceptionally well run company with exceptionally good management, and I think that’s really, the key behind it. It is a people business after all, and they’ve managed to combine good growth in the business (organically) with very good acquisitions in certain niche areas and they’ve done that repetitively for many years.
ALEC HOGG: It reminds me of Dimension Data. Here’s a story of a share, which, two years ago, was sitting at R30.00. Now, it’s sitting at nearly R120.00 and the market says ‘that doesn’t matter. Gravity doesn’t affect it’. You remember the DiData story. It was a similar thing – lots of acquisitions and enhancing, and they fell off the bus. Why won’t these guys?
IRNEST KAPLAN: Alec, in a way, you’re right but I wasn’t around in the form that I’m in now, when DiData was going through that period. I’d just started so I don’t 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 – one or two of those acquisitions… Firstly, many of those acquisitions are international and they were big.
ALEC HOGG: Toward the end…
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 don’t overpay and they prefer to partner with the business they’re buying, and give EOH shares as a portion of the payment. Those people then want to do well. I know it sounds cliché, 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 time… You can’t do that indefinitely. The world is not made that way. On the other hand, is it, in the case of EOH?
IRNEST KAPLAN: I don’t think so. My caution on EOH generally, (and I am a small shareholder) is that I don’t think the next few years are going to be anywhere as easy as the last few. The one argument says they’re bigger and stronger, so it’s 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 – as long as it’s something above ten percent, I guess – it’s still done incredibly well. I don’t think they’ll do as well during the next few years, though.
GUGULETHU MFUPHI: Well, if you contrast EOH’s 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 I’ve 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. He’s actually wanted to raise another R100m and I’m not sure of the exact figures, but it wasn’t subscribed very well from the other shareholders. His Guma Group will rocket in their shareholding from the 40’s 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) he’s determined to get it right, so much so that he’ll put his own money into it.
ALEC HOGG: But he did. At the beginning of last year, he put in R75m and he didn’t get it right. It went to one-tenth of the share price. Now what tells you that he’s 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 they’re not great but things are slowly becoming less ‘worse’ or slightly better. I think the team that he’s 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 it’s clear that Robert Gumede is determined to get it right.
ALEC HOGG: Two years ago, R13.00 per share. Today – eight cents. Ay caramba. You really are taking a bet. Take the three of them together, EOH you’re saying ‘a bit of a concern. They’ve quadrupled in the last three years. For them to carry on from here is not going to be that easy, but it’s a good company. Pinnacle halved in price in the last year and Gijima…well, I don’t know what the percentage is but it’s fractional from where they were three years ago. You seem to like Gijima.
IRNEST KAPLAN: I’m 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, I’m not a shareholder. As an outsider, I would just applaud Mr. Gumede for what he’s trying to do and hope that for the sake of the people and some of the projects that he’s doing (because they’re doing some seriously big projects for corporate South Africa)…I’m just hopeful that something good can come of it. It’s not easy to call and I certainly don’t 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 Robert’s 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: Sure, I agree with that.
ALEC HOGG: But you’d be going with Pinnacle.
IRNEST KAPLAN: Oh yes, I’d be sticking with Pinnacle and being a little bit cautious on EOH, watching for a potential slow-down. I’m 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. I’m 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 ‘Dimension Data has nothing to do with EOH’. History repeats itself.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.