Gijima, DiData, and the strange SA tech sector
The technology sector in South Africa is a funny bird. In the US, there are a lot of software developers, social media companies, innovative manufacturers and such like, but in South Africa, the majority of companies listed on the JSE tech board are, essentially, resellers – companies that take existing items like servers, PCs, and so on, and install and manage them for clients. In other words, with very few exceptions, South Africa's tech companies are not innovative, they're essentially undifferentiated middle-men. For that reason, they tend to have razor thin margins and to rely heavily on a handful of large contracts. Thus, when there are problems with one or two clients, as has happened at Pinnacle and Gijima, the entire business is threatened. Tricky bet for investors. – FD
ALEC HOGG: In company news this morning, Gijima has posted a 19 percent loss in interim revenue from continuing operations. To get a more in-depth view of how the market is trading today, we're joined by Sasha Naryshkine from Vestact. That Gijima story…their revenues are down, and it look like there's more trouble there.
SASHA NARYSHKINE: It's similar to a worse version of Pinnacle in terms of what it is that they do. Having lost that big Home Affairs contract a while back, they're struggling to come to terms with the rest of their business, and you can imagine there was probably a lot of fat built into the system. That could have been a very lucrative contract and now they're having to sweat their other businesses.
ALEC HOGG: You'll remember they had that rights issue not long ago and Robert Gumede, the founder of the Gijima side of AST – when they put them together, it became Gijima AST – and he put R75m of his own money into the company at a price substantially above where the share price is at the moment. Do you think he's thrown good money after bad, or do you think there's a tip there for us?
SASHA NARYSHKINE: Well, backing yourself, I suppose. There was a story over the weekend in which Elon Musk thought he would fail at Tesla, if you don't try to give it your all/everything, you're never going to know. I guess that's a positive for the business, as well as the other long-suffering shareholders, who sat and watched a dismal performance, to be perfectly honest. I guess that backing yourself, and having a shareholder like that alongside you, is sometimes a good thing.
GUGULETHU MFUPHI: Just before I mark this discussion, you mentioned that the company mentioned in its results that they still consider themselves a market leader in a technology sphere. You disagree…
SASHA NARYSHKINE: Well no, I don't disagree with that. I'm just saying that in terms of revenue in a South African context, it's pretty light to view yourself as one of the major, but I guess that's maybe an opportunity in itself. Many people are saying the South African ICT space is very fragmented and I guess that's why EOH has done quite well finding a whole lot of businesses, piecing them together, and leaving them to run themselves. I mean it against a backdrop of, if this is a major and this is their turnover, it's not insubstantial, but it's not as big for example, as our retail sector, which is very well represented.
ALEC HOGG: What you're saying is 'let's just stop the fluff'. Don't delude yourself into thinking you're one of the big guys when you aren't. Know who you are. Reflect a little.
SASHA NARYSHKINE: Maybe they are, in a South African context. Maybe our market is underserviced.
ALEC HOGG: R1.5b per year…DiData does that in a week.
SASHA NARYSHKINE: Well, I suppose so. Now, that they have the backing of NTT Docomo… interesting times I guess, for that business – DiData. Perhaps it's sad that we don't see them anymore because these were the champions of yesteryear.
ALEC HOGG: It's coming back.
SASHA NARYSHKINE: And remember, Data Tech of course, had a trading update this morning that looks quite positive. However, in that space, who do you want to be? Do you want to be a reseller of other people's services and hardware, or do you want to be constructing interesting technology for other people? Unfortunately, and strangely, almost like the London market we don't have enough opportunities in that type of space.
ALEC HOGG: DiData is coming back. There have been many rumours about that – no confirmation from the company yet – but you can be sure that at some point in time, they'll see the opportunity when the markets are more favourable.
GUGULETHU MFUPHI: The investors' NTT – would they want that, though?
ALEC HOGG: The Japanese?
GUGULETHU MFUPHI: Yes.
ALEC HOGG: Why not? If you can raise capital, you need more capital to…I don't know. Well, let's see. I think the management of DiData are very smart guys and they know how to come to the market at the right time, when they need to continue expanding. These guys have been around there since 1986, I think it was.
SASHA NARYSHKINE: There've been many technology listings in the U.S. Last year, I think there were 86 or 87 listed on the NASDAQ, which is about one-tenth of what listed in 1999/2000, so many people are starting to say 'it's frothy', but just to put it in context, they actually haven't seen as many. Maybe there's a better quality, a King Entertainment last week…Candy Crush. I've never played it and I wouldn't be speaking from any reference point. Have you played it?
GUGULETHU MFUPHI: It's quite addictive.
ALEC HOGG: Have you seen the video – talking about popular things – about Nkandla Style?
SASHA NARYSHKINE: I saw it when it had about 300-odd hits because on my way into the office… On 702, they said 'have you seen it' and I went and saw it, of course. It's actually really well made.
ALEC HOGG: When was that…on Friday?
SASHA NARYSHKINE: Yes, on Friday morning.
ALEC HOGG: I looked last night – 240,000 – the last thing any politician wants, is to start featuring on social media.
SASHA NARYSHKINE: In a negative light. However, we can be thankful Alec, that we have access to YouTube. Turkey had local elections over the weekend, and Twitter and YouTube were banned. I'm just saying.
ALEC HOGG: Don't even go there. That is Drift of a huge proportion – not thankful. We have a Constitution, which says we have a right to YouTube and we have a right to free press.
SASHA NARYSHKINE: Exactly.
ALEC HOGG: Turkey: they have a different philosophy on life, as we well know.
SASHA NARYSHKINE: We can be lucky we live here, I think.
ALEC HOGG: Is that the point? Okay, not the point that we're lucky to have YouTube…
SASHA NARYSHKINE: We can be thankful.
ALEC HOGG: Talk to us about Grindrod.
SASHA NARYSHKINE: The way you see Grindrod is what are they going to be? Are they going to be the premier provider of ports and railway service across the continent, or at least, across sub-Saharan Africa? Are they going to do partnerships with people they need to do partnerships with? I think the Mozambican thing is going to be a massive win. I speak to people in the oil and gas industry, and they reckon that thing's going to be bigger than Angola. It's going to be some of the biggest gas deposits. I guess it all falls down to the transportation of gas. Mozambique could be a key trading partner for South Africa, if we're looking for alternatives and we wouldn't even have to worry about the Karoo, in due course. Grindrod could play a key role in transportation of that – but not only there – eventually, in a South African context. In addition, they put out an announcement that they'd be able to build cheaper locomotives than what Transnet are looking for, but I think it's still a long way away.
ALEC HOGG: But we have oil and gas in KZN, according to Exxon, and it makes sense. If Mozambique has all the gas deposits there, you just go a little bit further down on the east coast, and you will find them in KZN as well. Exxon say they're very confident of getting it. Of course, we have to get our legislation sorted out in South Africa once they do find the damned stuff, so we can bring it on shore. This is an exciting time in that sector, in particular.
SASHA NARYSHKINE: I think it would solve many of our energy needs. Sasol of course, has worked very closely with the Mozambican government in order to go to develop their natural gas power stations – a smallish one in Ressano Garcia, already. That's just over the border from Komatipoort.
ALEC HOGG: I wonder if the guys at Eskom are actually picking up on the news. The news over the weekend was that the biggest power producer in Texas – all right, Texas has six times the economy of the size of South Africa, so you have to put it in perspective, – which is about half the size of Eskom, has gone bust. Why they've gone bust, is they have coal-fired plants i.e. what South Africa relies on, and as the gas-fired plants have come in through shale gas, the coal-fired plants are uneconomic. We're going ahead with Kusile and Medupi, and spending hundreds of billions of taxpayers' money at the end of the day, when the focus is now going to gas. It's an interesting point.
SASHA NARYSHKINE: I think the difference there though Alec, just to close off, is that it's a competitive landscape. Here, it's not necessarily a competitive landscape.
ALEC HOGG: Oh, you mean Eskom's not likely to go bust.
SASHA NARYSHKINE: Well, no, not at our expense.
ALEC HOGG: I think you're right, Sasha. That was Sasha Naryshkine from Vestact.