Big changes to Huge’s op­er­at­ing strat­egy

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

The tran­si­tion at Huge Group is gain­ing trac­tion. The com­pany, which used to make its money in Least Cost Rout­ing (LCR) is leav­ing that model be­hind to be­come a dis­tri­bu­tion busi­ness.

For com­pa­nies like Huge Group, LCR used to be a small but com­fort­able part of the tele­com mar­ket, as they would buy band­width from ma­jor op­er­a­tors at a dis­count and then re­sell it at a lower price to busi­nesses than what the op­er­a­tors sold it for.

This busi­ness model, how­ever, was de­pen­dent on static and high tele­com rates.

About five years ago this all changed as sharp cuts in the dis­counts, along with a drop in the in­ter­con­nec­tion fee — the charge op­er­a­tors pay for trans­mit­ting a ri­val’s traf­fic over their net­works — and in­creased com­pe­ti­tion be­tween op­er­a­tors all but killed it.

Though LCR com­pa­nies are adapt­ing to the more dif­fi­cult en­vi­ron­ment, most are still fo­cused on of­fer­ing some kind of tele­com-re­lated prod­ucts. Huge Group is dif­fer­ent be­cause it is in ef­fect ex­pand­ing out of the tele­com sec­tor and be­com­ing a dis­trib­u­tor of niche prod­ucts for small and medium size busi­nesses.

For now it is fo­cus­ing on

push­ing elec­tronic goods like PABX or Of­fice Au­to­ma­tion (OA) equip­ment but there are plans to branch out into sell­ing prod­ucts like in­sur­ance and ac­count­ing packages.

Huge Group’s new busi­ness model re­quires it to bring in re­sellers (it calls them busi­ness part­ners) to dis­trib­ute its prod­ucts. It signed up 425 re­sellers by the end of Fe­bru­ary, up from 293 a year ear­lier.

Th­ese re­sellers are key to its strat­egy but get­ting them to make a sig­nif­i­cant con­tri­bu­tion to earn­ings is a slow process. “There is a lag be­tween the time when busi­ness part­ners are ap­pointed and the time sales of new con­nec­tions ac­crue from th­ese busi­ness part­ners,” said Huge Group CEO James Herbst in its lat­est an­nual re­ports.

It said in the re­port, though it in­creased the num­ber of re­sellers 150%, av­er­age units sold per part­ner were up 11% for the year to end-Fe­bru­ary 2014.

Even so, the group was con­fi­dent and “up­beat about fu­ture prospects for rev­enue growth”. It rea­sons that it can over­come this slow sales con­ver­sion rate by in­creas­ing the num­ber of part­ners. “Greater num­bers of ac­tive busi­ness part­ners will re­sult in greater sales of new con­nec­tions, lower churn and there­fore higher net growth and rev­enue,” said Herbst.

This strat­egy is show­ing early signs of pay­ing off. Af­ter three years of see­ing rev­enue decline, the group ex­pects marginally higher rev­enue for the year to end-Fe­bru­ary.

It said cu­mu­la­tive rev­enue from Au­gust last year com­pared to mea­sures of cu­mu­la­tive rev­enue in the pre­vi­ous year was on av­er­age about 4% higher, and rev­enue dur­ing Fe­bru­ary this year was 7% higher than rev­enue gen­er­ated in Fe­bru­ary 2014.

It also in­creased its num­ber of client ac­counts by 52% in the cur­rent fi­nan­cial year.

The group’s prospects have im­proved to such an ex­tent, it re­cently an­nounced it was go­ing to re­sume pay­ing out div­i­dends. “The ex­ist­ing div­i­dend pol­icy of the com­pany is to pay a low, regular div­i­dend sup­ple­mented by ad­di­tional div­i­dends when earn­ings ex­ceed ex­pec­ta­tions. If earn­ings were to be higher than bud­geted ex­pec­ta­tions in a given pe­riod, an ad­di­tional div­i­dend might be paid, which would then be des­ig­nated a spe­cial div­i­dend,” it said.

Its lat­est re­ported num­bers also showed mod­est signs of a turn­around. Though rev­enue fell from R106m to R99m, taxed profit rose to R9,5m from R6m for the half year to Au­gust.

Though it had a neg­a­tive cash hold­ing of R8,3m at the end of the pe­riod, it has since re­ceived back­ing from its share­hold­ers, who took up a R20m rights of­fer in Septem­ber.

In­vestors are start­ing to take note of the group. Its share price has risen 77% from the R1,48/share it was trad­ing at a year ago to its cur­rent price of R2,65/share.

Given its prospects and the changes it has pushed through, at a price:earn­ings ra­tio of 15,77 it looks like there is still some up­side.

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