Go­ing the right way, but mar­ket is still hes­i­tant

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

Jasco Elec­tron­ics has gone through a lengthy re­struc­tur­ing process, but the changes it has rung in still have to be fully re­alised in its re­sults.

The tech­nol­ogy group, un­der the lead­er­ship of CEO Pete da Silva, has been stream­lin­ing its op­er­a­tions since he took charge three years ago. Its seven di­vi­sions have been com­pressed into three and its trou­bled in­vest­ment in ca­ble group M-Tec no longer dom­i­nates its con­cerns.

Jasco says it will con­tinue its ef­forts to re­duce cost and to move into new geo­graphic and mar­ket seg­ments. “As out­lined be­fore, the full im­pact of the re­struc­ture will start flow­ing through from 2015,” it said when it re­leased its half-year re­sults to end-De­cem­ber.

Judg­ing from its lat­est

num­bers, it is prob­a­bly hop­ing it would be the low-wa­ter mark in its ef­forts to turn it­self around. Rev­enue dropped 5,3% to R502,3m, op­er­at­ing profit be­fore tax plunged 39% to R7,7m and head­line earn­ings sank 82,3% to R1,4m for the pe­riod.

The group was hurt by a labour strike in its elec­tronic man­u­fac­tur­ing di­vi­sion, which had a neg­a­tive ef­fect of R5,8m on op­er­at­ing profit.

It says if it were not for the strike, op­er­at­ing profit be­fore tax would ac­tu­ally have risen 5%. The com­pany’s earn­ings num­bers may have taken a knock over the pe­riod but its cash man­age­ment has shown some im­prove­ment as a re­sult of bet­ter work­ing cap­i­tal man­age­ment.

Its bank over­draft was re­duced from R36,5m to R3,2m and cash in­flows from op­er­at­ing ac­tiv­i­ties were R10,9m, com­pared with the R1,8m out­flow in the pre­vi­ous fi­nan­cial year.

Though the com­pany has made progress in man­ag­ing its cash, it has no cash on hand, even af­ter its cof­fers were boosted by a R55m rights of­fer and the dis­posal of its head of­fice for R60m in the past fi­nan­cial year. The group hopes its turn­around ef­forts will pay off this year, but it will have to hap­pen in a skit­tish econ­omy. It points out that some of its key cus­tomers are de­lay­ing or­ders and that there is a no­tice­able rise in com­pe­ti­tion. Rev­enue at its en­ter­prise di­vi­sion, for in­stance, dropped 10% to R170,8m be­cause a R20,8m project was de­layed till Jan­uary.

Though Jasco is head­ing in the right di­rec­tion, its hold­ing in M-Tec still has not been re­solved. It has as 51% hold­ing in the group while Korean fi­bre-op­tic ca­ble man­u­fac­turer Tai­han Elec­tric holds the re­main­ing 49%. The ar­range­ment has not been an easy one, be­cause de­spite Jasco hold­ing more than 50%, Tai­han has op­er­a­tional con­trol.

Jasco put its hold­ing in M-Tec up for sale but as it has not yet found a buyer it had to in­cor­po­rate its con­tri­bu­tion into its re­sults. Even so, it says a lot about how it has man­aged to scale down its ex­po­sure to M-Tec, be­cause it has only had neg­li­gi­ble im­pact on its lat­est fig­ures. In con­trast, M-Tec’s poor per­for­mance was blamed for the 27% drop in over­all head­line earn­ings in the half year re­sults to end De­cem­ber 2013.

Jasco might be con­fi­dent its ef­forts will pay off, but the mar­ket is hes­i­tant. In the past year its share price has fallen from a high of R1,25 in July to 53c and it has a price:earn­ings ra­tio of only 3,56. Nev­er­the­less, it should be noted that some of its di­rec­tors, in­clud­ing Da Silva, have bought close to R875 000 of the group’s shares since the be­gin­ning of the year.

Jasco has come a long way, but it is prob­a­bly best to hold off on mak­ing a de­ci­sion on whether to buy its se­cu­ri­ties till af­ter its year-end re­sults.

And even if its earn­ings show an im­prove­ment, its cash man­age­ment will prob­a­bly be the most telling in­di­ca­tor on the per­for­mance of the group.

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