Control of Datacentrix makes all the difference

Alviva delivered the goods in its half year to December, bumping up its headline EPS (HEPS) 23.5% and building on the 23.3% rise in its year to June 2017.

The tech group’s reward from the market is a poorgrowth-prospects 8 p:e.

“The market is looking at Alviva as being a product distributor only,” says Daniel Isaacs of 36One Asset Management. “The trick people are missing is the acquisition of full control of Datacentrix in February last year. It increased the group’s exposure to ITC services and solutions markedly.”

Alviva CFO Richard Lyon says: “I do not understand why being a distribution company should mean that it has to be on a low market rating.

“Managed properly with a focus on factors such as tight cost and working capital control, distribution is a good business to be in.”

In its former guise as Pinnacle Technologies, Alviva concluded the acquisition of the 42.9% of Datacentrix it did not already own in a deal worth R563m in February 2017. The deal provided HEPS with a big helping hand in the latest half year. Without it Alviva’s results would not have shone, with net profit down 3.4%.

The HEPS helping hand came by way of reducing net profit attributable to noncontrolling interests by R35.6m, leaving profit attributable to owners of the company up 14% at R207.3m.

“I can’t think of too many recent acquisitions that have provided such a big immediate boost to HEPS,” says Isaacs. “It shows what a good deal Datacentrix was for Alviva.”

Share buybacks totalling R96m gave another boost to HEPS in the past half year, reducing. the weighted number of shares in issue by 6.5%.

Alviva has set its sights firmly on reducing the importance of distribution in favour of ICT services and solutions. It has already gone a fair way.

In its half year to December distribution generated 55.9% of the group’s R6.43bn revenue, down from 86% in the year to June 2016. The contribution of distribution to earnings before interest, tax, depreciation and amortisation (Ebitda) over the period fell from 56.6% to 55.9%.

It was a setback for Alviva, which in the year to June 2017 derived a lower 51.4% of Ebitda from distribution. The setback was caused by distribution’s Ebitda contribution rising by 7% and Ebitda from services and solutions, which were hit by very tough trading conditions, falling by 6%.

Isaacs believes Alviva will drive Datacentrix as its primary growth engine. “Datacentrix was a conservative company and did not pursue growth aggressively,” he says. “There is big opportunity for Alviva.”

There would certainly appear to be, with Alviva putting its market share in the services and solutions segment at only 2%, compared with its 32%-35% share of the distribution segment.

Alviva is showing good progress. Significant contracts were secured by Datacentrix with new clients such as Absa, Acsa, Sanral, Transnet and MTN in the past half year.

“The deals are worth between R70m and R200m each,” Alviva CEO Pierre Spies said at an interim results presentation. “Once you are in a company you can broaden the scope of service you provide.”

But gaining new clients is not easy, emphasised Spies, with the selling cycle running up to 24 months.

Now seemingly working in Alviva’s favour is a tentative recovery in business confidence from its lowest level in over 30 years. But it will take time to begin showing in Alviva’s numbers.

“Business confidence is improving, but it will take six to eight months to get sending going again,” said Spies. “We have seen it all before.”

Meanwhile, the company is preparing itself for a demand upswing. “We are investing ahead of the curve in skills,” said Spies. Alviva is also broadening the scope of its services and solutions offerings through acquisitions, of which there were five in the past half year.

Alviva has yet to capture broad market attention, but it has the makings of a rewarding investment for those who have the patience.