Con­trol of Dat­a­cen­trix makes all the dif­fer­ence

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

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.

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