BCX offers upside regardless of Telkom deal
SOME BELIEVE THAT Business Connexion (BCX) shares offer value – regardless of whether the Telkom deal goes through or not. Others are still not convinced and believe the shares can fall further. But that’s what makes markets.
The shares have been under significant pressure concerning uncertainty surrounding the deal – with an overwhelming view that the outcome of the Competition Tribunal process will be negative – and falling as far as R6,80 in late March. BCX then climbed back 5% to R7,25 in a single trading session on 2 April before the following session saw some of those gains erased – illustrating the volatility of a counter with an uncertain outcome.
Last week saw the news that there would be further delays in the Competition Tribunal process after chairman David Lewis was hospitalised with a back injury.
Telkom and BCX said in a joint statement that the hearings had been postponed to 18 May and would now be scheduled to end on 1 June (from the previous end date of 12 April).
At an offer price of R9,25/share most shareholders would still be holding out for a positive outcome. However, some are taking the view that the deal doesn’t necessarily need to proceed for it to be worthwhile holding BCX shares for the long haul.
In a recent report, Consilium Capital analysts said: “We believe Business Connexion offers upside, whether the proposed Telkom transaction goes ahead or not.”
Consilium says uncertainty concerning the future of the deal had placed both the company and shareholders “in a state of limbo”, inflicting damage in respect of lost busi- ness opportunities and staff. One example was
the recent departure of group executive for strategy and telecommunications Willem van Rensburg. Though Van Rensburg didn’t attribute his departure directly to the transaction and related uncertainty, he did say he wanted to pursue other opportunities in the sector. That must have played a role in his decision.
Consilium says BCX offers value up to R9,64/share (41% upside from R6,83 at the time of writing its report), placing the Telkom offer at fair value.
Consilium Capital, under licence from Collins Stewart in London, uses a valuation methodology called cash flow return on capital (CFROC), which measures cash flow generated relative to the asset base and is an alternative methodology to those used by most in the market. The methodology takes a long-term view and incorporates the competitive life cycle of a company.
But other analysts take an opposite view to Consilium. Irnest Kaplan, MD of Kaplan Equity Analysts, puts a value of between R5 and R5,50/share on BCX. Kaplan has for some time been bearish about the company’s prospects and lowered his forecasts at the time of BCX’s interim results. He believes Telkom will be significantly overpaying for BCX if the deal goes through and says the share will fall significantly if it doesn’t go ahead.
Though there’s always a chance of another suitor, Kaplan doesn’t believe that another company would match Telkom’s price.
The Tribunal hearings began in mid-March and though the die were undoubtedly loaded against Telkom from a sentiment perspective, it wasn’t clear from the early stages what the outcome would be.
Bearish on BCX.