Small-timers mean big bucks
Results-orientated business solutions group unaffected by current market turbulence
THE MORNING AFTER a day in which his company’s share price fell 22% isn’t the most propitious to interview a CEO. However, Simeka’s Mohamed Varachia was unbowed. “We can’t manage the share price, we can only deliver results,” he says. And Varachia insists the general economic slowdown is having little impact on the IT sector. Again, like many of his colleagues, he insists the AltXlisted company has unique attributes that also protect it.
In fact, what’s called its business support services division provided 60% of revenue before the recent merger with SAB&T Ubuntu and its technology division 40%, though the distinction is somewhat artificial. Many clients use both arms and those that use just one are candidates for cross-selling.
The SAB&T merger has heightened the imbalance, though Varachia says its technology component, while small, is “very exciting”. But the main attraction of SAB&T is its complementary client base.
Varachia says, historically, Simeka focused on major corporates and admits that experience in a previous business of the well-known hassles of dealing with public-sector clients – notably, their notoriously slow payments habits – was a deterrent. However, SAB&T focused on smaller businesses and the public sector and, as infrastructure and other public sector spend builds up, it’s a market no growth-orientated firm can ignore.
While the two groups are working well together, so far there’s been little integration, which isn’t possible until the profit warranty period expires in May next year. And given their different markets, even then opportunities may be limited, though there will obviously be scope for back office and similar rationalisation.
As the pre-SAB&T Simeka was itself the product of a merger of the original Simeka and BSG (its full name is in fact Simeka Business Group). And since its constitution in its current form in 2005 it’s made a number of small acquisitions; management has had considerable experience in getting previously separate entities to work together.
Its latest segmental division is a slight difference from previous years, when activities were broken down into three “clusters”: consulting and application; technology solutions and support; and secured print and payment solutions. That in turn was a structure that lasted only a year or so, as it was only in financial 2007 (to 31 May) that the previous 18 operating companies were streamlined into 12 and allocated among the three clusters.
Secured print and payment solutions are now subsumed in its business support services, in line with a stated intention to become a leading business solutions provider – but this doesn’t imply any downgrading of its importance.
In financial 2007 (to 31 May) it generated external sales of R124m, against R238m from consulting and applications. And Varachia says it’s still a major part of business support services.
Among other things, it’s a major competitor of Altech’s NamITech division in the manufacture and supply of cellphone SIM cards, with Vodacom as a major client. It’s developing a similar facility in Nigeria and though the delivery of plant is taking longer than expected, in other respects Varachia’s happy with the progress being made in that market.
Overall, Varachia says current market turbulence isn’t affecting Simeka’s game plan. He remains confident the enlarged group is on track for “exciting growth” this year and there are still lots of great opportunities.
Simeka’s track record as a listed company is short but not unimpressive. In financial 2005, revenue was R94m, EBITDA R17m and HEPS 7,3c. In the year just ended those figures were R597m, R92m and 15,5c (on a much larger issued equity) respectively.
In its preliminary report the company even held out the prospect of paying a dividend this year, although that may be one area where Varachia is backtracking slightly. “While our cash generation is good we have to look at our priorities. We need to invest for growth at a time when external credit will be less readily available, we have to be able to meet our debt service and working capital needs and, especially at these levels, we must consider a share buyback programme.
“And any dividend we do declare must be sustainable – so we may make only an introductory payment this year, which shouldn’t be seen as an indicator of our long-term dividend policy. But I must stress that we’re flexible and debating all possible ways of applying any surplus cash we may have.”
Its price fluctuated around 50c before taking off in mid-2007 to peak at around 160c/ share a year later. Since then it’s been downhill all the way in common with many other small cap stocks, though it’s recovered much of that one-day slide, which could have been simply the result of a big selling order in a reluctant market.
Currently at 40c, its historic earnings multiple is just 2,4. HEPS growth of 20% would bring that down to marginally above two. As I’ve said before, in any sane market that would offer great value.