Small-timers mean big bucks

Re­sults-ori­en­tated busi­ness so­lu­tions group un­af­fected by cur­rent mar­ket tur­bu­lence

Finweek English Edition - - News -

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.

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