Ser­vice with a (ner­vous) smile

Key Telkom con­tract is crit­i­cal for Mve­laserve

Finweek English Edition - - Openers -

WHAT MAKES THE Mve­laphanda Group a good deal dif­fer­ent to your tra­di­tional in­vest­ment trust is a size­able op­er­a­tional com­po­nent in the form of wholly owned ser­vices sub­sidiary Mve­laserve. That means Mvela Group is much more than a value play, be­cause there are mean­ing­ful op­er­a­tional earn­ings gen­er­ated from Mve­laserve’s sprawl­ing op­er­a­tions.

Mve­laserve com­prises ser­vices com­pa­nies such as Protea Coin (se­cu­rity), Trol­lope (min­ing ser­vices), Roy­alsech­aba (ca­ter­ing), Reb­serve Clean­ing, the To­tal Fa­cil­i­ties Man­age­ment Con­tract ( TFMC), Con­tract For­ward­ing (freight for­ward­ing), Khuseti (food fran­chise op­er­a­tions), plus 73% of Zonke (gam­bling mon­i­tor­ing sys­tems) and 50,1% of No­vare (fi­nan­cial ser­vices).

The bulk of Mve­laserve’s op­er­a­tions come from the old Reb­serve Group, which was sep­a­rately listed on the JSE be­fore be­ing merged with Mvela in 2004. At last count Mve­laserve rep­re­sented 34% of the Mvela Group’s in­trin­sic net as­set value of 868c/share as at end- June 2008 – a value of roughly 300c/share. That means Mve­laserve is a big­ger com­po­nent of Mvela Group than its flag­ship in­vest­ments in Life Health­care (307c/share) and Absa (154c/ share).

Per­haps what’s more im­por­tant is that Mve­laserve is cur­rently big­ger than Tsebo Out­sourc­ing (which owns Fedics and Drake & Skull) and Ser­vest (Clean­cor and Gremick Se­cu­rity).

It would ap­pear Mve­laserve is big­ger than its ri­vals mainly due to the breadth of its op­er­a­tions. The truth is that Mve­laserve doesn’t dom­i­nate all of its ser­vice ar­eas – in fact, it’s only numero uno in fa­cil­i­ties man­age­ment (cour­tesy a con­tract with Telkom that brings in R1bn/ year).

In a re­cent pre­sen­ta­tion to in­vestors, Mve­laserve con­ceded Drake & Skull was a pow­er­ful force in fa­cil­i­ties man­age­ment, while Pres­tige and Su­per­care are ma­jor na­tional clean­ing com­pa­nies. The ca­ter­ing mar­ket is dom­i­nated by Fedics and KKS Com­pass, with Group 4 Se­curi­cor hold­ing sway in the cash in tran­sit mar­ket and Chubb and ADT rul­ing the roost in the armed re­sponse se­cu­rity mar­ket.

That’s not to say Mve­laserve’s op­er­a­tions are bit play­ers… far from it. Protea Coin gen­er­ates R1,1bn from in­te­grated se­cu­rity ser­vices, such as as­sets in tran­sit, armed re­sponse, guard­ing ser­vices and hi-tech se­cu­rity so­lu­tions. Its ca­ter­ing & clean­ing divi­sion (Roy­alsech­aba, Berco, Medi­guard) gen­er­ates R700m/ year, while di­ver­si­fied ser­vices turn over more than R800m.

Not sur­pris­ingly, Mve­laserve’s pre­sen­ta­tion to in­vestors de­clared an in­ten­tion to grow Mve­laserve through ac­qui­si­tions over the next few years. Tagged to its ac­qui­si­tion strat­egy will be Mve­laserve’s in­ten­tion to ex­pand into Africa, de­velop sup­port ser­vices of­fer­ings to the gam­bling in­dus­try, tar­get lead­ing po­si­tions in the fa­cil­i­ties man­age­ment and se­cu­rity sec­tors as well as sub­stan­tially in­crease mar­ket share in ca­ter­ing and clean­ing ser­vices.

Ac­qui­si­tions and new op­por­tu­ni­ties are crit­i­cal for Mve­laserve. That’s be­cause Mve­laserve now earns half its op­er­at­ing profit from TFMC – which, in turn, is re­liant on one con­tract in the form of Telkom. Mve­laserve says the re­newal of the Telkom con­tract is on track – but “at sub­stan­tially re­duced mar­gins”.

The group also cau­tions if the Telkom con­tract isn’t re­newed early, there’s a risk of los­ing skilled per­son­nel, which could be ad­verse to the con­tract un­til the ten­der process in 2011. Mve­laserve also notes it’s “doubt­ful that TFMC will re­tain the full bas­ket of ser­vices af­ter a ten­der process be­cause of in­ter­na­tional com­pe­ti­tion en­ter­ing the mar­ket”. The sug­ges­tion is any new in­ter­na­tional com­pe­ti­tion “will be will­ing to buy busi­ness from Telkom.”

Mve­laserve says there’s a good chance the Telkom con­tract can be re­newed early, which will mean most ser­vices be­ing re­tained at new terms with re­duced mar­gins.

Mean­while, Mve­laserve hopes to seek out in­te­grated fa­cil­i­ties man­age­ment con­tracts with blue chip clients and hopes to cash in on a pipe­line of “cus­tomised so­lu­tions” of­fer­ings (with one or two con­tracts hope­fully se­cured by year-end).

Fin­week reck­ons if Mve­laserve is go­ing to be “mov­ing and shak­ing” over the next few years, then be­ing tucked away in a pas­sive in­vest­ment com­pany such as the Mvela Group is hardly ideal. Per­haps it would be bet­ter – in terms of the an­tic­i­pated deal­mak­ing – if Mve­laserve were again a sep­a­rately listed en­tity. Then – like the old Reb­serve/ Reb­hold – there would be the op­tion of us­ing scrip as set­tle­ment in lur­ing other niche ser­vice sec­tor play­ers into its fold.

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