Service with a (nervous) smile
Key Telkom contract is critical for Mvelaserve
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.