Minor buy, major positive
A QUICK GLANCE at Digicore’s earnings and profit over the past eight years doesn’t inspire much confidence. The group was hit by the slowdown midway through 2009 and its 2010 year-end numbers show a further decline. But first impressions can be deceiving. The South African fleet management and vehicle tracking company employed a sound strategy by buying British-based fleet management company MinorPlanet while prices in the market were still depressed. MinorPlanet will give Digicore access to a substantially bigger customer base in Europe and Ireland, plus the group’s intellectual property.
The acquisition is half the reason behind Digicore’s recent announcement of a R90m rights offer for 30m new shares, which will commence in mid-February and be fully underwritten by Allan Gray. The acquisition was initially funded through working capi- tal and R40m of the money raised will go toward replenishing the group’s cash store.
The remainder will be used to implement an internal lease book in its fleet division, which has until now relied on upfront payments by clients. Financial director Francois Schindehutte says market demand is forcing it to change the way it does business but the positive upshot is that annuity income from fleets will increase substantially over the next few years, making up for the initial capital outlay. Annuity income was 55% of total group revenue in its full year to end-June 2010.
Digicore is a good cash generator and has a relatively modest amount of debt. The reason it decided on equity funding for the MinorPlanet deal is that it found financial institutions still reluctant to extend loans. Schindehutte says the company will report some marginal improvement to its