Pin­na­cle bounces back, posts im­pres­sive re­sults Af­ter it ex­pe­ri­enced a tough 2014, the tech­nol­ogy group’s lat­est set of re­sults shows a re­turn to sig­nif­i­cant growth. But is the stock al­ready pric­ing in the turn­around?

Finweek English Edition - - MARKETPLACE PRO PICK - Ed­i­to­rial@fin­ is a mar­ket an­a­lyst at IG.

pin­na­cleHold­ings is one of Africa’s largest providers of in­for­ma­tion and com­mu­ni­ca­tion tech­nol­ogy (ICT) prod­ucts and ser­vices, of­fer­ing hard­ware and soft­ware prod­ucts, im­ple­men­ta­tion so­lu­tions as well as struc­tured fi­nance so­lu­tions through its sub­sidiaries Pin­na­cle Africa, Cen­trafin, Ax­izWork­group and Datanet.

The group boasts an im­pres­sive world-class se­lec­tion of branded prod­ucts in­clud­ing Mi­crosoft, Dell, Hewlett-Packard, Sun, In­tel and IBM, as well as its own Pro­line range of au­dio-vis­ual equip­ment.

The most re­cent set of re­sults, for the six months to end De­cem­ber 2015, shows the com­pany re­turn­ing to sig­nif­i­cant growth af­ter a brief lapse in 2014 when the group was marred by al­le­ga­tions of at­tempted bribery, when pros­e­cu­tors charged one of its di­rec­tors for bribery re­lated to a R1.6bn ten­der, and a se­ries of equip­ment write-downs.

The bribery charges were with­drawn and the com­pany is show­ing the re­silience and ar­guably de­fen­sive na­ture of the tech­nol­ogy space within a dif­fi­cult eco­nomic cli­mate. Some of the salient fea­tures of the group’s afore­men­tioned in­terim re­sults are as fol­lows: Rev­enue in­creased by 19% to R4.3bn; Op­er­at­ing profit mar­gin im­proved to 5.3% (first half of 2015: 5.3%); Head­line earn­ings in­creased by 20% to R150m; Work­ing cap­i­tal im­proved by 17 days to 44 days (first half of 2015: 61 days); Debt-to-equity ra­tio down to 27% (first half of 2015: 75%); Cash flow from oper­a­tions in­creased to R183m (first half of 2015: R117m); and Share­hold­ing in Dat­a­cen­trix has been in­creased to 55%.

While hav­ing in­creased rev­enue and earn­ings sig­nif­i­cantly, the group has also man­aged to im­prove cash flow, while re­duc­ing its level of gear­ing (an area of con­tention in the past), high­light­ing the astuteness of man­age­ment. The ICT dis­tri­bu­tion as­pect of the busi­ness re­mains the most sig­nif­i­cant, ac­count­ing for well over 90% of the group’s rev­enue and more than 80% of its profit be­fore tax.

Man­age­ment has done well in di­ver­si­fy­ing the com­pany’s of­fer­ing, re­duc­ing its de­pen­dence on client com­put­ing prod­ucts, by in­creas­ing its in­vest­ments in stor­age and ser­vic­ing as well as in­fras­truc­ture, re­tail and so­lu­tions prod­ucts. This has helped trans­late into rev­enue for the divi­sion hav­ing grown 20% from R3.55bn in the first half of 2015 to R4.26bn in the first half of 2016.

In ad­di­tion to the fact that we are see­ing a re­turn to earn­ings growth, both ac­qui­si­tion-based and or­ganic, the share’s pric­ing still looks to of­fer good value. Pin­na­cle Hold­ings trades on a con­ser­va­tive nor­malised price-to-earn­ings ra­tio (P/E) of around 7.5 times, while hav­ing of­fered a his­toric div­i­dend yield (DY) of 2.75%. This is a sig­nif­i­cant dis­count in terms of its P/E and a pre­mium in terms of its div­i­dend yield rel­a­tive to sec­tor peers Adapt IT (P/E 24.5 times, DY 0.89%) and EOH Hold­ings (P/E 21.93 times, DY 1.06%).

Pin­na­cle Hold­ings has done well to turn its earn­ings mo­men­tum around, bear­ing tes­ta­ment to the group’s strong man­age­ment team. Although the com­pany is sub­ject to ex­change rate fluc­tu­a­tions, ICT has be­come a nec­es­sary, util­ity-like in­dus­try in to­day’s so­ci­ety. This al­lows for some head­way in terms of be­ing able to pass on in­fla­tion­ary costs to the consumer, and in essence pro­vides a de­fen­sive na­ture for not only Pin­na­cle, but the sec­tor as a whole.

The rest of Africa oper­a­tions con­trib­ute around 15% of group rev­enue and is record­ing strong growth of nearly 30%. It would ap­pear likely that the com­pany might be look­ing for fur­ther ac­qui­si­tions to ex­tend its African reach.

While a re­turn to growth is be­ing re­alised for Pin­na­cle Hold­ings, the mod­est pric­ing of the share sug­gests a cur­rent un­der­val­u­a­tion of the com­pany. Add to that a mar­ket-lead­ing po­si­tion in a com­pet­i­tive space, with a host of qual­ity and trusted prod­uct brands, Pin­na­cle Tech­nol­ogy Hold­ings pro­vides a higher risk spec­u­la­tive small- to midcap op­por­tu­nity for those with a longer term time hori­zon.

Pin­na­cle Hold­ings has done well to turn its earn­ings mo­men­tum around.

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