Mov­ing with the times, from a solid back­ground

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

The for­tunes of tech­nol­ogy firms can be fickle. One minute you are cel­e­brated as the in­ven­tor of a new­fan­gled mouse­trap and the next you are seen as yes­ter­day’s news.

This is why Mustek’s longevity is some­thing of a sur­prise. The PC as­sem­bler has been around since the late 1980s but has still man­aged to stay rel­e­vant de­spite big shifts in trends and be­ing at the mercy of SA’s roller­coast­ing cur­rency.

It also op­er­ates at the more price-con­scious end of the mar­ket — its com­po­nents are ef­fec­tively com­modi­tised — so it can’t charge as much as the more glam­orous brands like Ap­ple.

In spite of th­ese ob­sta­cles, it has still man­aged to find a rea­son­ably sized mar­ket. Rev­enue was up 10.3% to R4.4bn for the half year to end December 2015 and profit be­fore tax was ba­si­cally un­changed at R80.6m.

The num­bers are flat but that is un­der­stand­able be­cause Mustek is a com­pany in tran­si­tion. It may have built its rep­u­ta­tion on desk­top PCs but even it can see the writ­ing is on the wall and it is mov­ing into more prof­itable mar­kets.

Where be­fore it ba­si­cally sold two types of prod­ucts, it is now mov­ing into sell­ing a much broader range of goods and also ex­pand­ing into IT ser­vices.

Lower broad­band prices and the in­creas­ing ubiq­uity of wire­less ac­cess will drive the up­take of wear­able tech­nolo­gies (cloth­ing and ac­ces­sories in­cor­po­rat­ing ad­vanced tech­nol­ogy) and In­ter­net of Things de­vices (ev­ery­day objects that can be con­nected to a net­work) and it must be pre­pared for this.

Mustek is also mov­ing up the sup­ply chain by tak­ing a 26% hold­ing in Sizwe Africa IT Group and a 36% stake in Khauleza IT Solutions. It reasons that as de­mand for con­verged tech­nol­ogy such as on­line data backup grows, it will be able to pro­vide in­te­grated hard­ware, net­works and soft­ware solutions.

The group also sees op­por­tu­ni­ties in the move by sev­eral provin­cial ed­u­ca­tion de­part­ments to­wards e-class­rooms. “Mustek has over the past few years been in­vest­ing sub­stan­tially in this par­tic­u­lar mar­ket ver­ti­cal and we be­lieve that we are well po­si­tioned to grow our mar­ket share over the next three to five years.”

The group’s rein­ven­tion is one reason for in­vestors to like it — but there is also an­other.

Mustek bought back 3.62m shares for just over R30m in the six months to December 17 2015. It also bought back 12.5m shares for about R95m from the end of Fe­bru­ary 2014 to May 27 2015.

With so many shares taken out of the mar­ket, it is not un­think­able that a buy­out could be on the cards.

Founder and CEO David Kan tried to delist it in 2011. But back then the new Com­pa­nies Act put a span­ner in the works as it was un­clear what the im­pli­ca­tions would be for the buy­out.

It also helps that the group’s shares are tightly held, so it would only have to per­suade a hand­ful of in­vestors to give up their stake.

Buy­ing it out now also makes sense price-wise. It is cur­rently trad­ing at R5.75/share — not too far from where it was when the buy­out bid was made — and the PE is only 4.27.

But even if a buy­out doesn’t hap­pen, it is still at­trac­tive at its cur­rent val­u­a­tion. It has a de­cent div­i­dend yield of 6.51% and a re­turn on eq­uity of 10.82%.

Prob­a­bly the most com­pelling reason to take Mustek se­ri­ously is that tech­nol­ogy is only go­ing to grow in im­por­tance in the lives of or­di­nary South Africans.

Given Mustek’s scale, its es­tab­lished distri­bu­tion net­work and re­la­tion­ships with tech brands such as Len­ovo and Acer, it is well placed to tap into this de­mand.

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