Moving with the times, from a solid background
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.