Take off your 4IR-tinted glasses

ver the past year, Alviva’s share price has about doubled. It’s been a standout player in the broader JSE recovery in 2021. But as global supply chains continue to buckle under pressure, the chip shortage threatens to derail this story.

Global auto industry bosses are warning that chip shortages could continue until 2023, but Alviva is forecasting a return to historical norms in the next 12 months. In the meantime, its revenue grew only 1% in the 2021 financial year, with the company blaming the lack of product availability for the lethargic outcome. Demand ran well ahead of supply.

Alviva’s ICT Distribution segment imports, assembles and distributes computer hardware. In the year to June 2021, the segment contributed 69% of group external revenue and 54% of group earnings before interest, tax, depreciation and amortisation (ebitda). That tells you that it runs at lower margins than the rest of the business. With ebitda margins of 3.5% and 4.6% in 2020 and 2021 respectively, there isn’t much fat there to absorb input pricing pressures and there is very little pricing power available to ICT distributors.

Despite the blame being placed on chip shortages, this division grew revenue by 4%. It may be true that the growth could have been far higher, but the key lesson here is that ICT Distribution is masking relatively disappointing results in the other divisions, at least at top-line level.

The Services and Solutions segment is full of all the right buzzwords, like cybersecurity,

Oapplication development, artificial intelligence solutions and renewable energy projects. Buzzwords are great, but revenue pays salaries.

Results in this segment were a mixed bag. The Digital Generation business saw profit decrease by 37%, while Sintrex achieved profit growth of 95%. Overall, the segment reported a 6% drop in revenue. This is a poor top-line result that was saved by a jump in ebitda margin from 3.7% to 6.3%.

Though Alviva does have some interesting businesses, you shouldn’t wear your fourth industrial revolution-tinted glasses while being fooled into thinking that the key dependency in this group isn’t a vanilla ICT distribution model.

For example, a more detailed look in the financials reveals that solar-related products contributed just 0.6% of revenue from contracts with customers, while IT products contributed 85%. The renewable energy industry contributed 1.9% of revenue, and sales to that industry grew by just 13% versus last year. Investors should always be careful of getting swept up in the excitement around new technologies.

The Synerg acquisition story brings further weirdness to this segment. The UK business was shut down after a key individual resigned from his position. You’d hope that an entire initiative wouldn’t be based on a single warm body, as the point of investing in listed companies is that key-man risk is far lower than in private companies.

The mothballing may been an opportunistic decision, though, with a net benefit to the financials. The release of a contingent consideration of R28m (which won’t be paid for a business that is now shut) flows into headline earnings, ramping them up by 23c a share. Impairments of related goodwill and remaining intangible assets are excluded from headline earnings per share (HEPS). Just when you thought HEPS is a safe way to avoid any accounting distortions, you see something like this.

The narrative in the Financial Services segment is positive. Monthly metrics are tracking in line with or better than pre-Covid levels. The book has grown by R142m and now exceeds R1bn for the first time. The management team is happy with credit losses and the levels of funding available for this business. That all sounds good, but revenue only grew 1.5% as IT products are being financed.

The relatively high gross profit margin of 17% helped gross profit increase 4% while operating expenses decreased by 2.3%. Achieving positive jaws with revenue growth of just 1% is impressive, but it isn’t sustainable in an inflationary SA environment. Staff costs ate up half of gross profit.

As sales are likely to be hamstrung by chip shortages for at least the next year, investors will take comfort from the progress made in deleveraging the balance sheet. Still, interest-bearing liabilities of R1.3bn against an asset base of R7bn isn’t low gearing.

Stripping out the contingent consideration benefit from HEPS gives an answer of 262c a share. At the time of writing, Alviva is trading on an earnings multiple of 5.5 times. With uncertain supply and working capital challenges ahead, it feels as though the easy money has already been made. ●

“The Services and Solutions segment is full of all the right buzzwords, like cybersecurity