Most information technology shares lag market as takeovers lift some
Investors sell out of most domestic stocks due to weaker economic growth and prevailing uncertainty
The share price performances of some listed information technology companies have been poor, lagging the JSE all-share index growth of 5% so far this year
Investors have been selling out of most domestic stocks due to weaker economic growth and prevailing uncertainty as well as much weaker business confidence, says Mergence Investment Managers portfolio manager Peter Takaendesa.
But the share prices of entities such as Datatec and Alviva, formerly known as Pinnacle Holdings, have risen along with their growth prospects due to, among other things, disposals and acquisitions of assets.
Datatec’s share price has risen 17% since January, with most gains posted in June after the sale of Westcon to US-based Synnex for about $800m.
Alviva’s stock has risen 6%.
Cratos Capital portfolio manager Ron Klipin says Alviva has been one of the better investments on a single-digit price: earnings ratio, with solid prospects. The takeover of Datacentrix has enabled it to move away from low-margin hardware products into higher-margin services and software operations.
The worst performer so far is Adapt IT, which has shed 37%, followed by EOH and Mustek at 29% and 19%, respectively.
Adapt IT has grown steadily over the years, lifted organically and by acquisition. But its latest interim financial performance has raised concern about its prospects. It is trading at high multiples, but managed just low single-digit organic growth.
"Investors are wondering how the company can trade at a high rating, while its organic growth is only 4%. What happens if it does not make acquisitions?" asks Kaplan Equity Analysts MD Irnest Kaplan.
Investors are now waiting for the group’s 2017 full-year financial performance.
"Adapt IT is not a bad company. Investors are just concerned about its future," he says.
Klipin says Adapt IT’s share price peak in 2017 was R16 when it was highly rated on a p:e of about 30, with growth way below this metric.
The current share price of R9.90 is "perhaps a more realistic pricing", he says and its global expansion prospects might help growth in future.
Mustek’s share price decline could also be attributed to its slow earnings growth and the general economic condition.
EOH, once the darling of the market with a superb growth track record, dropped from a high of R163 in January to close at R115.80 on Tuesday.
Before Tuesday’s 8% drop, EOH suffered a similar fall in the share price in May, when it announced that founder Asher Bohbot was stepping down.
Tuesday’s drop came after the company disputed media reports regarding its contracts with the South African Social Security Agency. The company denied what it called "false and unfounded insinuations" and said it was "considering all options available for recourse and corrective action".
Takaendesa is more "constructive" on EOH’s business model, scale of operations, strong balance sheet and depth of its leadership team.
He says the group is in a stronger position to continue to gain market share and grow ahead of the industry over the medium term.
"Based on publicly available information and our assessment of the strength of the business model, we believe the EOH share price weakness presents a good buying opportunity for investors with time in the market," he says.
EOH CEO Zunaid Mayet says, while the company has no control of the share price, its primary focus is for the business to perform optimally and protect the interests of investors.
The lower share prices present a buying opportunity for investors. Moreover, analysts are upbeat about the recovery of the stocks provided the general economic climate and confidence levels improve.
Global research firm Gartner expects information technology spending in SA to total R266bn in 2017, up 2.4% from 2016.
Software is predicted to be the best-performing segment, with a 13.2% increase.
Gartner vice-president John-David Lovelock says South African organisations continue to prioritise investments in software as a way to catch up with the rest of the world.