SA'S TOP TECH PLAYERS
Finweek English|23 April 2021
As yet, our smaller listed tech companies cannot be mentioned in the same breath as their large foreign counterparts, but undoubtedly, they have growth and investment potential.
Zerelda Esterhuizen

You must have been living in a cave if you haven’t heard of today’s tech giants and their triumphal march on share markets. Apple, Amazon and Co have pushed the Nasdaq, which is heavily weighted in favour of tech shares, to new highs, and while businesses are battling worldwide to shake off the burden of Covid-19, it appears as if these large tech companies are immune to the impact.

True, we have no companies on the FAANG scale, such as Facebook, Apple, Amazon, Netflix or Alphabet (Google), but we do have many ingenious technology entrepreneurs, who are in the right sector to appeal to private equity companies looking for acquisitions, says Andrew Bahlmann, MD of Deal Leaders Africa, a boutique advisory firm. “We’ve seen a definite appetite for lending to or investing in technology companies. The companies that are attracting acquirers’ attention are those that have rand-denominated overheads, while they generate dollar revenue. They deliver those services that work easily across borders,” says Bahlmann.

He believes what does count against South African companies is their size. “Most of the international acquirers are on the lookout for opportunities of R1bn or more. This is a problem for SA companies serving the local market. At the moment, there is more interest in this sector from the venture capital market than from private equity acquirers.”

There are only a handful of SA companies that are listed in the software and IT-sector on the JSE: Adapt IT, Altron, AYO, Bytes, Capital Appreciation, Cartrack, Cognition, Datatec, EOH, Etion, ISA, Jasco, Mixtel, Naspers*, PBT Group, Prosus, Sebata, SilverBridge and TCS.

Although they're not in abundance, they do attract the attention of investors. Adapt IT is constantly in the news regarding the Huge Group’s offer, which offered shareholders R5.52 per share and now the Canadian Volaris Group made an all-cash offer of R6.50 per share.

Another tech company that is constantly in the news is Altron. Bytes UK unbundled from Altron in December 2020 and currently trades on the JSE and the London Stock Exchange. Altron is also planning to sell Altron Document Solutions, Arrow and People Solutions.

Rella Suskin, head of research at Benguela Global Fund Managers, reckons the SA technology sector has had a relatively good 2020. “However, share prices in the sector have largely been driven by the strong beta rally across the SA market as global uncertainties waned and risk-tolerant investors looked for opportunities. The FTSE/JSE’s All Share Index increased by approximately 60% last year, and the FTSE/ JSE’s Small Cap Index, under which the majority of SA’s tech sector falls, is up a stronger 70%. In a risk-on market environment, it is generally the most geared companies that see the largest rise. We also see this in SA with Adapt IT, which, for example, increased by 150%, while Datatec (more stable and with less debt) rose by single digits.”

Suskin believes that the Covid-19 pandemic has certainly created more opportunities in the sector, with among others, cloud storage. She believes even with the progress made with vaccines, working conditions are likely to remain flexible for a long time, thus supporting the continued demand for ongoing IT support.

But what if I want to invest?

Peet Serfontein, an independent market analyst, says it’s advisable to compare any sector with the general market. It gives one a good indication of whether the sector as a whole is under- or overvalued (graph 1).

“If one looks at the relative graph of the FTSE/JSE’s Technology Index, it is evident that the sector is underperforming compared to the general market, the All Share Index. Therefore, on a basis where one compares apples with apples, it does look as if there’s value to be had. Since 2018, the index has increased in a very stable bull trend, so it’s not going to give you sleepless nights completely.”

Suskin on the other hand, believes that technology stocks make little sense if one looks at the price to tangible book value.

“Technology businesses are usually asset light, most of their value is made up of intellectual property and relationships. These undertakings also grow through acquisitions, so they have a fair amount of goodwill on their balance sheets. The tangible book value of Adapt IT and EOH is, for example negative, given their historical growth through acquisitions. This makes it difficult to evaluate them on this basis,” says Suskin.

She then states that most of these companies’ earnings profiles are also volatile, owing to their high fixed-cost bases, the impact of acquisitions and the constant restructuring that led to onceoff charges. That is why it’s difficult to determine a price-to-earnings multiple.

“One should rather look at an Enterprise Value-to-EBITDA-multiple as these companies’ EBITDA is more stable,” she says. Suskin mentions that the value of a business ultimately depends on its ability to generate cash and therefore they prefer the price-to-free cash flow metric.

A FEW OF SA’S LISTED PLAYERS

Adapt IT

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM FINWEEK ENGLISHView All

What is a store of value?

Gold, cryptocurrencies and cash have all been argumented for as protection against inflation and market crashes. Simon Brown busts this myth.

3 mins read
Finweek English
11 June 2021

Simon's stock tips

Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

6 mins read
Finweek English
11 June 2021

STOCKS PROTECTING THE PLANET AND DIGITAL LIFESTYLES

Is it possible to invest in companies that aim to secure humans’ existence on an ever-dwindling planet and those that protect our increasingly digital lifestyles? finweek looks at these issues and analyses four offshore companies that fit these themes.

10+ mins read
Finweek English
11 June 2021

The morass that is coal supply to Eskom

The Seriti contract with the power generator shows up other issues in the supply chain to keep SA’s lights on.

3 mins read
Finweek English
11 June 2021

Does convenience cause risk?

Thanks to technology, it has become far easier to make payments, but how safe are contactless payments and what are South Africans’ options?

7 mins read
Finweek English
11 June 2021

Swanky, safe, and more affordable

The Volvo XC40 T3 with its turbocharged three-cylinder engine brings a less pricey entry point to the XC40 range.

6 mins read
Finweek English
11 June 2021

Do central banks still care about inflation?

Structural consumer price increases may be abating. We’ll soon see whether monetary authorities will adapt their mandates.

3 mins read
Finweek English
11 June 2021

Are you on the right track with shares?

It is a good time to look at your portfolio to determine whether there are still good prospects, advises Schalk Louw.

3 mins read
Finweek English
11 June 2021

The Outlook For Inflation

What is driving higher local consumer prices?

3 mins read
Finweek English
11 June 2021

Flush-Outs Among Cryptos Are Healthy

Valuing cryptocurrencies and determining their correlation with traditional asset classes are becoming easier.

4 mins read
Finweek English
11 June 2021
RELATED STORIES

Making it in Mobile: 19 Years of Resilience in a Competitive Industry

Wireless industry solution provider Live Wireless shows what it takes to make it in a competitive industry: nimbleness, patience, and balance

2 mins read
Inc.
May - June 2021

David Neeleman Has No Fear Of Flying

The founder of JetBlue has overcome some crazy setbacks on his way to becoming the most successful serial airline entrepreneur in history. So why would he let a global pandemic get in the way of launching his latest carrier?

10+ mins read
Inc.
May - June 2021

TIME TRAVEL, CATS, AND AN OLD MANUSCRIPT

Have you ever wished that you could go back in time and change something in your past or visit the future and find out what it has in store for you? Have you questioned what would happen if time travel was available to everyone? Could 9/11 have been prevented? Could the spread of COVID-19 have been eradicated before it ended so many lives?

2 mins read
Mystery Scene
Summer #168 2021

Stop Hustling Black Death

Samaria Rice is the mother of Tamir, not a “mother of the movement.”

10+ mins read
New York magazine
May 24 - June 06, 2021

Doremus has fun exciting little minds

Sedgwick school art teacher wins county Teacher of the Year award

3 mins read
The Weekly Packet
May 20, 2021

The Conners

SEASON FINALE Wednesday, May 19, 9/8c, ABC

2 mins read
TV Guide Magazine
May 10, 2021

ESCAPE ARTIST

IT’S RARE TO FIND AN OCEAN-GOING YACHT THAT CAN DRY OUT ON THE BEACH, BUT DISCOVERY’S REVISED 48S MAY HAVE BROUGHT THE SWING-KEEL BACK INTO FASHION

10 mins read
Yachting World
June 2021

THE MAGIC OF MUSHROOMS

If you add mushrooms to your stir-fry, you’re just toeing the edge of the fungi forest. Follow us down this path of both culinary and magical discovery, beginning with an iconic moment in women’s sports.

7 mins read
Oxygen
Spring 2021

Remember When: Fifteen years ago in Rome, Hingis rekindles her magic

The Swiss kept missing until a throwback performance in the Eternal City

1 min read
Tennis
May - June 2021

CQC SAMBO

Why You Should “Fill Your Cup” With Wisdom From This Russian Close-Quarters-Combat System!

10 mins read
Black Belt
June/July 2021