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Investors take a shine to local tech sector

JSE’s software & computer services index outgrew the Top 40 index over the past year.
Altron CEO Mteto Nyati has a lot to smile about. Image Moneyweb

The local listed technology sector has shown a marked recovery over the last year or so.

The JSE’s software & computer services index – which excludes Naspers and Prosus and has largely tracked below the Top 40 index since early December 2018 – moved ahead of the Top 40 in November 2020.

The software & computer services index has risen 50% to 991.62 since the beginning of last year. In contrast, the Top 40 index has risen just over 19% to 61458.47 for the same period.

This is a bit of a surprise, given that over the last few years the listed software and computer services sector had fallen on hard times; many of the industry heavyweights had been bought out and delisted – e.g. Telkom bought BCX in 2015 – or had to deal with governance issue like what happened at EOH.

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A difficult past

EOH once traded at close to R170/share in October 2016, but had collapsed to R2.75/share by early March 2020.

Allied Electronics Corporation (Altron) also was in big trouble. It saw revenue fall 8% to R10.5 billion and incurred a R447 million post-tax loss in its half-year results to end-August 2015.

For its part, the performance of EOH, which is releasing results later this week, was also affected by allegations of numerous frauds under its previous management team. The scale of the problems at EOH could be seen in its loss increasing from R1.98 billion to R4.87 billion at the end of July 2019, year on year.

A new dawn

For a while, it looked like the sector’s best days were behind it, especially after the delisting of Dimension Data, when it was bought out by Japan’s NTT for R24.4 billion in 2020.

But things have changed.

Under new leadership, EOH and Altron have started to turn themselves around. EOH, under CEO Stephen van Coller still expects to incur a loss for the half-year to end January, but its headline loss per share is now expected to be between 96c and 118c, as opposed to the corresponding period’s 687c.

Under CEO Mteto Nyati, who joined in 2017, Altron is also on the road to recovery. Revenue was up 6% to R16.7 billion and net profit had risen 4% to R672 million for the year to end February 2020.

Though like the rest of the market the sector took a knock as a result of the Covid Crisis, it starting to track upwards as investors are coming back into the market, says Irnest Kaplan, MD of Kaplan Equity Analysts.

“The way the investors work, is they go for the bigger, more liquid companies in times of trouble. But when their valuations turn, they go to the smaller caps,” Kaplan says.

As many of the listed tech companies are considered small caps, investors are looking at them.

A rapid rise

Kaplan points to how EOH was trading at about R3/share a year ago but is now trading at well over R8/share. Adapt IT, which is the target of two takeover bids, which was trading at R1.20/share in October, more than doubled to R6.40/share.

“If you bought these small caps in April last year you could have doubled your money.”

The spinning off of Bytes Technology Group Plc out of Alton in December 2020 also boosted the sector, as gave local investors direct access to a company that earned the bulk of its income in the UK.

Listen: Cannon Asset Managers’ Adrian Saville on Altron’s turnaround and the Bytes unbundling (December 2020)

Covid boost

The sector has also been helped by the trend to work from home. With companies placing a premium on securing their IT network and upgrading infrastructure, the Covid crisis has made spending on technology a priority.

This meant IT budgets that were usually argued about were now being prioritised and increased.

This does not mean locally-listed technology companies will gain from this trend, as they are competing with global giants that can easily crowd them out of domestic markets when it comes to cloud-based solutions and video conferencing.

We are seeing companies adopt the “best of breed” cloud solutions than go with what local companies are offering, says Kaplan, but there is still room for local firms.

He says there are niches for South African companies, such as Capital Appreciation, which has a subsidiary that specialises in migrating cloud databases.

Though the local tech sector has had a good run, Kaplan still thinks there is more upside when it comes to their valuations – just not at the scale of the rises seen over the past year.

“Most of these companies are not excessively valued at all.”

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