You know the story: the JSE is a lost cause for investors, and all great wealth is made in foreign markets. Experienced investors know that’s just not true, at least not all the time.
The JSE All Share has been stable since the start of the year, saved by our mining and resources sector, which gained more than 11.5%. During the same period, the Nasdaq-100 lost more than 15% of its value.
Of course, if you change the period, the answer may also change. Backtrack far enough and you’ll see that there’s no clear cut answer here, hence why diversification is recommended in textbooks.
Those looking for international diversification can also find it here on the JSE. South Africans have demonstrated their ability to bring business models to the global stage. Our efforts to conquer the world have generally been a failure in the retail sector, but fortunately the technology sector has produced winners.
One such company is Bytes Technology Group, which was unbundled from Altron in December 2020. Share prices have diverged sharply since then. If you bought at the closing price on the day of unbundling, you would be up over 40% in Bytes and down over 25% in Altron.
Bytes is a leading provider of software, security and cloud services in the UK. The company distinguishes between gross revenue invoiced (invoicing to customers) and revenue (products and services delivered under contracts).
On longer contracts, revenues will lag invoices because the invoice may be sent in advance. This can lead to significant differences in growth rates between the two measures.
Profit margins should be assessed as a percentage of revenue, not gross billed revenue. The most recently reported gross margin was over 21%, and adjusted operating income (which removes non-recurring items) reflects a margin of just under 10%.
Bytes operates with higher margins than technology companies operating in the field of ICT distribution, such as Alviva, with a gross margin of 15.2% and an operating margin of 5.4%.
Alviva’s share price performance has blown Bytes since December 2020, more than doubling in that time. Having a different margin structure doesn’t necessarily make a business a better or worse investment – the analysis needs to be much broader than that!
In its latest market update, Bytes provided guidance for the year ending February 2022. Results will be released on May 24, but until then, we at least know that gross billed revenue increased by 26%. and the gross margin increased. by 20%.
Adjusted operating income increased by 23%. It is important to note that the cash conversion of profits was very strong (over 100%), meaning that some working capital savings were also realized.
Bytes’ stock price rebounded sharply by 16.6% on the day of the announcement. Investors will be eager to get all the details in May.
Datatec is another JSE-listed technology company with a global footprint. The company is present in more than 50 countries and has more than 10,000 employees, with most of the money being made in Europe. Like Bytes, Datatec updated the market for the year ending February 2022 ahead of the May earnings release.
Datatec has significant hardware operations, with more than 60% of group revenue contributed by Westcon International. With approximately 18 logistics and storage sites, it is a game of volumes and working capital. Westcon’s revenues have increased by 12% over the last period.
The Logicalis division operates in the areas of data center, cloud services, security and network infrastructure and offers consulting services. It contributes more than a third of revenue but has higher margins, so it is Datatec’s most important source of profit. Logicalis also posted solid revenue results, up 14%.
In Westcon and Logicalis, revenues would have been higher without semiconductor shortages. The backlog increased compared to the end of the previous period. The company expects shortages and supply chain issues to continue for the foreseeable future.
Analysis Mason is a small and growing consulting division for the telecommunications, media and technology industry. It contributes less than 2% of the group’s turnover but has increased over this period by 23%.
Datatec’s board of directors believes that the market has not given enough credit to the underlying transactions.
Towards the end of 2021, international bankers Lazard & Co were appointed to undertake a strategic review of the business. When companies do this, they consider options such as unbundling and new capital partners. With appointed international advisors, the market infers an intent for any global transaction.
Datatec has delivered strong returns to shareholders over the past year, with a 24% increase in share price and a huge special dividend of R5.12 per share in November 2021. Total shareholder return over the past year exceeds 40%.
This article reflects the views of The Finance Ghost and should not be construed as financial advice. The Finance Ghost holds a position in Bytes Technology Group.
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