In-Depth Analysis
Irnest Kaplan of Kaplan Equity Analysts says SA won't see a return to the boom times just yet.
Although the economy is showing signs of improving, not all parts of it will benefit equally.
All indications are that South Africa’s economy is improving, with consumer spend starting to rise again. Yet, as the recent slew of results shows, not all of this optimism is filtering through to ICT companies.
Analysts expect the economy to continue recovering, and as consumer spending rises, the ICT sector will feel the benefit. However, the recent gains are not a one-size-fits-all win, as some parts of the economy will lag.
Towards the end of May, Statistics SA released pleasing gross domestic product figures, showing the economy grew 4.6 percent in the first three months of 2010 when compared with the last quarter of 2009.
This is the highest growth figure SA has seen since the economy went into a recession, when it contracted 7.4 percent a year ago. The first quarter of recovery was the third quarter of last year, when growth of 0.9 percent was recorded.
Statistics SA attributed the increase in economic activity to gains in manufacturing, mining and quarrying, the finance, real estate and business services industry, the wholesale, retail, motor trade and accommodation sectors and general government spending.
Irnest Kaplan, MD of Kaplan Equity Analysts, says the figures indicate a recovery is underway. However, he cautions that SA will not see a return to the heady boom times of 2007 for at least another year.
The ICT sector is expected to see a muted recovery overall, says Kaplan. The government sector has continued to spend during the recession, and this has buoyed some companies. However, several projects were delayed, and recovery in spending in the private sector has been very slow, he notes.
Kaplan adds that the rand, which has been strong in comparison to currencies such as the dollar and euro, will aid demand as imported technology will be cheaper. However, because what is coming into SA costs less, this will weigh on revenues as companies will see lower prices.
A concern for local IT companies is the fact that the currency continues to be volatile and is not range-bound, Kaplan explains. This makes pricing imports tricky, as the currency changes so rapidly. “You print marketing material and a week later, it’s out of date.”
Consumer power
Datatec expects the global economic recovery to start filtering through in its results soon. While the company reported less revenue this year than last year, this was all due to a difficult first half. CFO Ivan Dittrich says the organisation started seeing a pick-up towards the end of the first half, and all its business units are now growing.
In its full year results for the year to February, the company reported revenue of $3.74 billion, down from last year’s $4.19 billion and at the bottom end of its targeted $3.7 billion to $4 billion in revenue.
However, Datatec has managed its costs tightly and will start to benefit as increasing sales flow through to the bottom line in the new year.
Vodacom is also starting to feel increasing consumer spend as people again feel comfortable making calls out of bundle, while the average price of cellphones is on the increase.
CEO Pieter Uys says March and April saw a positive move back towards more expensive cellphones being bought by pre-paid customers, and there was a swing back towards out-of-bundle calls, an area that had suffered when people were keeping a close eye on costs.
Vodacom’s results for the year to 31 March reveal 5.6 percent growth in group revenue to R58.5 billion, and improved operating margins. Headline earnings per share came in at 510c – an improvement of 22.3 percent from last year.
Chris Gilmour, Absa Investments analyst, says consumer spending has finally started to pick up, with retail sales showing their first increase in several months. Statistics SA says retail sales grew 5.7 percent year-on-year in March.
Gilmour explains that an uptick in consumer spending will filter through to increased spending in the ICT sector as the economy is two-thirds driven by the consumer. He explains that people will replace PCs, buy new software and generally spend more in the sector.
However, while the recovery is “not an imaginary thing”, Gilmour says it will be patchy and it will take a while before the entire economy is on an even growth path. “It’s not going to be across the board and will take time to filter through,” he comments.
Slower than others
Altron reported a mixed bag of results when it released its latest figures for the year to February. The listed company said the much hoped for economic recovery did not filter through to its results, but there are signs that the economy is starting to grow.
Revenue was ten percent down to R22.3 billion, while net profit moved down from R1.15 billion to R841 million. Headline earnings per share dropped 28 percent to 198c. Powertech and Bytes Technology bore the brunt of the recession. Large projects were kept on hold, denting both Powertech and Bytes’ results.
However, CEO Robert Venter pointed out that the group’s diverse range of offerings was a blessing, because its Altech unit was the company’s saviour thanks to its strong base of annuity revenue.
Warwick Lucas, an analyst with Imara SP Reid, says the economic recovery appears to be real, but he points to several worrying clouds on the horizon, such as concerns over Greece’s debt, which could see any economic gains in Europe being reversed.
South Africa is more sheltered than many of the economies that fell out of bed towards the end of 2008, however, and much of the ICT spending that was put on hold during the global recession is now starting to filter through, says Lucas.
Kaplan points to concerns that are closer to home. One is the exuberance of the Soccer World Cup, which is expected to wear off after the last match party. Another is a reluctance seen in developed markets to invest in emerging markets.
These issues are holding back large ICT projects and refreshments of aged computing equipment, says Kaplan. “I think companies are not going to make massive decisions now.” As a result, he notes, it will be at least a year or two before SA again enjoys spending levels like those seen in 2007.
Perhaps a more gentle recovery is just what SA needs, as, if the economy climbs too quickly, it could fall back down to earth dramatically, resulting in more casualties like Faritec.
