ICT stocks surge R79bn

Investors holding IT stocks can expect to continue to see growth as the sector is not yet mature.

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Investors who bought shares in listed IT companies a year ago would have seen their assets gain in value, with most of the improvement coming since the beginning of the year, as the shares outperformed the all-share index.

However, those who bought telecommunication shares would have experienced significant volatility, as the stocks have gained a total of R76.2 billion since last May, but lost R31.8 billion in the first five months of 2013 as MTN, Vodacom and Telkom all lost ground.

ITWeb obtained historical and current market capitalisations from Absa Investments for 21 ICT and telecoms stocks, and calculated movements from a year ago, to Friday, and the year-to-date changes.

In total, the ICT stocks have gained R78.9 billion since last May, a figure that would have been higher had they not slid R29 billion since the start of the year, largely due to an 8% decline in the value of Vodacom, which lost R23 billion in the first five months of the year.

Overall, ICT stocks have gained 17.57% year-on-year, and 5.24% since 2 January, while the JSE's all-share index grew 19.5% year-on-year, before slowing and only improving 0.5% since the start of the year.

Since 2 January, the value of ICT stocks has improved more than the top 40 shares, companies in the food and drug retailer category, and mining shares. IT stocks have improved 10.17% year-on-year, and 9.41% so far this year.

However, telecommunications stocks, which have gained 18.04% since last year, have slid 6% since the start of 2013.

EOH, Pinnacle and Datatec have all grown their market caps in the past year. Datatec is now the biggest listed IT company since Dimension Data left the bourse a few years ago, and is now worth R10.1 billion after gaining R1.7 billion in the past 12 months.

Across the 18 stocks included in the calculations, IT shares on balance gained a total of R2.77 billion, the bulk of which has come during 2013. Absa Investments analyst Chris Gilmour says IT stocks are generally cheap and have scope for further growth, as neither the sector nor the asset class is near maturity.

Gilmour adds that IT is mission-critical and many companies need to upgrade on a constant basis, and the bulk of the stocks in the sector would have made money. He notes there should be more growth to come from the sector. "The intrinsics are correct."

The general market is currently a bit lower than the euphoric beginning to the year, says Gilmour. Although the general bourse is languishing a bit, it is still at high levels compared to historical figures, he adds.

Gilmour notes the top end of the market - the companies with the biggest market capitalisations - have a lot of overseas exposure in their sales and ownership. That and a weaker rand have pushed the bourse higher.

EOH, which is rated as slightly more expensive than the market, with a price-to-earnings ratio of 18 compared to the bourse at around 17, consistently grows its top and bottom lines. Gilmour says, while some question whether the company can keep up the same rate of growth, he sees it as cheap.

The company's stock has gained R2.35 billion in the past year and its market capitalisation is now R5.68 billion.

Pinnacle also stands out as a growth stock, says Gilmour, as it has gained from R2.6 billion to R3.97 billion in the past year. He says the company is well managed and would be in Absa's portfolio if it kept small caps on behalf of clients.

However, there were several stocks that had tough years, which hampered their share price.

The biggest move downwards in IT stocks came from Altech, which has lost R557.5 million since the start of the year, and more than R2 billion in market capitalisation from a year ago. Altech recently reported a large loss as its African operations, which it has disposed of, bit hard into its financials.

Parent company Altron has gained R37 million in market capitalisation so far this year, but it also saw its shares come under pressure and, year-on-year, its stock has lost R381.5 million. The group recently reported its year-end results and said Altech's African losses had also weighed on its numbers.

Gijima, which has also been through tough times, has seen its market capitalisation lose R377 million from last May, with R193.7 million of this slide coming in the first five months of 2013. The group made an operating loss from continuing operations of R123 million in the six months to December, partially due to pressure on its top line, as it lost several key contracts.

The other major loser on the bourse was DigiCore, which has seen its market capitalisation slide R237.8 million since last May, with R101.5 million of this being wiped off its share price in the first five months of the year.

However, telecommunications stocks - MTN, Vodacom and Telkom - have not fared as well this year, sliding a total of R31.8 billion, almost half the R76.2 billion gain since last May.

Telkom's market capitalisation has shrunk R2 billion in the first five months of this year alone, and since last May, has declined by R5.9 billion. The company's share price has been hit by its results to March 2012; trading updates; the resignation of its previous CEO, Nombulelo "Pinky" Moholi; and a R449 million Competition Tribunal fine, which it recently agreed to pay, after initially deciding to appeal.

Shares in Telkom started losing more ground last June, after government binned a proposed offer from Korea-based KT Corporation that would have seen Telkom issue 20% more shares in return for a R3.3 billion injection.

MTN has lost R6.48 billion since the start of last year, but is up R75.4 billion from a year ago. The gain in its share price is despite the cloud of threatened legal action by Turkcell, over a licence in Iran, hanging over its head for some time. The lawsuit has since been withdrawn.

Gilmour says MTN had a torrid year last year, with issues such as the court case, unrest in Syria and network problems in Nigeria, where it had to invest to improve quality after being warned by the regulator.

The biggest surprise is the shift in the value of Vodacom stocks, which have lost R23 billion in the first five months of the year, although the stock is still up R6.7 billion from last May. Vodacom has not experienced adverse issues, but is seeing its higher margin voice revenue come under pressure, in line with global trends.

Gilmour says this equates to an 8% change, which is not drastic, and the stock is still cheap. Vodacom is currently trading at a discount to the market, and its price-to-earnings ratio has come off since January, when it was around a ratio of 16, he says.

Both MTN and Vodacom are seen as dividend players, handing out a massive dividend despite ongoing investment in networks and infrastructure, says Gilmour. He adds that MTN could be acquisitive after a long hiatus, but any deals done in the sector are likely to be large, making the shares volatile.

In addition, regular reporting of numbers also moves the market quickly, as investors get a good feel for where the companies are going, while IT stocks report only once every six months, says Gilmour

Stocks included: