In a year that saw the rebranded Morvest Business Group (“Morvest”) coming of age, the group delivered a commendable financial and strategic performance highlighting its resilience in a tough economic cycle.
For the year to May 2011 revenue, earnings and margins all grew by double digits on the previous year. In addition, the group concluded a strategic acquisition to boost its mobility offering, BEE equity ownership was entrenched long-term, and the board and governance in general were strengthened to bolster sustainability. Morvest further marked its maturity with a post year-end transition to the JSE Main Board from AltX and the completion of an internal restructure.
Revenue grew 16% to R807.3 million, 90% of which was generated in South Africa, with business support services contributing the bulk and ICT solutions the balance.
Earnings were up 35.5% to R104.7 million. Margins increased to 13% despite intensifying pricing pressures from the customer base. CEO Mohammad Varachia attributes this accomplishment to cost control benefits arising from the restructure, which streamlined and simplified operations, as well as the India-based joint venture, which offered good cost savings on infrastructure and skills. He says: “The Indian joint venture formed in 2010 has lower overheads than in South Africa, enabling us to compete with international pricing pressure, especially from Eastern competitors, and scoop higher margin work in Africa.”
Headline earnings of R32.3 million were up 18%, translating into six cents a share at 20% higher than the previous year. Morvest remains cash-flush, with an R84.5 million cash balance despite having paid R15 million in cash for the R and S acquisition. Varachia says in light of the group's strong performance and financial position, in contrast to macroeconomic trends, the board decided the time was appropriate to declare a maiden dividend of one cent a share.
At the end of the year (effective 25 May 2011) Morvest bought a 50.1% stake in R and S Consulting for R50.1 million. R and S is an established leader in mobile data applications and strategy. Varachia says their services are unique in Africa as they can deliver and support mobile data products and services as well as provide GSM convergence for mobile operators, while also introducing strong management skills to the group. He adds that this will help entrench Morvest's footprint in the arena of mobile data applications, which has long been highlighted as a growth area for the group. The acquisition further bolstered Morvest's skills pool.
The group has had an established presence in Nigeria for the past six years, providing SIM and scratch cards to major cellphone operators in the country. “Nigeria was a key growth focus for the group, and notable milestones were achieved during the year,” he says, referring to take-up by the energy sector of Intergraph's engineering enterprise software. The group then leveraged this opportunity to launch its full offering to Nigerian companies in a formal event in June 2011.
Morvest made sure to secure existing contracts and position strongly to secure new ones when it upped black shareholding to over 50% by locking in its senior executives and management for five to seven years. Varachia points out: “To conclude the transaction we - the senior executives - offered our existing Morvest equity as collateral and assumed further personal sureties to secure the funding for our buy-in. So in the short-term, we sacrifice any dividend benefit to our loan repayments. Our interests are therefore aligned with other shareholders in long-term wealth creation and sustainability, and confirm our long-term sustainable view of the group.”
The resultant Level 2 BEE-rating distinguishes the group in a highly competitive industry and contributes to PPPFA-compliance, which is essential for government work.
Varachia is cautious when looking ahead to the next 12 to 18 months. Growth is certainly on the agenda, and the group is in the process of acquiring land to build a new head office housing all of its operations (currently spread out over Sunninghill and Centurion). Varachia is confident this will further boost cost savings down the line by enabling the group to capitalise on economies of scale and share efficiencies. “Growth prospects locally are coloured by a challenging outlook for the next year to two,” he says. “As a result, a key focus for the group is expansion in Africa and international markets. Emerging markets particularly offer promising opportunities in specific sectors in which we have established capability.”
He concludes: “Our sustainable five-year pipeline over R2 billion, of which more than 50% is annuity income, should be maintained to provide a cushion from macroeconomic shocks.” He explains that while the project landscape will change year-on-year, new business secured to offset the conclusion of existing contracts is expected to top up the pipeline to the requisite level.
Morvest's share closed yesterday at R0.23.
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