Smaller stocks still offer value

Although larger listed ICT companies have seen their shares gain ground since the global crash a year ago, smaller companies are still trading at cheaper levels. This could make good buys for the speculative investor, say analysts.

Just over a year ago, the US market spun out of control, sending ripples through the rest of the world. SA entered a recession this year, and ICT companies came under pressure as spending eased off with companies delaying investments.

While there are signs of recovery in the US, SA is only expected to follow with a real recovery half a year later. Local shares in the larger companies have shown some stabilisation, but stocks of smaller groups are still under pressure, and are seen to be trading at a discount by analysts.

Irnest Kaplan, MD of Kaplan Equity Analysts, says the market is not yet at a place where investors are moving into the smaller companies on the JSE. He says these shares are expected to be undervalued for the next while, and there is longer-term value to be gained if investors study track records, as these companies could be a good pick over the longer term.

Chris Gilmour, an analyst with Absa Investments, says there are stocks on the JSE that are reasonably valued after the economic crisis hit markets worldwide.

Datacentrix's share is trading below value: it closed on Friday at R4.40, but a year ago it ended the day at R3. At a price:earnings ratio of 7.15, it is a cheaper buy than some of its larger peers.

Warwick Lucas, Imara SP Reid analyst, says Datacentrix is reasonably valued and a good buy at its current share price.

In the six months to August, Datacentrix saw a decline in revenue to R687 million from R699 million. Net profit was all but flat at R52.5 million, compared to last year's R52.3 million.

Gilmour says the company has sustainability and is well-placed if government picks up spending in the ICT sector.

Another Lucas pick is EOH, which he says is “deeply discounted”. In mid-morning trade today, the stock was unchanged at R8.85 a share. It closed Friday at that price.

Last month, the company reported record revenue of R1.255 billion in the year to June, a 32% improvement on last year. In 1999, it reported revenue of R32.7 million and has shown compound annual growth of 38% since then.

DigiCore is another company that Gilmour would consider adding to a portfolio. He says the company has - ironically - benefited from high crime levels in SA as it operates in the vehicle-tracking sector of the market. DigiCore has exported these services to other markets, such as the UK, which Gilmour says bodes well for growth.

DigiCore is slightly higher priced than Datacentrix and EOH, with a price:earnings ratio of 9.64. The company has, however, lost a lot of ground in its share price in the last year. On Friday, it closed at R3.40, but a year ago, it closed at R5.25.

This could be attributed to a drop in revenue, which decreased by 16% in the year to June, which translated into a 45% drop in operating profit. Turnover dropped from R685 million to R576 million, and operating profit reduced from R204 million to R113 million. Earnings per share were down 47%, from 68.7c to 36.1c.

GijimaAst, which closed on Friday at 86c and was untraded this morning, is a share that analysts seem to be in two minds about. Lucas says GijimaAst is well-positioned to receive government contracts and is a share he “quite likes”. The company earns 44% of its revenue from the state.

Gilmour notes that while the listed company may have the edge in government contracts, the state has an 8% budget deficit and is likely to start cutting back on spending. He says he would not add this share to his portfolio. “The bean-counters will rule the roost.”

A year ago, GijimaAst closed at 54c, and the company has gained some ground since then. However, it is still a fairly cheap share, with a price:earnings ratio of 7.53.

In its most recent results for the year to June, the company reported revenue up to R3 billion from R2.5 billion, but headline earnings were slightly down to 11.42c from 11.70c a year ago.

Adding back the foreign exchange loss of R51 million, normalised earnings per share grew 88% to 15.14c.

Computer distributors Pinnacle Technology Holdings and Mustek are both facing a volatile rand, which can impact earnings, analysts note.

Pinnacle closed Friday at R3.45 and was down in early morning trade today to R3.37. A year ago, the company was trading at R3.39. It has a price:earnings ratio of 4.65, making it a cheap share.

Pinnacle's latest results for the year to June indicated revenue was up 14%, to R2.8 billion. Fully-diluted headline earnings per share increased 3.3%, to 59.1c, and net profit increased 5%, to R110.1 million.

Mustek, which closed at R3.20 a year ago, has been losing ground. It closed on Friday at R2.50, and lost 10c in early morning trade today. Its price:earnings ratio is 4.93, making it a slightly more expensive share than its peer, Pinnacle.

The company saw headline earnings per share drop from 76.34c to 48.65c, and its net profit fall from R87 million to R52 million in the year to June. Mustek, says Gilmour, does not seem to be competitive enough on price in the face of imported products, and this could hamper earnings in the future.

Lucas is wary of both Pinnacle and Mustek, as these companies are affected by the rand, and have been known to report foreign exchange losses.

While analysts are wary of Faritec, after the company produced abysmal results for the year to June, CEO Fanie van Rensburg is bullish that it will return a profit in the next full year.

Faritec's shares closed on Friday at 6c, and opened this morning at 5c. A year ago, the stock was trading at 40c. It has a price:earnings ratio of 0.

In its most recent results to June 2009, the company reported a slide in revenue from R1 billion, to R727 million, and operational losses led to a loss per share of 48.1c, compared to a gain of 11.3c in 2008.

Lucas says he is cautious of the stock, as turnarounds take some time to show fruit. He adds that it may be a speculative buy, should an investor want to take risks.

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