Savvy investors who bet on ICT stocks over the past three years would have seen their investment grow at a faster rate than those who hedged their bets by focusing on the JSE's all share index.
In the past three years, a spread of 29 ICT stocks gained an average 163%, beating out the all share index's 63% improvement. Year-on-year, ICT stocks only improved 46%, although this is still a gain on the 23% return from the all share.
In the mix are substantial standout performers, such as MICROMega, which grew 643% between the end of June 2011 and the same period this year. Other gainers include EOH - returning 308% over the same period - and Adapt IT, which moved up 932%. However, by far the most rapidly gaining share is Poynting, with a return of more than 1 756% over the past three years.
Telecommunications shares - in MTN, Vodacom and Telkom - have also improved, showing a three-year return of 45.7%. Year-on-year, these three shares have gained 56.5%.
Gains are expected to continue, with analysts noting local investors can take advantage of the current economic climate, and well-priced ICT stocks, to snap up shares as the local market is ripe for merger and acquisition activity.
However, not all the shares have performed well, with some - such as SilverBridge - losing ground. SilverBridge is down 36% over three years, although it has gained 23% year-on-year. TeleMasters is down 44% over three years, but up 45% year-on-year.
Consolidation to continue
Independent analyst Paul Booth notes it is encouraging that the basket has beaten the all share, adding now is a good time to buy as consolidation is set to increase. He explains the trend of companies being taken off the bourse and going private - such as what happened with Vox a few years ago - is not being seen internationally to the same extent, and there are no new local listings to replace these moves.
"It makes sense to invest now," because buyouts in general offer a premium of between 10% and 20% on the average share price, providing a quick return for a savvy investor who has done their homework, says Booth. He notes local stocks' price-equity (PE) ratios are either on par, or lower than, their US counterparts, adding impetus to these companies' potential. Absa Investment analyst Chris Gilmour notes PE ratios of IT stocks have risen sharply in recent years as "investors have at long last begun to realise their potential".
Gilmour adds ICT stocks are a good buy because the global trend is upwards, and the ability to use IT and communication technology to vastly improve efficiencies in SA is great. He cites sectors such as telecoms, cellular, outsourcing and new media as good investment areas, but cautions that shares must be bought selectively.
On the block?
Booth notes there are a number of cheap acquisitions that companies - local and international - may be eyeing. He says Gijima could be a target, as it is cheap and has been battling. The company, currently worth R119 million, has been in a restructuring phase to get out of its loss-making position.
Buying Gijima could be tricky for a potential predator because of chairperson Robert Gumede's sizeable stake in the company - as the single largest shareholder - adds Booth. EOH is still in acquisition mode, while Telkom is in the process of buying rival Business Connexion for R2.67 billion, he notes. Datatec, which has the bulk of its operations outside of SA, could be snapped up by a bigger distributor, he adds.
There is also room for consolidation among companies the JSE classifies as industrial, such as Jasco, Reunert, DigiCore and MICROMega, says Booth. Morvest appears to be up for grabs, as do some of the telecoms companies listed on the Alternative Exchange, such as Huge Group, Poynting and TeleMasters, he adds.
Poynting could be absorbed by a big tower company, says Booth. Financial services software provider SilverBridge could be acquired because of its solid business intelligence capabilities, he adds.
* Core data provided by Absa, and calculations done by ITWeb.
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