Not all tech companies are created equal
You know by now that the lockdown period was great for many tech companies. Although “tech” is used as an umbrella term all the time, it’s something of a misnomer to do so.
The companies that did well typically offer consumer apps or enterprise cloud solutions. Some software companies also did well and there were of course outliers like video conferencing company Zoom, which literally shot the lights out.
Companies like NVIDIA have also had a great year, benefitting from the increased popularity in gaming.
Unfortunately, a company like JSE-listed Alviva Holdings has had a horrible time, despite being in the tech industry.
A quick overview of Alviva
Alviva Holdings has a market cap of just under R900m, so it would be considered a small cap on the JSE.
The website proclaims that the word “Alviva” is loosely derived from a long-forgotten language to mean “breathe life into” – longer-term shareholders will be anxiously waiting for that to happen. The share price is down around 65% over the past 3 years.
In the past 6 months however, Alviva is up 38%. That starting point coincides of course with the major equities sell-off in March. Despite the tough trading conditions Alviva has faced since then, the share price has still rewarded those who had a punt at the start of lockdown.
Alviva supplies around 117,000 products from 250 OEM suppliers to 7,000 customers. It’s a meaty business for sure, but it operates in highly competitive market segments and doesn’t have a particularly scalable competitive advantage.
Between FY15 and FY19, EBITDA did grow from R464m to R860m, so shareholders over that period may well feel aggrieved about the share price. At the current market cap and using 2019 net profit, the company is trading on a Price / Earnings ratio of around 2.3x. That’s really low for a listed company.
The distribution of ICT products contributed 54% of EBITDA in 2019. Services and Solutions (systems integrations etc.) contributed 30%. Financial Services (a rather odd part of the business that finances office automation and technology-based equipment) contributed 13% of EBITDA.
My gut tells me that the financial services business shouldn’t be there. If the banks and alternative funders won’t lend to your customers to buy your products, you shouldn’t be lending to them either just to drive sales.
Alviva is also complicated geographically, with businesses literally across Africa (including West Africa which is an area few South African businesses dare to compete in).
Life in lockdown
More than half of Alviva’s profits directly depend on being able to supply ICT hardware, which requires a functioning global supply chain. Companies like Apple might be able to navigate lockdown, but a South African company isn’t so lucky.
Revenue fell 7% in the year to end-June and headline earnings fell a nasty 53% to just under R200m. The company is on a “Headline Earnings Multiple” (which doesn’t really exist) of under 5x, but one shouldn’t assume that the lockdown performance is reflective of conditions the company will face going forward.
However, there were definitely cracks in the system even before lockdown. For the 6 months to December 2019, Alviva gave the market a negative surprise with a drop in operating profit of 26.1% and a decrease in headline earnings of 35.7%.
Interestingly, in these latest results, Alviva noted that South Africa’s fibre market has shrunk since January 2019. That’s completely counter-intuitive.
Write-offs of R45m for customers who may not survive Covid-19 hasn’t help either. What was I saying about the risks of lending to your customers to buy your products?
It’s time for a turnaround
Alviva is one to watch. If management put together a credible plan to get this thing back to where it should be, it becomes an interesting play for shareholders.
Personally though, I feel my money has better places to be than in a computer equipment importer with some adjacent business interests. It feels like a competitive space fraught with operational challenges linked to currency and supply chain.