Evidence of the economy being in a grave state can be seen in the logistics sector where volumes are under threat and pricing is precarious.
Imperial exited the domestic consumer packaged goods business due to an “unviable and uncompetitive business model”. Costs in the industry have been rising on the back of higher fuel costs, requiring appropriate pricing models for viability. Strategies such as percentage of invoice introduce a level of uncertainty in profits as costs incurred are generally similar regardless of goods being transported.
The barriers to entry into logistics are low, but it is easy to fail. Competitiveness based on pricing alone is a death knell to a logistics company in a low-volume environment. The winners are those that offer competitive pricing, excellent execution and an all-round service to clients.
The strategies to employ include a sharp focus on managing fuel costs; the application of sophisticated logistics solutions — such as third party logistics (3PL), 4PL and 5PL — and an incentivised sales force. It is still too early to expect the sector to offer strong returns.
Information technology companies have been going through some difficult times in the past couple of years. Think AdaptIT, EOH (granted, there have been some questionable practices) and Alviva, and so on Mustek has managed to buck the trend over five years, three years and the short term by outperforming the technology index over all these periods as well as the JSE all share index.
It has many factors going for it — a great broad-based BEE level 1 rating from which it will benefit from government business, diverse brands and share buybacks. Unlike many competitors, Mustek has not been on an acquisitive spree and does not have debt issues. The counter presents an attractive valuation. Its return on capital is greater than its cost of capital while the share price is less than its book value.
Management is focusing on the right things, getting working capital in order being chief among them. This will be the catalyst for the future. Opportunities are near-infinite in the IT space. New product introductions aimed at diversification and vertical market reach is one of the strategic objectives that management aims to capitalise on.
Software portfolio enhancement would move them away from being stock-heavy and lighten up the working capital profile. Disposing inefficient and noncore assets will free up capital to allow for further share repurchases or increased dividends. The sale of assets could fund share buybacks up to 5% of market cap. Mustek did sell a property for a profit of R6.3m in the financial year.
The investment case is not without risks. Like many small-cap counters, Mustek is dependent on SA’s economic fortunes and consumer spending. It will need to maintain relationships with ICT customers and suppliers. The effects of international trade conflicts on Huawei could threaten future prospects as it accounts for 8% of revenue and 6% of gross profit. There is the constant foreign exchange forecast risk inherent in an import distribution model, and its forex effects have been erratic in the past.
The opportunity for Mustek relies on the optimisation of its working capital management by shifting more into software offerings, managing its short-term debt levels — accounts payable — and unwinding of the overdraft, which should reduce interest costs.
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