Co-founded by David Kan in 1987, ICT hardware and services company Mustek is a ubiquitous South African brand for buyers of computer and related hardware products.
The business is the largest assembler of personal computers in the country and, via its Rectron subsidiary, it has a wide ICT reseller business in branded hardware, software and networking solutions, alongside a technical support and training operation.
A lucrative newer division is involved in energy solutions and has had significant growth in demand for solar equipment and alternative power supplies thanks to Eskom’s erratic performance.
Mustek, like the entire global technology sector, benefited from the increase in demand for laptops and home office automation and peripherals as a result of the pandemic and the work-from-home trend in 2020.
Results in 2021 were at record levels, with strong gross profit margins, revenues and operating profits emanating from a post-pandemic boom. Worldwide product shortages padded margins and a lower interest rate environment aided the company’s performance.
It was too good to last, and as buyers mopped up new products the consumer pipeline became saturated. The reopening of global supply chains led to a flood of product supply that weakened margins.
The 2021 boom filled the market with new equipment which has yet to reach its typical replacement cycle. That has slowed global computer hardware demand and revenues of companies in the segment.
Mustek had a resilient balance sheet, however, and its wide range of interests — augmented by a fast-growing energy solutions business — has helped it recover its poise.
The company has also been aided by an aggressive share buyback programme which has boosted its headline earnings performance
Results for the year ended June show the company is starting to recover from the Covid hangover, but domestic economic conditions are weighing on operational performance.
Revenue rose 14% to R10bn and operating profit was up 12% to R455m. However, profit before tax fell 9% to R293m as rising inventories and a 127% increase in finance costs from the Reserve Bank’s rate increases hit the bottom line.
Financial 2023 was a period of two distinct halves, with interim results 6.5% lower to 222c a share. A reset in the second half — aided by a growth in sustainable energy which now comprises 20% of the business and better management of inventory — resulted in headline earnings for the year rising 5% to 375c a share, with a final dividend of 77c.
The company has also been aided by an aggressive share buyback programme which has boosted its headline earnings performance. On listing there were 120-million shares in issue. Today there are about 55.7-million, illustrating the scale of the buyback.
Mustek commented that it plans to limit its buyback and focus on internal efficiency, growing its energy solutions business and reducing financing costs. IM would like to see a year-on-year reduction of the nearly R2.8bn inventory line and the R174.5m in finance costs.
As IM writes, Mustek is trading at R15 and a multiple of four with a market valuation of R863m. The counter has a cash pile of R349m and a NAV of R27.24 a share.
IM selected Mustek as one of its top shares of 2023 based on its bargain-basement earnings multiple and material discount to NAV — and with an assumption that the counter was a clear candidate for a delisting via a management buyout (possibly aided by private equity). Year to date the counter is up 7%, having hit R17.70 in April, within spitting distance of IM’s target price.
The work-from-home trend is still alive in many professions, albeit in a hybrid format. Ditching physical spaces means companies have to update their digital capabilities more often. Mustek is positive on prospects for the equipment replacement cycle of the large pre-Covid installed base alongside growth in its software, services and energy businesses.
On a modest earnings multiple and encouraging sounds for the year ahead, IM maintains its buy recommendation on Mustek.
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