Readers might note that, despite a downside prediction on technology group 4Sight Holdings, IM has not slapped a “sell” recommendation on the share.
That would have been unfair, because 4Sight, under CEO Tertius Zitzke and other key executives, have done awfully well to untangle and reposition the group that at one stage had gone very much awry. As recently as mid-June 2021, 4Sight was still priced for a worst-case scenario when the shares dipped below 20c.
The share has run high — perhaps too high. But IM is intrigued by the continued operational turnaround, and might be tempted to accumulate at lower levels.
4Sight changed its financial year end to end-February, which means the recently released results are the second interim results for the 12 months to end-December.
The numbers were encouraging. Revenue grew from R696m to R939m, with operating profit up to almost R38m from R22m the previous financial year. Headline earnings came in at 5.4c a share — almost double the previous period.
A first interim period dividend was paid, but there was no payment for the second interim period. One presumes — noting operational cash flow of R48m and a cash pile of R101m — that a final dividend will be considered for the extended financial year.
Now, the interesting thing about 4Sight is that the share price really caught fire around the start of the year — peaking at 120c in mid-February. Clearly some small-cap punters were enthralled at the prospects of bumper second six-month profits after 4Sight’s promising showing for the first semester.
Judging by the pullback in the share price since the release of the trading statement, punters may have got ahead of themselves. What stood out for IM was a seeming slowdown in the second six months. About R27m in operating profit was generated in the first six months, but only R11m in the second six months. First-half attributable income came in at R20m, but only R9m was earned in the second six months.
Cash flow looks decent, the balance sheet is in good nick and revenue and the client base are growing
This is probably because the bulk of 4Sight’s clients are in the mining and industrial sector, which means an early close of operations in December.
The 120c share price level that 4Sight raced to in early February suggests the market might have expected earnings of 10c a share, perhaps even more.
The share price is still trading on an elevated earnings multiple of 14 — demanding for small-cap counters, which seem to range in the mid-single digits (even for redoubtable companies with long profit and dividend histories).
Taken in isolation, there are several positives at 4Sight. Cash flow looks decent, the balance sheet is in good nick and revenue and the client base are growing.
While the gross profit margin dipped from 43% to 40%, the operating margin firmed to 4% from 3.1%. It probably needs to move higher into the mid-single digits. Zitzke’s comment to IM that 4Sight still has plenty of new opportunities to hand hopefully means the company can push up revenue further without affecting the margin detrimentally. That said, we all know it’s tough out there, and even customers looking for production efficiencies don’t want to pay up for cost-saving technology.
If there is one big positive to take out of the recent 12-month results it is the growth in the support and maintenance offering, which accounted for a chunky R413m of total revenue. Consulting services have also increased to more than R300m of revenue. These both bode well for margin enhancement in years to come.
4Sight has disclosed that its partner network grew 12.5% in the 2023 financial period, which added another 100 partners for a reach across 55 countries.
In his comments accompanying the latest results, Zitzke stresses that 4Sight has supported this continent-wide growth while containing the overhead costs that typically accompany cross-border expansion. “The ability to remotely service multiple countries from South Africa and to deploy projects to customers internationally has contributed massively to our success.”
Overall, 4Sight — from its horribly shaky start in late 2017 on the JSE (where it, incidentally, privately placed shares at 200c a share) — looks on a reasonable growth trajectory.
Still, IM would be wary of rushing in at current prices. Accumulating at levels closer to 50c-55c might be more prudent.
* The writer holds shares in 4Sight
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