Investors and analysts have taken a shine to Business Connexion (BCX). This is despite a decline in profit and a reduction in operating cash flow in its latest set of results.
A slowing economy and a corporate sector that is reluctant to upgrade its computers should have scared investors away from a technology company that provides and integrates information and communication technology systems for companies. Its profit has dropped from R128,1m to R104,7m.
Oddly, investors have not been holding back. Instead, the company's share price has rallied from a low of R3,05 in April to R5,15. It has a high p:e of 19 and has earned a positive-leaning "hold" consensus recommendation by three analysts in I-Net Bridge.
This is a big turnaround from when the company was lambasted at a results presentation in March last year. Back then analysts were frustrated by management's inability to answer questions about the running costs of the company's new data-centre facilities. One analyst even wondered out loud if BCX CEO Benjamin Mophatlane should be running the group, because he was part of a consortium bidding for a holding in Vodacom.
So, what is BCX doing right? Cutting costs for one thing, says Frost & Sullivan analyst Mpho Moyo.
Mophatlane says the streamlining of the group will cut R100m off its operational costs.
A closer reading of the group's results for the 15 months to end August shows that operating expenses as a percentage of revenue actually rose from 22,4% to 24,1% and operating margins dropped from 4% to 2,4%.
Mophatlane points out that this year's numbers include a on e-off charge of R97m relating to the cost-reduction programme.
Moyo says besides the reduction in cost, BCX is also making headway in securing projects in the public sector.
Mophatlane says getting work from state entities is important to the group because of the slowdown in spend by large corporations over the past 18 months.
Mophatlane cannot afford to give up on the corporate sector. He says there are still substantial IT outsourcing projects to be won among the country's 300 largest companies.
Getting more clients will not only boost revenue, it will also reduce the risk of having the bulk of BCX's income coming from a handful of customers. "Historically, less than 10% of BCX's clients have accounted for around 60% of its revenue. This is a risk because any slowdown in spend by the companies in this small group will definitely have an impact on BCX's bottom line," Moyo says.
Its outsourcing business has grown in importance because its start-up Nigerian venture still has to post a profit and the drop-off in spending by the private sector has knocked BCX's hardware sales.
The sharp fall in its cash generated from operating activities is a result of the group paying out R200m in a special dividend. Mophatlane is not too concerned about the group's cash position, though - it has R333m in the bank and no debt. The dividend for the period matches the past year's final dividend of 18c.
Mophatlane says BCX plans to grow organically. He says that though the group has no plans to make acquisitions he expects the technology sector to consolidate. The merger trend will most likely follow that seen overseas, where hardware companies have been taking over more service-orientated groups, as when Xerox bought Affiliated Computer Services.
The one merger that BCX did consider was the R2,4bn bid Telkom made for it in 2007. The competition tribunal prohibited the merger from taking place, saying it would undermine competition.
The proposed merger was widely criticised at the time by many operating in the sector. The tribunal came down hard, saying it was an attempt "by an erstwhile monopolist [Telkom], to thwart the beneficial impact of de regulation".
Looking back, should BCX have gone along with the merger? Mophatlane says it was an offer the group could not easily walk away from. "If shareholders are presented with a juicy offer, it should be considered," he says.
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