Published Date: 2021-09-28 | Source: INCE|Community | Author: The Finance Ghost
Alviva has released its annual results for the period to June 2021. The technology company's share price has been on a charge this year, up more than 60%.
Group revenue was up just 1% to R14.9bn. That sounds about as exciting as watching your computer do an update, but things improve further down the income statement with a 25% jump in EBITDA to R887m. This was driven by an increase in gross profit margin, foreign exchange gains of over R30m and a drop in operating expenses of R50m.
That's still only an EBITDA margin of around 6%, which shows how difficult it is to make money in this industry. Only chicken farmers are allowed to complain about margins at a braai with ICT people.
The tiny revenue growth was attributed by the group to lack of availability of products. The supply chain disruptions of the pandemic have really hit the ICT industry. Alviva only expects this situation to normalise by the next reporting date.
HEPS (Headline Earnings Per Share) increased 91% to 285 cents, which is another lesson in the value of financial leverage. When operating profit jumps sharply, the effect on bottom line earnings is usually even better thanks to the impact of debt. Share buybacks also helped drive an increase here, as Alviva repurchased 13.8 million shares during the period at a cost of R115 million. There was a further anomaly in the HEPS number, which I deal with in the segmental section.
The tangible net asset value (TNAV) per share came in at R14.73 per share, which is incredibly similar to the share price. Alviva is now trading at essentially its tangible book value (which excludes intangible assets like R603m worth of goodwill, contributing around 8.6% of total assets on the balance sheet).
This also demonstrates that the share buyback was executed at an average share price well below the TNAV, which is a great example of where buybacks make sense. If companies have cash and the share price is stubbornly low, there are several benefits to share buybacks. The company's buybacks have been extensive, with R742 million invested in buybacks over the past 5 years, decreasing shares in issue by a third.
Alviva has also been putting the balance sheet to work in acquisitions, with a deal to acquire Tarsus for R178 million. The first payment of R100 million was paid on July 2021 when the deal became effective, so there are no Tarsus earnings in this Alviva result as the deal closed the day after year-end.
The group operates three distinct segments.
The ICT Distribution business imports and (in some cases) assembles ICT hardware for distribution into the sub-Saharan African markets. Software distribution is also included in this business. Revenue increased by 3% and EBITDA by 37%, with a stand-out performance from Pinnacle as a response to demand for work-from-home products.
The Services and Solutions segment offers systems integration and solutions like cyber security, application development and AI solutions. In Datacentrix, tender activity is at an all-time high.
There are also renewable energy businesses in this segment. Solereff grew revenue 14% on the back of product sales and GridCars completed its roll-out of charging stations on major highways but remains loss-making. It is insignificant to the overall group.
This segment experienced unusual issues in the Synerg UK business, in which Alviva acquired a 51% stake for GBP 3 million a couple of years ago. A key individual resigned from the business recently, which caused that business to be mothballed. This caused contingent consideration of R28m to be released to Alviva's income, which means that earn-out payments that Alviva expected to have to pay will no longer apply. On the negative side, goodwill impairments and accelerated write-offs of other intangible payments came to R22m in total. The net accounting benefit was thus R6m, which is perhaps why the decision was made to mothball the business and focus on Synerg UAE instead, which was also part of that acquisition.
The UK write-offs are excluded from headline earnings, but the R28m released to income is included because of accounting rules. This distorted HEPS (the exact thing that HEPS is designed to avoid) by a positive 23 cents. Considering HEPS came in at 285 cents, that's a material distortion.
The Financial Services segment offers finance solutions for office automation and technology-based equipment, targeting SMEs and larger businesses. The book exceeded R1bn for the first time in June 2021 and credit losses have been maintained at acceptable levels.
Alviva only pays 10% of HEPS as a dividend, retaining most of its earnings to invest in further growth. The company has declared a dividend of 29 cents per share, up from 15 cents per share last year.