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Faith in Africa
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Stafford Thomas
Financial Mail
Friday, July 02, 2010
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Robert Venter, CEO of Altron, has good news for shareholders. Better times are ahead for the company, whose headline profit fell 40% to R625m and whose dividend dropped 47% over the past three years.
The biggest company in the Venter family’s electronics and electrical empire, Altron has been battered from all sides. The strong rand alone wiped R100m off its bottom line in the year to February 2010, says Venter.
At work, too, was a slump in building and construction activity, which sent demand for power cables diving 65% from early-2008 levels, hammering 100%-owned Powertech and cutting its contribution to Altron’s headline profit from R266m (51%) in 2007/2008 to R97m (16%) in 2009/2010.
Powertech relies on building and construction for half its revenue, says Venter. He expects an initial recovery in its fortunes in 2010 to be driven by last year’s restructuring, which included a 20% cut in staff numbers.
Building and construction demand should begin to recover in late 2010, says Venter. Hinting at a strong rebound in Powertech’s profit in 2011, he adds that even a slight increase in revenue “will drop straight down to the bottom line”. Powertech’s revenue fell from R9,6bn in 2008/2009 to R7,2bn in 2009/2010.
Altron will also be looking to a recovery from its 100%-owned IT hardware and software unit, Bytes Technology.
As a major supplier to SA banks and retailers, which account for about 40% of its revenue, Bytes was hit by spending cuts in these sectors, says Venter. The unit’s UK operation was also knocked, with rand strength adding damage.
At the cost of lower margins, Venter says, Bytes kept its revenue almost stable at R6bn in 2009/2010, but cut its contribution to Altron’s headline earnings by 24% from the previous year, to R157m.
Holding the fort and building on its record of stable profit and dividend growth was 62%-owned Altech, which held its revenue stable at R9,2bn and its contribution to Altron’s headline profit in 2009/2010 unchanged at R342m. Altech was bolstered by annuity revenues, which make up 85% of total revenue, says Venter. Major annuity revenue generators include Autopage Cellular and Netstar.
With Altech also comes the potential of its African broadband telecom operation. Kenya-based Altech Stream East Africa is already generating 20% of its operating profit. “We have laid 6000km of fibre-optic cable and are expanding into countries such as Uganda, Tanzania and Rwanda,” says Venter. “We see Africa as Altech’s main growth driver over the next five to 10 years.”
Element Investment Managers analyst Mohamed Loonat says: “As a first mover Altech has a major advantage in East Africa.”
For those more open to risk, this is an added attraction. Altron also offers the allure of a significant recovery in earnings per share.
It is an indication of the potential of the two shares that analysts’ consensus forecast put Altron’s average annual EPS growth to February 2013 at 23% and Altech’s at 12,5%. Altron’s average dividend growth is forecast at 21% and Altech’s at 9,8%.
But with Altron on a p:e of 12,7 and Altech on 10,8, which share offers better value? In reality there is probably not much difference between them. If both shares revert to their 25-year average p:e of 13, and a 15% average return is demanded over the next three years, Altron is trading at a discount of about 25% to its current R25/share price and Altech at a discount of about 20% to its R61/share price.
Given Altron’s higher risk profile, Altech looks the better bet of the two.
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