Top IT players: Is their growth sustainable?

Two of South Africa’s top IT firms published sterling interim results last week. Both made significant revenue gains from their previous acquisitions, and are keen on making more in the future, whilst also increasing their work with the public sector but can the growth continue?

On Wednesday EOH, an ICT solutions provider, reported revenue growth of 44.1% to R1.6bn in its interim results to the six months ended December. The growth in revenue was attributed to a combination of both organic growth and recent acquisitions. It also grew headline earnings per share (heps) by 31,6%, see table.

Pinnacle performed similarly well. Its revenue was 32% higher at R2.7bn, driven mainly by the contribution of Pinnacle Africa and AxizWorkgroup which it acquired in 2010. Heps were up 63%.

Irnest Kaplan, MD of Kaplan Equity Analysts, said the similarities in the two companies’ financial performance is surprising given that the IT players couldn’t be further apart in what they do.

“They have been very acquisitive in the past and this has contributed to their good performance,” he said.

EOH said it had identified several opportunities for it to expand its service and solution offerings which will enable it to strengthen its revenue line. Company CEO Asher Bohbot added that whilst the company is keen on future acquisitions it will only do so under certain circumstances. “We are keen on growing the company organically and in making future acquisitions as long as we are either bulking up on our product delivery or we are entering a market that we don’t cater for as yet,” he said

Pinnacle said in its Sens statement that it intends to remain acquisitive and plans to keep on diversifying in the markets it operates in.

It will also open more offices in Africa after its Botswana operations showed growth of 100% year on year. The company plans to “duplicate these efforts in Namibia” as well as two other countries on the continent.

Kaplan said the market has asked a few questions about growth by acquisition, “it’s quite clear that both companies look set to have a good year or another 18 months as they both want to expand their geographies, but after this the question around sustainability of future acquisitions will become more important”.

Participation in the public sector is often riddled with complaints of late or insufficient payment of services, by several private companies who work with them. However, both EOH and Pinnacle are keen on increasing their level of public sector participation.

About 25% of EOH’s revenue is derived from its public sector work. Bohbot says the company’s interactions with government have not been plagued with the usual “issues”, of late payment etc, as a result it is keen to do more work at municipal, provincial and national level.

“What government needs are more efficient systems on which to deliver their services. There are genuine challenges that government faces in this regard, and we would like to assist in providing solutions to them,” said Bohbot.

Bohbot also indicated that EOH’s participation with government is likely to take place in the healthcare sector, following the proposed launch of the National Health Insurance (NHI) fund. “The South African society is still growing and evolving it’s a needy society and we want to cater to some of these needs. What we hope to bring to the party is to provide a better service whilst at the same time making use of a great business opportunity,” said Bohbot.

Pinnacle group has yet to reveal which area of the public sector its hopes to contribute to only mentioning that it will increase its activities in the arena.

Kaplan reckons there is lots of potential for these IT companies to grow in the private sector. He cites Gijima as an IT company that has done well in the public sector, despite its problems around the Who am I online deal with Home Affairs.

According to Kaplan, Business Connexion, Didata and Bytes Technology Group are also strong contenders in the public sector.

“I don’t think all these companies will be focusing on the public sector primarily but they are making sure that they do get involved as it is a sector that can’t be ignored, “adds Kaplan.

Source: Moneyweb