Mustek profit plummets

South African ICT distributor Mustek saw its revenue and profits plummet in the second half of 2023, according to its latest interim results.

Mustek Group’s revenue decreased from R4.91 billion in the last six months of 2022 to R4.27 billion in the same period in 2023.

Operating profit declined to R180.60 million, down 25.3% from the previous period.

As a result, the company posted a profit after tax of R52.37 million, down 59.5% from R129.29 million.

Headline earnings per share also dropped 58.81% from 221.74 cents in the second half of 2022 to 91.34 cents in the second half of 2023.

Mustek said the declines reflected the adverse impact of prevailing local and global economic challenges, including high
inflation, high interest rates and low consumer and investor confidence.

Significant decline in demand for energy products

Mustek pointed to weaker demand for its green energy products as a major contributing factor to its lower revenue.

This segment had been a key driver of revenue growth in the second half of 2022 but declined 55% in the latest period.

“Gross profit on green energy products reduced by approximately R100 million year-on-year,” Mustek said.

“The gross profit margin decreased to 13.4% [from 14.1%] due to competitive forces in green energy products, product composition and the effort to lower stock levels.”

This decline correlates with a broader drop in demand for solar and backup products in South Africa during the second half of the year after explosive sales in early 2023.

Mustek Group said the performance of the rest of its business was more stable.

Mustek and Rectron saw their revenues decline by 15.0% and 9.9%, respectively.

Mecer Inter-Ed, the group’s IT training company, saw a slight revenue decline from R48.8 million to R46.2 million, due to what Mustek described as tough market conditions.

On the flip side, the group made a R10.6 million profit from currency fluctuations, compared to a forex loss of R62.9 million in the previous period.

Mustek also kept distribution, administrative, and operating expenses in check with a conservative 3.4% increase, lower than the inflation rate.

However,  higher interest rates caused financing costs to surge by 50.5%, from R76.5 million in the second half of 2022 to R115.1 million in the same period in 2023.

“The average South African prime interest rate was 24% higher in this period compared to the comparative period,” Mustek explained.

“Approximately 60% of the Group’s available working capital facilities are USD-based, and the fluctuations of the exchange rate have also played a role in the increased trade finance costs.”

“The average borrowing rate applicable to the Group’s USD-based borrowings nearly doubled to 5.3% from 2.9% in the comparative period.”

Hopeful about demand for AI-powered PCs

Looking forward, Mustek said the macro landscape remained challenging due to factors including the upcoming local elections, climate change, the digital divide, and emerging geopolitical risks.

“To help it navigate these uncertainties, the group will continue to work closely with its vendors and pursue the sourcing of innovative products while also focusing on environmental impact reduction, social equity, and operating fairly and ethically,” Mustek said.

On the positive side, Mustek said demand for PCs has been stabilising following a drop in sales following a Covid-19 pandemic-driven boom.

The company said it was cautiously optimistic that the AI PC will bring a new round of potential growth in the PC market.

“The recent release of AI-capable systems by large OEMs, together with a strong focus from operating system providers in 2024, is likely to drive refreshed demand in the commercial sector,” Mustek said.

“AI-generated content and large language models require tremendous computing power, bandwidth, and high availability of data.”

“Not only does this drive opportunity for hardware refresh but also for the enablement and training of skills that are required in the market to apply these technologies responsibly, securely, and sustainably.”

“We believe the wider availability of Microsoft Co-Pilot due to a relaxation of the licensing rules will be the first driver.”

Mustek also expects its traditional infrastructure business to see growth in the form of connectivity, storage and compute as cloud repatriation sees certain workloads return to the edge.