South African tech stock jumped 50% in two weeks

Mustek, one of South Africa’s largest assemblers and distributors of personal computers and complementary ICT products, has had an excellent two weeks on the JSE.

The company’s share price increased by 50% between 16 July and 29 July, which shows a renewed interest in the company.

This jump comes after the share price was hammered in the first five months of the year. It declined by over 30% between January and May 2024.

Mustek enjoyed strong growth during the lockdown, and its share price followed suit, increasing from R5.73 in July 2020 to R17.34 in August 2022.

However, its most recent results were not good. Revenue declined by 13% and basic earnings per share was down 59%.

The bad results caused the share price to plummet to R8.25 per share, the lowest it has traded since the pandemic.

Many analysts highlighted that Mustek’s share price decline provided investors with a buying opportunity.

Three months ago, Alex Duys, chief investment officer at Umthombo Wealth, said there were good things in store for Mustek.

He highlighted that Mustek is the second cheapest it has been since 2008, when it was priced for liquidation. The same risk does not currently exist.

Duys said the poor results were partly due to Mustek being overstocked on renewables. However, there is still demand for these products, and they are still selling them.

“They used to sell them at gross profit margins of over 20%. They are now selling them at margins of 12% to 14%. They are still making money from them,” he explained.

The key for Mustek is to reduce its working capital — the inventory and accounts receivable — which piled up over the last few years.

Mustek’s management promised the market that they would actively address the working capital issue.

If they successfully reduce Mustek’s working capital, a significant amount of cash will be released.

The higher cash flow will reduce the company’s debt and interest payments. In turn, earnings will increase. This is expected in a year or two.

“The next set of results will not be pretty. Earnings will be down significantly,” he said. “However, this will be the new low base to build on.”

“If management can reduce working capital and reduce debt, Mustek is extremely attractive,” Duys added.

Another option is for Mustek to de-gear its balance sheet and do share buybacks at these low levels. “I can see Mustek rallying a lot from that,” he said.

Group financial director Shabana Aboo Baker Ebrahim told MyBroadband that Mustek has been executing a strategy to strengthen our balance sheet by reducing working capital and debt.

“While progress has been made, the current economic climate and slowdown in the sustainable energy market has impacted these initiatives.”

The low liquidity has caused the share price to fall further than expected. However, Duys believed Mustek provided a good buying opportunity for those in it for the long term.

Fast forward three months and investors who followed Duys’ advice would have made a good return.

Mustek’s share price increased from R8.25 in May 2024 to R13.68 on Monday 29 July. This is a 66% increase.

This rapid share price rise means Mustek has wiped out all the losses in the first few months of the year.

The share price increase comes amidst significant activity involving large asset managers, including Standard Bank and Old Mutual.

Last week, Mustek announced that Standard Bank had sold most of its shares in the company. It now owns only 0.02% of Mustek.

This announcement came two days after announcing that Old Mutual had also sold shares. It reduced its stake in Mustek to 4.65%.

Peresec, in turn, has stocked up on Mustek shares. In recent weeks, it has increased its stake in the company to 23.09%.

Mustek share price over the last month