Mustek ready to rock
Many analysts believe Mustek offers a good investment opportunity because it is a good company which is undervalued and an acquisition target.
Mustek is one of South Africa’s largest assemblers and distributors of personal computers and complementary ICT products.
The company’s portfolio includes many top-tier ICT brands, including Acer, ASUS, Samsung, Lenovo, Brother, Microsoft, and Huawei.
Protea Capital Management CEO Jean Pierre Verster and Umthombo Wealth chief investment officer Alex Duys said Mustek is worth a look.
Verster said Mustek can be considered cheap, and small-cap stocks will benefit with more positivity towards the local market.
The lockdown was good for Mustek as the work-from-home revolution forced companies and workers to upgrade their home technology.
The company’s results were excellent, and the share price rallied 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 decreased by 59%.
The share price declined to R8.25 as investors dumped the stock, fearing that the company’s best days were behind it.
The death of the company’s founder and chief executive, David Kan, also put pressure on the share price.
However, it rebounded in recent months. The Mustek share price increased by over 60% over the last four months.
Although challenges remain, analysts expect the 2025 results to improve as the upgrade cycle kicks in following the frenzy in 2020.
Mustek’s low valuation also makes it an acquisition target. Many companies may see it as an opportunity to buy the distributor at a bargain price.
Duys explained that Mustek previously took pain because it overstocked on renewables. Eskom’s load-shedding reprieve dropped demand for these products.
However, there was still demand for these products, and they were still selling them — albeit at lower margins.
Mustek’s management said they are actively addressing the working capital issue, which will release a lot of cash.
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.
Mustek revenue
Mustek’s average annual revenue growth has been 14.9% since 2019. This is significantly higher than the average annual revenue growth between 2002 and 2018, which was 4.85%.
Although the group’s revenue saw strong growth, in its latest interim financial report, Mustek’s revenue saw its first decline in trailing annual revenue.
Interim revenue dropped by 13% from R4.91 billion to R4.27 billion. The main reason for the decline was a 55% decrease in the group’s sales of sustainable energy solutions.
Mustek’s entire business suffered from revenue decline, and all three segments saw revenue pullback.
Mustek’s profitability experienced a strong boost during the lockdown. In 2021, gross profit margins and group net profit margins were at the highest levels in a decade.
However, margins have pulled back ever since, with its latest interim report delivering a gross profit margin of 13.4% and a net margin of 1.23%.
This is in line with profits Mustek delivered pre-pandemic but significantly lower than the highest gross margin of 16.25% and net margin of 3.71% it achieved during 2021.
Mustek Operations
Mustek operates in two main segments aside from its smaller Mecer Inter-Ed segment — Mustek Operations and the ICT distributor Rectron.
Mustek Operations, founded on the Mecer brand, assembles ICT products and distributes ICT brands across its reseller network.
This segment delivers most of Mustek’s overall revenue. Its latest annual report showed it contributed 64% to the group’s revenue.
Since 2019, the segment has increased its annual revenue by 72% – from R3.8 billion to R6.53 billion.
However, it pulled back significantly in the most recent interim results, with revenue declining by 15%, from R3.3 billion to R2.8 billion.
Profitability also came under immense pressure. It dropped by 51% from the previous six-month period.
Rectron’s performance
Rectron specialises in distributing ICT products to South African SME resellers and provides software solutions and services.
Like the Mustek operations segment, Rectron has experienced strong growth since the pandemic. However, revenue retracted by 10% in the last interim period.
It also suffered a big decline in profitability. It fell from an interim net profit of R22.96 million to only R7.98 million, representing a 65% decline.
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