BCX blues
WATCHING BUSINESS CONNEXION'S price fall below 500c/share last week, people might have been forgiven for thinking that Telkom was willing to significantly overpay for an asset. Its 925c offer fell away at the hands of the Competition Tribunal just seven months ago.
Either that or the market is more than a little disillusioned with Business Connexion (BCX) and doesn't anticipate Bytes Technology will come through with a renewed offer for the company. BCX CEO Benjamin Mophatlane attributes the drop in price – taking it below net asset value, which was 555,9c at year-end – to a combination of global market weakness and the fact that the market's still rating the company on its previous, full-year results to May. Those were released in August last year.
Mophatlane says the market wants to see direction and a game plan from the company when it announces interim results towards end-February. "We have a plan in place and we'll have a story to tell," Mophatlane promises.
Meanwhile, some value investors have been capitalising on its weakness. Mophatlane notes (with encouragement) that Allan Gray is now the biggest institutional shareholder at almost 17%, which came as a "surprise" to it, he says.
Allan Gray sold out of BCX after it disposed of its European operations and paid the proceeds, a total of 650c, out as special dividends early in 2004. That came about as a result of what was seen at the time as shareholder activism by Allan Gray and two other institutions: Investec and Sanlam Investment Management.
BCX has undoubtedly had a rocky ride. The potential for more uncertainty exists, particularly if recently delisted Altron Group subsidiary Bytes comes through with an offer for the company. Bytes has long believed the two would make interesting bedfellows but walked away because it wasn't prepared to offer as much as the BCX board believed the company was worth.
Mophatlane said Bytes CEO David Redshaw hadn't been to see him this year, but declined to say whether the two had spoken recently.
Kaplan Equity Analysts' MD Irnest Kaplan has been right on BCX. He never believed it was worth 925c/share. In fact, he valued it – using a five-year, discounted cash flow valuation – at 529c/share after its results last year. He recommended clients should sell at that stage.
Kaplan says nothing much has changed that would influence his valuation of the company. He believes the share is currently trading at fair value, for the first time in ages.
Even though BCX has, post year-end, won a portion of a significant SA Revenue Service tender – the Managed Network Services tower that Kaplan estimates should be worth R100m to R150m/year to BCX – that revenue wouldn't yet have flowed through. And even though big, such a contract wouldn't be material enough to influence his valuation, Kaplan says.
Of some concern, says Kaplan, is the fact that neither Bytes nor some other – perhaps overseas – predator stepped in and made another offer for BCX. Kaplan says although it's been through a rough patch, he believes it should be able to surmount its recent issues and re-emerge to a position of strength. It's still a "great company" – one of SA's best-positioned ICT services companies – and should still be an attractive acquisition target. Either way, Kaplan says investors shouldn't value a company based on its potential as a takeover target.
Mophatlane took over the reins from Peter Watt in July last year. Watt stepped down from the board in an executive capacity from the beginning of January this year and is now a non-executive.
Mophatlane said from the outset that he'd make some changes and quickly reduced the size of the executive team to what he considered more manageable levels. He also promised to re-look at whether BCX was appropriately structured. In addition, Mophatlane said previously that he wanted to roll the empowerment shareholding (Gadlex) up from the operating to the holding company level and also look at bringing in some sort of anchor tenant shareholder to protect against unwelcome interest.
BCX held its AGM on Tuesday last week, with shareholders giving it permission to issue shares for its share trust (up to 15% of the share capital, to be placed under the control of the directors), and to buy back shares.
It would be instructive to see if BCX sees value in itself at current levels and proceeds with aggressive buybacks.
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