SMALL CAP UPDATE - cdn.24.co.zacdn.24.co.za/files/Cms/General/d/1436/5debef82a0614d6bb8564c7d… · Merchantec CEO Confidence Index • Regular survey to all approximately 400 CEO’s

Corporate Profile

SMALL

CAP UPDATE

July 2011

Brian Rainier, CFA

Merchantec Research

1

Highlights

• Valuations remain under pressure

• Poor earnings visibility – losses still being reported

• It DOES appear that many smaller companies have been worse hit than larger more

established companies by the Global Financial Crisis

• Over-investment on very low reserves and weak balance sheets

• Many small companies were particularly leveraged to growth

• Some in better shape than others: still opportunities out there…

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AltX vs Small & Mid Cap Indices

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To highsJ201: 18%J202: -12%J232: -78%

Merchantec CEO Confidence Index

• Regular survey to all approximately 400 CEO’s

• Provides an early guide of the changing sentiment in the listed sector

• 2nd Quarter 2011 Results

• Whilst overall confidence is close to 60%, indicating overall optimism, the

index is down on last quarter…..confirming things are still tough across all

industries

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CEO Confidence Index

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General Small cap risk premium

• Average implied equity risk premium – 10% (DCF 17%)

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ADR Kel PCN Mix DGC CBH SOV

Implied DCF factor

IT Small cap risk premium

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10.00%

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30.00%

BCX DCT ADI EOH SDH CVN GIJ MST PCN PNC UCS

Implied DCF factor

• Average implied equity risk premium – 15% (DCF 22% )

AltX risk premium

• Average implied equity risk premium – 27% (DCF 34%)

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10.00%

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BEG BWI FWX IQG RAC SFH TAS TFX

Implied DCF factor

Adcorp

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• Profile: Adcorp offers human capital services and outsourcing solutions. Activities include temporary staffing, permanent recruitment and business process outsourcing (BPO).

• Price: 2840c

• Market Cap: R1.8bn

• Revenue: R5.38bn

• HEPS:196cps

• DY: 6.4%

• Forward PE: 9.3

• FY11 Forecasts

– Revenue growth of 7%

– HEPS growth of just 1%

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PCN ADR KEL

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Employment growth vs. GDP

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Adcorp

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Adcorp

Staffing Price (R)Mkt cap

(Rm)

1 year fwd

PE

Paracon 1.95 682 9.67

Adcorp* 29.50 1719 9.24

Kelly 4.01 401 11.50

Average 10.1

Premium (Discount) applied to average: 20%

Adcorp: Implied current (gain): 38.85 31.7% 12.2

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Both our DCF and relative PE valuations indicate that the share is undervalued value and we recommend a BUY

Share is cheap at the bottom of the employment cycleDividend yield of 6.4% is attractiveWell managed Government’s new growth plan to target blue collar employmentMarket discounting the share due to regulatory risk which we believe is unlikely to

materialise

Adcorp

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PE upside (downside) DCF upside (downside)


Price R 28.75

DCF value R 34.89

PE value R 38.63

Mix Telematics

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• Profile: Mix Telematics (Mix) offers stolen vehicle recovery (SVR) and fleet management (FM) solutions, with a diverse geographical presence which extends across 111 countries.

• Price : 140c

• Market Cap : R919m

• Revenue: R886.6m

• EBITDA margin: 20.2%

• HEPS: 11.4 cps

• Forward PE: 7.8

• FY11 Forecasts


– HEPS growth of 27%

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J202 DGC MIX

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Key Catalysts

• Tender activity

• GDP Growth new vehicle sales

• Credit cycle

• Oil price (Middle Eastern and US operations)

Key Risks

• Continued strength of the Rand

• European sovereign debt concerns

• Interest rate hikes slowing vehicle sales

• Technology advances

Mix Telematics

15

Why we believe Mix Telematics holds value

Strong annuity revenue base (~57%)

Significant Rand Hedge

Level 2 BEE (Largest local fleets are government owned)

Expected to secure phase 2 of the Eskom contract (4 000 units)

Secured two large US contracts (12 000 units)

Imperial Holdings acquired a 25% stake in 2010

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Mix Telematics

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Mix Telematics

Vehicle Tracking Price (R)Mkt cap

(Rm)

1 year

fwd PE

Altech* 60.64 6233 9.5

Imperial* 123.38 25790 9.5

Mix Telematics 1.36 894 7.8

Digicore 3.21 795 10.1

SCIT Index 8.0

Average 9.0


Mix Telematics: Implied current (gain): 1.56 15% 9.0

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Both our DCF and relative PE valuations indicate that the share is undervalued value and we recommend a BUY

57% annuity revenueUS operations turned profitable H2FY11, recently secured 2 large FM contacts. Rand projected to depreciateEskom contract (Blue sky)Level 2 BEE

Mix Telematics

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Price R 1.36

DCF value R 1.63

PE value R 1.56

EOH

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• Profile: EOH is a business and technology solutions provider for medium to large clients

• Price: 2041c

• Market Cap: R1.68bn

• Revenue: R1.73bn

• HEPS:142cps

• DY: 1.9%

• Forward PE: 7.1

• FY11 Forecasts



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J953 EOH

EOH

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Key Catalysts

• Opportunities for further acquisitions

• Continued demand for IT services

• Government expenditure

Key Risks

• Increased competition in larger tenders

• Continuation of growth will require larger acquisitions

EOH

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Why we believe EOH holds value

Strong track record of organic growth and successful acquisitions

Well managed

Increased empowered profile and new government opportunities with latest acquisition

Positioned for developments and changes in ICT wrt Cloud Computing

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EOH

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Systems Integrators Price (R)Mkt cap

(Rm)

1 year

fwd PE

BCX 4.60 1863 11.6

Adapt IT 0.74 73 4.9

ConvergeNet 0.27 247 11.1

Gijima 0.56 542 -

Datacentrix 4.35 893 8.9

EOH 20.41 1822 7.1

SecureData 0.65 160 4.9

SilverBridge 1.30 45 9.5

Paracon 2.04 682 10.2

Morvest 0.21 143 2.5

Average 7.9


EOH: Implied current (gain): 29.75 42% 10.2

EOH

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Our DCF indicates the share is at value at a discount rate of 20.0%* whilst our relative PE valuation indicates that the share is undervalued value and we recommend a BUY (R29.75)

Provides a complete end-to-end outsource model Large government projects now in reachConsistent performer

*Due to its consistent performance and relative size we believe a 20% discount rate is more appropriate for EOH

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Adapt IT

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• Profile: develops and supports niche IT application and IT outsourcing, specifically in the sugar industry, expanding into the energy, mining and process engineering markets

• The group also supplies niche ERP systems for tertiary institutions with a global client base

• Price: 74c

• Market Cap:R79.1m

• Revenue: R196.7m

• (*change in year end for 16 months)

• HEPS: 13.6 cps

• DY: 4%

• Forward PE: 4.9

• FY11 Forecasts



– *adjusted for 16 months

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Adapt IT

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Key Catalysts

• Sugar industry recovering from drought

• Conversion of new market & product opportunities

Key Risks

• Industries of operation still under pressure

• Still a relatively small player

Adapt IT

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Why we believe Adapt IT holds value

Strong track record of successful acquisitions

Well managed

Empowered

Growing global business prospects

Possible acquisition target

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Adapt IT

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(Rm)

1 year fwd

PE

Adapt IT 0.74 73 4.9

BCX 4.60 1863 11.6


Gijima 0.56 542 -


EOH 20.41 1822 7.1


Paracon 2.04 682 10.2


Morvest 0.21 143 2.5

Average 7.9

-38%

Adapt IT: Actual current 0.74 73 4.9

Premium (Discount) applied to average: -20%

Adapt IT: Implied current (gain): 0.96 29% 6.3

Adapt IT

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Our DCF valuation indicates the share is at value whilst our relative PE valuation indicates that the share is undervalued (R0.96) and we recommend a BUY

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Price R 0.74

DCF value R 0.79

PE value R 0.96

FoneWorx

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• Profile: FoneWorx provides Fax2Email, PC2Fax, secure hosting, storage, DR facilities, and virtual business services

• FoneWorx also offers large scale SMS services for companies running advertising and viral marketing campaigns across the continent

• Price: 85c

• Market Cap: R118.3m

• Revenue: R91.9m

• HEPS:15cps

• DY: 5.2%

• Forward PE: 4.4

• FY11 Forecasts

– Revenue growth of 7.9%

– HEPS growth of 12.1%0

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FoneWorx

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Key Catalysts

• Growth in African Fax2Email and SMS services

• Conversion of new market & product opportunities

Key Risks

• Fax2Email as a technology service has a limited lifespan

• Increased competition – disintermediation by major telco’s

• Small size of company

• Technology shifts in SMS

FoneWorx

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Why we believe FoneWorx holds value

Well managed

Consistent revenue generation

New products showing potential

African growth starting to pull through

Dividend yield

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FoneWorx

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(Rm)

1 year fwd

PE

Adapt IT 0.74 73 4.9


BCX 4.85 1920 12.3

Gijima 0.57 552 -


EOH 20.41 1822 7.1

Fonew orx 0.85 116 4.4



Paracon 1.80 647 9.0

Simeka 0.20 136 2.4

Average 7.4

FoneWorx: Actual current 0.85 115.6 4.4

Premium (Discount) applied to average: 0.0

FoneWorx: Implied current (gain): 1.46 72% 7.4

FoneWorx

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Both our DCF and relative PE (R1.46) valuations indicate that the share is undervalued and we recommend a BUY

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Price R 0.85

DCF value R 0.89

PE value R 1.46

Disclaimer

33

The data provided in this report is for information purposes only and for no other purpose. Whilstevery effort has been made to ensure that the information contained in this report is accurate,Merchantec (Proprietary) Limited (“Merchantec”) does not guarantee the sequence, accuracy, orcompleteness or any other aspect of the data nor shall Merchantec or any of its directors,officers, employees or agents be liable in any way to the reader or to any other person (natural orjuristic) whatsoever for any delays, inaccuracies, errors in, or omissions in respect of such data orthe transmission thereof. Merchantec takes no responsibility for any loss or damage suffered byany person as a result of reliance upon the information contained herein. Any investmentsreferred to herein may involve significant risk, are not necessarily available in all jurisdictions,may be illiquid and may not be suitable for all investors. The value of, or income from, anyinvestments referred to herein may fluctuate and/or be affected by changes in exchange rates.Past performance is not indicative of future results. Investors are expected to make their owninvestment decisions without relying on this publication. Only investors with sufficient knowledgeand experience in financial and business matters to evaluate the relevant merits and risks shouldconsider an investment in any issuer or market discussed herein. The inventories of Merchantecmay from time to time include securities mentioned herein. Given that traditional brokeragepayment alone would not cover the costs of producing this research; a subscription-based modelhas been employed where subscribers (including some companies being researched) arecontributing a nominal amount per month for access to the on-going research. Merchantecand/or its affiliates and any of its or their officers may have an interest in transactions and/orsecurities referred to herein. Merchantec and/or its affiliates, may perform services, for, or solicitbusiness from, any company referred to herein.

Contact Details

Merchantec (Proprietary) Limited PO Box 414802nd Floor North Block Craighall 2024Hyde Park Office Tower Tel: +27 (0)11 325 6363Cnr 6th Road & Jan Smuts Ave Fax: +27 (0) 11 325 6362Hyde Park, Johannesburg

Contact Us

Brian Rainier

[email protected]

34

Documents

SMALL CAP UPDATE - cdn.24.co.zacdn.24.co.za/files/Cms/General/d/1436/5debef82a0614d6bb8564c7d… · Merchantec CEO Confidence Index • Regular survey to all approximately 400 CEO’s