Mustek Limited (MST) Earnings Call Transcript & Summary

[Audio Gap] And thanks for joining us on this presentation of the interim results of Mustek for the period ending 31st December, 2024. My name is Hein Engelbrecht. I'm the Group CEO. And with me...

Shabana Aboo Baker, I'm the Group Financial Director. And on behalf of the Mustek Group, for all our Muslim stakeholders, we'd like to wish you a Ramadan Mubarak. And for those that are observing Lent, wishing you all the best over this period.

Thank you, Shabana. And maybe just a word of warning, we're actually experiencing quite a bit of a static power supply within the Midrand area. The power in our whole block went out about 5:00 a.m. this morning. And obviously, the solar backups were fairly depleted by the time everybody got to work. So the load created a bit of -- [indiscernible] created a bit of problems. [indiscernible] We've got backup power here, so we should be okay. But if there are any disruptions, please just -- apology upfront from our side. Just maybe some of the salient features. I'll just go through some of the highlights or lowlights and then Shabana will go into a bit more detail. Some background on the company and the group, where we're coming from and where we're going. And then I'll finish up with just some of the -- maybe some of the prospects and the outlook for the industry as a whole. I think if you look at these results, I think it's fair to say that the group performance remained under pressure. I think it was the whole calendar year last year. And yes, it's reflecting some of the challenges, which is [indiscernible] by the global and local economic conditions. I mean if you look at persistent inflation, elevated interest rates, sluggish economic growth, fluctuating consumer and investor confidence in both South Africa and internationally, that all affected us negatively. Some of it was self-inflicted. As you know, a couple of years ago with COVID we did exceptionally well. So the year after that with the challenges we had with power supply, we do exceptionally well. And we made some mistakes, we were overstocked and we're working quite hard to actually get that rectified. So like I said, some of it is external, but some of it is also internal and self-inflicted. And we're trying our best to rectify that. If you look at from a revenue point of view, a decrease of 14%. It's -- I think from a Rectron point of view, it's a reflection of the lower consumer demand. And then from a Mustek point of view, more being selective in deals that either we accept or not, that align with our risk appetite and our profitability targets. Just Shabana might give you a bit more detail, but just in the comparative period we did with one specific project about ZAR 600 million worth of business in the 6 months to December '23 and the comparative is only about ZAR 400 million, right? So, being selective there because some of these larger projects do absorb cash and you only return it into cash in 9 to 12 months, and we are very cautious about those deals going forward. Gross profit, slight increase there due mainly, as I said, being selective on some of the transactions we're engaging in, but also more favorable product mix. We've got certain products that give us higher GP margins than others. And depending on how they perform in a specific period, obviously, that's the effect. Also recovering some of the ForEx losses. If you look at profit before tax, down about 75%. One of the areas that affected negatively there is the ForEx. Included in those numbers there's a ZAR 28 million ForEx loss, of which most is unrealized. And we're hoping to recover either through higher selling prices or as the rand has appreciated in the last couple of days, by appreciation of the rand. So hopefully, that turns positive through to 30th June. On the operating cost side, again, I think improved budget management and stick to discretionary purchases and spending has resulted in actually a 5.2% reduction in overall expenses. Keeping in mind that there is certain inflationary pressure still on a lot of the segments within the operating expenses. I think the management did particularly well there. We were encouraged -- if I look at just last -- the cash generated from operations, we're encouraged by the improvement in working capital. I think we've highlighted the last time it's going to be a focus area for us, not only for the 6 months, but probably through to year-end as well and beyond and then hopefully maintain it at nice levels. So the net result of that in the cash generated from operations, which obviously is a result of the efforts to enhance liquidity and strengthen our financial position despite all the difficult trading conditions. The finance cost has been and will remain a focus area for us. And I think the management is quite pleased with the reduction and the decrease in net finance cost by about 23-odd percent. While we received some relief from ZAR in U.S. dollar interest rates in the second quarter of FY '25, I think the bulk of the reduction was because of the focus on the working capital. And if you try and extrapolate the year, Shabana might be able to give you a better idea, but a lot of the benefits only came through specifically on the Mustek side, maybe in the last quarter of the 6-month period. So hopefully, that will show a trend through to June. And hopefully, we continuously improve. I think the other thing as well, and I'll touch on when I go through the group and some of the investments we've got, the associates contributed positively about ZAR 5 million profit [ for ] the previous year as we combined, they incurred a loss. We disposed of the investment in Zaloserve. And if you look at the current investments, Khauleza, which is the desktop maintenance and support, is breaking even. They've got a nice contract and hopefully, they can get one or 2 more and be able to get the benefits of the economies of scale. CPS, which manufactures a wide range of server cabinets and used to be a big manufacturer of our trolleys that we used for the batteries and inverters, they're profitable. And then YOA, which is our fiber cable manufacturing operation in Dubane, in Durban, they contributed positively. But I think from their side, if you look at January, February and March, the pipeline and the actual rollout of fiber was pretty good. They're doing nicely. I think if you look at maybe just on the distribution side as well, November and December was particularly bad for us both in Mustek and Rectron. January better in both Mustek and Rectron and so is February. We're not shooting lights out, but it's a lot better than what we did in the previous 6 months. So hopefully, that trend continues speaking to the salespeople. They see a lot more requests from customers. On the government side of things, we were hoping to do quite a bit of business in basically this month of March. There seem to be some delays. So we're not overly excited about what's going to happen in the next couple of days. But there are business and there's a lot of requests. And I think that's one thing that gives us a bit more -- like we said in the announcement that we're cautiously optimistic, and I'll give you a bit more detail later on why we're cautiously optimistic. But yes, it seems -- things seems to be happening. And now it's just a matter of being ready. And if we can keep our working capital contained at the level where we are now, I think it should be positive for the foreseeable future. If you look at -- for the people that's not familiar with the group, maybe just a quick one, and I don't want to run through it too quickly, but we were established in 1987, listed in the JSE in 1997. We've got a national presence. We've got some investments, or investment in Kenya, investment we had in Nigeria, we exited a couple of years ago. So externally, that's our only exposures we've got. But the main focus is on SA. And the reason for the national presence is we just felt from a service point of view and a presence there, creating jobs in the environment that we're trading in, it's well received, and that's something that we've initiated a couple of years ago, and I do believe that it's beneficial to us as a group. And then our mission is obviously to look at material stakeholder needs and working on the long-term sustainability of the group. Like I said, we've made some mistakes, and we are in the process of rectifying it. I think we've done pretty well in doing -- rectifying some of it, but there's still a long way to go and hopefully to create a sustainable business over the long-term. And we'd like to believe that we are end-to-end IT and sustainable technology solution provider. I'll run through some of the [indiscernible] to show maybe how we anticipate and how we positioned ourselves. So from a Mustek Group overall, you've got the distribution side of the business, which is mainly Mustek and Rectron. Then on the trading side is mostly Inter-Ed, which even in the 6 months did particularly well. A slight decrease in the revenue, but the profitability is quite good. So they are doing quite nicely, and it's continued now in Jan, February and seems to be quite well positioned for the foreseeable future. Then on the manufacturing and assembly side, we've got CPS, like I've discussed with you and mentioned they do the server cabinets and our trolleys, and then YOA which is the fiber manufacturer in Dubane. We're actually having a launch of the new facility next week, Tuesday, I think, if I remember correctly, where they've doubled their capacity, where historically they were only able to do about just over 1 million fiber kilometers per annum. They can do 2 million now and happy to report that they're running at full capacity in the last 2 months at the higher level. And then on the service and support side, Khauleza more desktop maintenance service and support. Mustek and Rectron is there because we're doing a lot of service and support in-house. And then the new acquisition that we did in the last financial year when we disposed of our Zaloserve was Cyberantix and they focus -- they've got security [ as ] an operating center. So typically, what they do is they monitor your network and there's all sorts of technology and world-class technology that they use to detect any threats and to report. They don't fix themselves, but it's just like your IT department and they look after your environment 24/7. Very profitable, highly profitable in next 3 months. And to say, unfortunately, I can't mention the names of the customers they've signed up, but they've signed up quite substantial customers in the last 2 or 3 months as well. And it's annuity income. And I think that's a nice part of their business. It's annuity income. It's not big numbers per month, but there's quite a few of them, and it all adds up. And we're pretty excited about Cyberantix. Once again, next week, Wednesday they're opening their new SOC, which has increased the capacity substantially as well. So we're pretty excited to go and see what they've done there. So pretty excited about Cyberantix and the potential way forward. Just on the products and it's more distribution and planning side. A lot of people say, you've got all these products, where do they fit in? And that's typically how we think, you've got certain product solutions on the edge, and the edge for the people that know, that's typically a machine that's in front of you, which you're looking at. And I'll touch on that later, but I think there's great opportunities going forward on that side. Gaming, software and cloud, and there's all our products there. And so by the way, I think this presentation will be available on the website. So if we're going a bit fast, you can always go back and just have a look at what we've got and see how it fits in the bigger picture of things. Then on the network infrastructure and service side, there, once again, we do believe with AI-specific and the opportunities that will arise from artificial intelligence in the future. That's an area of potential growth for us. Sustainable energy, as much as that was a big growth area for us 2 years ago. That unfortunately has slowed down substantially. But quite interesting when [indiscernible] defaulted versus about 2, 3 weeks ago, there was immediate reaction. So it sounds a bit harsh, but if they can do it a bit more often, that will help us to clear the excess stock that we still do have. Then on security and compliance, that's -- those are typically the products we've got. And obviously, then that's where Cyberantix will play in. And then more on the MIE or Mecer Inter-Ed side in training and enablement. And they are -- obviously, the biggest partner of ourselves is Microsoft and there's a lot of training happening about Microsoft -- around Microsoft. And we do believe that's going to continue specifically once again with opportunities that might arise with Windows 11 and artificial intelligence. So those are just maybe a bit of background on the Mustek Group and some of the brands that we've got in-house. And what I'll do now is just give it over to Shabana just to go into a bit more detail and explain some of the -- from the financial side to everybody. And please, if there's questions, we will have a Q&A session, just post it on the questions on the meeting. And then Nicole will just feed it through to us once we're done with the operation -- once we're done with the presentation and see to what extent we can answer. And if not, we'll just get your contact details and report back to you guys.

Thank you, Hein. Appreciate it, and good morning again, everyone. So, just on the financial summary. So this is a 6 -- sort of 6 half year overview of our performance over the previous 6 halves. And as Hein mentioned, the 2021, 2022 financial year, and for those who have been tracking Mustek for a while, you've heard me saying this before that the 2021-2022 financial year was more the COVID work-from-home hype where we experienced exceptional growth in the business. And then the 2023 financial year was marked by the load shedding era where sustainable energy was a big driver of our revenue growth over those periods. Subsequent to that, we started seeing a decline in performance from the 2024 financial year almost going back to normal pre-COVID levels. And as Hein mentioned, on the revenue side, obviously, we've seen economic downturn. We've been experiencing and we've been -- we felt it. And as much as we try to -- we foresee a stable operating environment at the end of the financial year in June, the economy has just not stabilized and the growth that we expected just did not materialize. But this is just an overview. I will go into the main sort of KPIs of all line items on our income statement and balance sheet, just to give you a bit more color as to what was the driving factors around each of those numbers. So as I mentioned, revenue, economic and industry pressures continued. And also from a Mustek -- as Hein mentioned, from a Mustek perspective, specifically, we were very -- more sort of picky on some of the deals that we went through in terms of our -- in line with our risk appetite as well as our profitability targets and try to just maintain and control our working capital and the related finance costs with that. So that has had an impact on our overall revenue numbers. But from a GP perspective, that has been -- that has proven quite nicely. So we've had a nice uptick especially from the second half of the 2024 financial year, down at 11.1%, down -- up to now 13.8%. And I think what is also quite positive that within this period also we have been trying to push out slow-moving stock. And generally, when you move slow-moving stock, you do it at lower margins. But with that move of slow-moving stock, we were still able to maintain a higher margin or be able to recover margins quite nicely. And another impact on our GP margins was also on product mix. So focusing on products and those that are giving us higher margin as opposed to the smaller deals that are at lower margins. So a bit of tactical strategy and change within both the Mustek and the Rectron business, but that has resulted in better returns, which we hope to continue over the rest of the financial year. If I look at EBITDA, and you'll see that -- you'll think that I've left out certain periods, but I've kind of extracted the honeymoon phase of our business being the 2021, 2022, 2023 financial year and just had a look at what our normal operations EBITDA is. And you'll see that we have gone back to pre-COVID stabilization on an EBITDA level. And -- but I think what the main difference is that boils down into our net profit numbers is that pre-COVID we were not operating at the interest rate levels that we are -- currently are. So I think the highest that we ever went to over pre-COVID was around 10%, where we're averaging now on the South African prime rate, 11.6% -- or we're now down to the 11%, 11.25% levels, but the average for this period was 11.6%. So that makes a massive difference on your overall bottom line from your EBITDA. And then another big thing that impacts our net profit compared to EBITDA is that we previously pre-COVID were in the process of implementing an ERP system that has now been implemented, and we are depreciating it over the useful life. So obviously, from a depreciation and amortization perspective, that also has increased. But I think what is important around operational cost is, as Hein mentioned, we've had a year-on-year savings of 5.2%, and that's predominantly through cost containment efforts. We've done a lot on head count freeze. Both Mustek and Rectron have just been through a Section 189 that has just been completed. And going forward, probably within the 2026 financial year, we will see some of those savings coming through on an operating cost. We are obviously still subject to inflationary pressures on certain segments of the -- of our operational costs, but we are trying to contain it as much as possible. Net financing cost still features quite significantly on our income statement, and that is because it is still quite a big number. However, we've seen a 23% year-on-year saving on net financing costs, which we are quite pleased about. And if you just have a look at the average interest rates in comparison to where we were this time last year, there has been a drop -- a slight drop through the interest rate cuts that we've seen in predominantly the second quarter of the half. But majority of this -- the interest rate savings has come through from our working capital reductions. Rectron, for example, had reduced their working capital through June, and they've seen that savings come through in this financial -- in this half, whereas Mustek started seeing their reduction only towards the latter part of the half. So we will -- we expect to see a lot more savings or quite a bit of more savings in our financing costs over the next 6 months of our financial year. Headline earnings per share, obviously, quite a dip, and that's predominantly relating to our decline in operating profit, which is a result of the reduction in revenue, net financing cost, ForEx losses, et cetera. I think a nice uptick from where we were in the second half of 2024, but second half of 2024 was marked by once-off expenses such as the impairment and write-off on the investment in Sizwe and as well as the high financing cost environment that we still were subject to. Looking at our net asset value and tangible net asset value per share, look, our balance sheet still remains strong. And over this half, I think we've strengthened it a lot more, even though we've reduced working capital. We've obviously reduced our borrowings, which reduces our exposure and sets us up for reduced financing costs over the second 6 months of the financial year. Moving on to -- sorry, moving on to the balance sheet. Sorry, just a timing delay. Okay. Inventory. So inventory has reduced quite nicely compared to where we were at June 2024. Still, the inventory days seems to be high, but that's obviously because of the reduction in the revenue number. And as Hein mentioned, working capital still remains a focus area. We have managed to reduce or extract between inventory and receivables in excess of ZAR 550 million. But we still -- as Hein mentioned, we have made some mistakes, and we are continuing to rectify those and working capital still remains a focus.

Yes, [ I might -- if I might ] I just interject, I'm sure the question will come, but at the end of June we had our Sustainable Energy ZAR 660 million of inventory. It's reduced now to ZAR 480 million. Another question is probably going to come up. So we are making progress, but it still needs some work. There are some opportunities that can expedite the reduction, but still early days in discussions. So hopefully, by June, we'll be able to give you a better update on that.

Thanks, Hein. Just moving on to receivables. Okay. So receivables, economic constraints. So we are still -- there is a lot of customers that are asking for extended payment terms. So that is impacting our overall days and as well as the reduction in revenue that has it. But also with receivables we've made some good progress compared to where we were at June, and we continuously remain -- it continuously remains a focus area for us. Okay. And then the next one, cash generated from operations. I think I love this slide. This graph is going in the direction that we really wanted to go. So as I mentioned, the focus on reduced working capital, and I think Hein and myself have been harping on this for the past 18 months that working capital remains a focus, working capital remains a focus. And it's quite pleasing to see that, that focus has actually started generating some results. And we can see that through the cash that we've released from inventory and receivables and resulting in a ZAR 698 million cash generated from operations, with majority of that used to reduce our overall borrowings.

And I think maybe just to mention there as well, normally in December we absorb cash and then we generate cash through to June. So I think this is quite pleasing that we've managed to do this turnaround and do it quite quickly.

Yes. And then that's it from me. I hope I didn't go too fast, but I'll hand over to Hein on the strategic priorities.

Yes. I think we've mentioned before for this financial year '25, we've set it out last year already that our strategic priorities as a group is obviously, as we've discussed, is the structural improvement in working capital and liquidity. Still some work to do there, big [indiscernible] on [ current ] terms. Yes, it does have an effect on your revenue line. But I don't think that's a priority for us at this stage is chasing revenue. And I think we need to get the balance sheet sorted out. We are looking at disposing of nonstrategic and noncore assets. We are in some discussions. Unfortunately, we can't share more details, but that's work in progress. We have disposed of the one last year, which is Zaloserve. And then we are -- we'll continue looking at the future as well and look at smaller complimentary acquisitions that make sense for the group. And then the one specific I can mention here is Cyberantix, which we are pretty excited about. So those are strategic objectives. Some of them we've met. Some of them still work in progress, but we are working on it. Just for some of the opportunities and maybe just look at the group's prospects and the industry outlook as such. I think if you look at the -- a lot of the analysts will -- they are predicting and expecting that the growth will improve in 2025. It will mainly be driven by increased IT spending, obviously, AI investment, cybersecurity solutions. And I think a greater emphasis on hybrid cloud approaches. We've seen in the past where one stage it was -- everybody was going to the cloud, and I think people are actually coming back now and say have a hybrid approach. Cloud tends to over time become quite expensive and people want to be in control of their own environment as well. And when they start looking at a hybrid type of model, and that obviously bodes well for us, specifically on the server and the infrastructure side of the business. And saying that it is expecting that the spending on data center equipment and devices, which is obviously where we're playing quite handsomely. Software is forecasted to grow by double-digits in the year compared to single-digits in the previous year. And I think our distribution business is well positioned to capitalize on this -- on these opportunities because we've got some strong relationships with our partners within the supply chain. And then AI, I mean everybody talks AI, and I think it's been a means for enterprise innovation, automation and people getting a competitive edge and it's been there for several years. But I think it's risen now to the top of the IT priority list. And new AI cases with measurable AI return on investment are starting to surface. And I think that's leading to an increased optimization for IT spend in 2025 and obviously, into the underlying infrastructure and edge devices. So we are cautiously optimistic of improving conditions in the future. And specifically as these trends develop and evolve, and then also specifically return on normal replacement cycles, increased spend on cybersecurity. And then yes, it comes with growth in infrastructure and devices to drive tangible benefits from AI. So if you look at a lot of the installed base out there with the spike that we had in 2021 with COVID, those machines are 4 years out now. So we're expecting them to come back to the market as well. And then the other thing that I've just read this morning as well, there was some research that was done, I think it was on -- I don't know if it was on behalf of Microsoft, but it was done on an installed base -- not an installed base, I mean the survey size was 10 million Microsoft users. And what they come back is only 50% of those devices that the people were using currently are capable of being upgraded to Windows 11. So we've also seen from a lot of the larger corporates and government space, there's a lot of requests regarding Windows 11, keeping in mind that Windows 10 the support ends in, I think it's October this year. So it's just around the corner. And if you look at the adoption of Windows 11 worldwide, it's still pretty low, but it's picking up pace quite extensively -- exponentially over the last couple of months even. So we do expect that closer we get to time, people realize that to equip them for the future, they need to upgrade their hardware. So they're capable of using Windows 11. And you will ask them why Windows 11. I think a couple of quick ones is, number one, security. They've got a lot more security features. Number two, speed, and then they are AI enabled. So I think those are the things that's going to be driving spend over the next year, 2, 3, maybe even longer. Maybe have a chat to your CIOs and ask them what their plans are. But I think a lot of people are under pressure both from -- to get themselves AI ready and to get the benefits of AI, but also from a security point of view to give them the best chance of protecting themselves. So those are some of the opportunities we see in the future. And then the one that's on the self-service offering is just the internal project that we've got. We're nearly there. We've installed, and I think Shabana has mentioned the new ERP system. That now enables us to actually put some e-commerce on top of that, which hopefully will be beneficial to our resellers where they can come on to our system. They can download it through EODs, they can check the invoices, they can check their account balances. They can go on the system and see stock availability. They see the pricing, they can place the orders online, can see ETAs if the stock is not available. So we do believe that, that's going to enhance the offering that we've got to our customers as well. And hopefully, that can generate some more profitable revenue for us in future.

Sorry, and if I could just add on the Windows 11. I think from a cybersecurity insurance policy perspective, I mean, we've seen that the insurers actually are not going to be -- one of the requirements for cybersecurity policies is to make sure that your environment is upgraded to Windows 11 or on the higher security levels. So I think from -- especially your big corporates that have -- and I think it's a must these days to have cybersecurity insurance. That is going to be one of the biggest requirements, and that's where we also see opportunity coming through on upgrading of devices.

Yes. So yes, I think all those things are coming that we're cautiously optimistic. Yes, it might take some time to start materializing. But yes, there's great opportunities for us in the foreseeable future. Then I think just from -- maybe I'll just ask you by now, because I know a lot of people would like to know just some of the -- maybe just an update of where we are with this -- with our Novus transaction, just for information purposes, and I'm sure there might be some questions as well.

Yes. Thank you, Hein. So yes, just on an update. So you all are probably aware that Novus Holdings issued a firm intention announcement on the 15th of November, giving the market -- indicating to the market that they will be making a mandatory offer to Mustek shareholders for their share. And the offer currently on -- that is in play is ZAR 13 cash or ZAR 7 cash and 1 Nova share or 2 Nova shares. Subsequent to that, Mustek, as part of the normal process, has appointed an Independent Board and the function of -- or the responsibility of the Independent Board is to ensure that the process is being run in the correct way, that valuations are independently done, fair and reasonable opinions are being put together. And we're currently in the process of getting the necessary approvals from all the regulators that are in play. You would have probably seen that the Competition Commission has referred the transaction to the Competition Tribunal with a recommendation to approve the transaction. We have also had to submit filings -- competition filings to a number of jurisdictions within Africa. That process is going about quite nicely, and we've managed to -- we've already gotten approvals from, I think, Kenya, Botswana and Namibia. So subject to all the regulatory approvals coming through being -- the main ones being the Johannesburg Stock Exchange and the takeover regulation panel, we are -- we intend to issue the joint circular on or about the 14th of March. If there are any delays, we will notify the market through a SENS announcement. So that's all at this point in time. That's what we can give on the corporate action update. And if there's any additional questions, please pop it through in the Q&A. And if we can answer it, we will do, or respond to you as soon as we can.

Thank you, Shabana. And I think that just brings us to the Q&A. If there are any questions or comments, we will gladly respond. I don't know, Nicole, have you received any yet or we're still waiting?

So first one from [indiscernible] is, can we expect more improvements in working capital as a percentage of revenue?

Yes, we'd like to believe that, that's we're working quite hard on that.

[indiscernible]?

[indiscernible]

Stock we have got, yes. As I mentioned, we have seen some savings coming through in the first half of this financial year. And with the Section 189 that we've been through -- we might not see it through the second half because of the cost that we had to incur in terms of retrenchments, et cetera. But through the 2026 financial year, we expect those costs to come through -- cost savings to come through.

Okay. And next question, if there is working capital improvement, what will be the capital allocation priorities?

Well, firstly, it's obviously to try and reduce the level of interest-bearing debt as much as possible. And then, once there is excess cash, then obviously, we'll have a Board discussion whether it's going to be additional dividends or share buybacks or whatever the case. But at this stage, no plan on any of those. The focus is on reducing the interest-bearing debt. On the medium-term, it has been -- or always been 12% to 15% depending on the interest rate environment. When the interest rates were at 7%, we targeted 12%. Now we need to go 15%. So that's the target. Are we likely to achieve it now immediately? Probably not. But hopefully, over the longer term, we should be able to get there, number one, by improving the working capital, and number 2 is having a cold look at assets that are not giving us a similar return that's expected from the group itself and then maybe reposition some of those. Yes. I think the invitation is still there. You've got our e-mail addresses there, for the people that don't have it. I think people that's on the presentation now probably do. Please give us -- send us a mail or if you want to come around and kick the [ tires ] and for us to show you around, give us a shot, we will gladly entertain you. Thank you very much. Is that the end of it then?

I think so.

Thanks for making the time and effort. And once again, be safe.