Paracon: SA emigration 'a cost'

But it could have done even better were it not for the exodus of skills from South Africa.

Financial director Mireille Levenstein described the problem of people leaving as an "opportunity cost" to its business. "The business would have grown faster." But, the skills shortage also meant prices got pushed up, improving its margin.

CEO Mark Jurgens said it was concerning that 30% to 40% of those leaving the company were also leaving the country: "That is our biggest concern. Because then they are lost forever."

Jurgens said it was bringing skills in from India, through associate company Nihilent. But, this was expensive, particularly as the candidates often wanted to leave after six months anyway, most of them citing the country's high levels of crime as a deterrent to staying.

Asked what it could do about this, Jurgens joked that it had tried to complain to the right people, but to no avail: "I tried to call (President) Mbeki, but he didn't return my call."

On a more serious note, Paracon is involved in a learnership programme, where it trains up mostly black graduates, and also a graduate training programme, where it deploys graduates to clients and trains them into specific skills. But, it battled to retain these skills, as once trained, the market was theirs for the taking, Jurgens said.

Other than the increasing concern around the skills shortage, it is business as usual at Paracon, which is another of the smaller cap IT companies - like Datacentrix and EOH - that has set itself up as a steady deliverer. It continues to grow the top and bottom line, generates good cash and manages debtors well (although these had increased because of an acquisition, but would come back down to 30 days, Levenstein said).

The company reported turnover growth of 15% to R438 7m for the six months to end March, with profitability growing at a faster pace than this. This was because of price increases - as these go through to clients, it makes more money off the same base, Levenstein explained - and a change in the business mix.

Earnings before interest, tax, depreciation and amortisation (EBITDA) margins improved significantly, to 9,9% from 8,8% in the comparable period. But, Jurgens said these were not sustainable at such high levels and could come down to around 9,5%-9,6%. This was mainly as a result of two large, but lower margin contracts.

Paracon recently won the exclusive right to supply skills to Mutual & Federal and one of the big four banks (other than Standard, which is already a client). Jurgens said it had been forced to agree to a lower margin in exchange for exclusivity, and was quite excited about these two contracts.

Headline earnings a share increased by 24% (or 30% if one excludes the first-time secondary tax on companies charge) to 10.1c. Annualised, this puts Paracon on a forward earnings multiple of ten times (although it does tend to have a better second half, so annualising the first six months is not strictly accurate).

- Fin24.com