Faritec: A contrarian's buy

The year to June 2004 was to all intents and purposes a disaster and though it recovered in the next two years, the second half of financial 2007 again saw earnings fall back as a result of the strain of acquisitions and restructuring.

So though results for the six months to December are little better than a year before, they are a big improvement on the intervening six months.

This is reflected in most major financial indicators. Sales, for instance, fell from R473m in the six months to December 2006 to R386m in the six months to June 2007 to R502m in the latest period.

For Ebitda, the progression was from R29.5m through R26.5m to R32.4m; for attributable earnings, from R12.3m to a scrawny R4.2m to R17.7m; and for EPS, from 6.7c to 1.8c to 7.0c. Margins have been similarly erratic.

The recovery in EPS is held back by a big hike in issued equity, from 188m shares to 258m, following the exercise of the option held by empowerment partner J&J, controlled by Jay and Jayendra Naidoo.

This was met partly by an effective conversion of preference shares and partly by taking up new shares at 135.59c, the weighted average price when the option was exercised last May.

Though the share price subsequently peaked at 171c, that doesn't look a particularly good price now, with a share price hovering around 100c. But the Naidoos couldn't have known that results were about to collapse.

In recent years Faritec has been a classic example of profitless growth. In the 2003 financial year, turnover of R282m generated HEPS of 5.0c. Last year, turnover was R858m and HEPS 8.9c.

Though recent acquisitions have helped, especially in expanding into Western Cape, it's not found it easy to reduce its dependence on low-margin hardware sales and the Gauteng market.

"Big growth"

But CEO Simon Tomlinson remains confident. He's looking for "big growth" in the second half, with sales of up to R600m and at better margins. And in what's becoming a popular refrain, he says Faritec will suffer little direct impact from power cuts, though warns that its customers may be harder hit.

At face value, if sales rise 20% and margins widen, we should be able to look for second-half HEPS to gain at least 25%, taking the annual return to about 15.75c.

That would be a notional forward earnings multiple of just 6.35, which shows how sceptical the market is of Faritec's long-term ability to deliver on its promise. And those who pay attention to such things will find no solace in a tangible NAV of only 4c a share.

On the other hand, contrarianism can be rewarding, and for a contrarian investor Faritec could be an outstanding buy. But such brave souls are by definition a small minority.

- Fin24