Pinnacle bounces back

Pinnacle Holdings is one of Africa’s largest providers of information and communication technology (ICT) products and services, offering hardware and software products, implementation solutions as well as structured finance solutions through its subsidiaries Pinnacle Africa, Centrafin, AxizWorkgroup and Datanet.

The group boasts an impressive world-class selection of branded products including Microsoft, Dell, Hewlett-Packard, Sun, Intel and IBM, as well as its own Proline range of audio-visual equipment.

The most recent set of results, for the six months to end December 2015, shows the company returning to significant growth after a brief lapse in 2014 when the group was marred by allegations of attempted bribery, when prosecutors charged one of its directors for bribery related to a R1.6bn tender, and a series of equipment write-downs.

The bribery charges were withdrawn and the company is showing the resilience and arguably defensive nature of the technology space within a difficult economic climate.

Some of the salient features of the group’s aforementioned interim results are as follows:

• Revenue increased by 19% to R4.3bn;
• Operating profit margin improved to 5.3% (first half of 2015: 5.3%);
• Headline earnings increased by 20% to R150m;
• Working capital improved by 17 days to 44 days (first half of 2015: 61 days);
• Debt-to-equity ratio down to 27% (first half of 2015: 75%);
• Cash flow from operations increased to R183m (first half of 2015: R117m); and
• Shareholding in Datacentrix has been increased to 55%.

While having increased revenue and earnings significantly, the group has also managed to improve cash flow, while reducing its level of gearing (an area of contention in the past), highlighting the astuteness of management.

The ICT distribution aspect of the business remains the most significant, accounting for well over 90% of the group’s revenue and more than 80% of its profit before tax.

Management has done well in diversifying the company’s offering, reducing its dependence on client computing products, by increasing its investments in storage and servicing as well as infrastructure, retail and solutions products.

This has helped translate into revenue for the division having grown 20% from R3.55bn in the first half of 2015 to R4.26bn in the first half of 2016.

In addition to the fact that we are seeing a return to earnings growth, both acquisition-based and organic, the share’s pricing still looks to offer good value.

Pinnacle Holdings trades on a conservative normalised price-to-earnings ratio (P/E) of around 7.5 times, while having offered a historic dividend yield (DY) of 2.75%. 

This is a significant discount in terms of its P/E and a premium in terms of its dividend yield relative to sector peers Adapt IT (P/E 24.5 times, DY 0.89%) and EOH Holdings (P/E 21.93 times, DY 1.06%).

Pinnacle Holdings has done well to turn its earnings momentum around, bearing testament to the group’s strong management team.

Although the company is subject to exchange rate fluctuations, ICT has become a necessary, utility-like industry in today’s society.

This allows for some headway in terms of being able to pass on inflationary costs to the consumer, and in essence provides a defensive nature for not only Pinnacle, but the sector as a whole.

The rest of Africa operations contribute around 15% of group revenue and is recording strong growth of nearly 30%.

It would appear likely that the company might be looking for further acquisitions to extend its African reach. 

 While a return to growth is being realised for Pinnacle Holdings, the modest pricing of the share suggests a current undervaluation of the company.

Add to that a market-leading position in a competitive space, with a host of quality and trusted product brands, Pinnacle Technology Holdings provides a higher risk speculative small- to mid-cap opportunity for those with a longer term time horizon.

*Shaun Murison is a market analyst at IG.

This article originally appeared in the 28 April 2016 edition of finweek. Buy and download the magazine here.