Between Giants and Minnows

06-Jun-2011 | News-Press Release

In 2009, JSE-listed Mustek, a local computer maker and distributor, filed a complaint against Hewlett Packard (HP). Mustek accused its international rival of flouting five sections of the Competition Act, including engaging in price discrimination, selling goods below their marginal cost and inducing customers not to deal with its rivals.  The Competition Commission threw out the complaint this week because it could not find evidence of anticompetitive behavior or could not establish whether HP was dominant in the local personal computer market. HP’s share of the market does not exceed 45%, while there was no evidence to suggest that HP possessed market power. Some businesses may wish that they had no competition because then the entire market for their product or service will be theirs. Businesses that have little or no competition become stagnant. Customers have fewer alternatives to choose from, so there is no incentive to innovate. Competition helps grow your market share by providing opportunities for creative thinking. It motivates you to a higher standard of customer service or innovation.

Mustek has been listed on the JSE for over 13-years and has a market capitalisation of R542-million. In December last year, a consortium planned a buy-out of minority shareholders, citing low liquidity and listing costs as the main reasons for the proposed delisting. Analysts said at the time that the company had not taken advantage of its listing by, among other things, issuing shares to raise capital and thereby expand its business.  This week, Mustek reported a mixed set of results for the six months ended December 2010 with revenue inched just 1% higher, as an 8% volume increase was offset by the stronger average exchange rate. Although HEPS jumped 14% higher; no interim dividend was declared, while cash generation remained poor for the period. Trading on a historical P/E of 8.1 times and at 16% discount to its net asset value (NAV), the share does not appear expensive. However, due to the group's low interest cover, poor cash generation and inconsistent results we would not recommend an investment in the share at this stage, so avoid. Pinnacle is the other company listed in the same sector as Mustek. Both computer companies operate within a niche market, with many competitors and relatively low margins. Both company’s share prices have gained about 100% from March last year till February. 

On the other hand, Bidvest is a large, diversified and multi-national company that boasts an impressive ROE in excess of 20%, historically good cash flow and a strong portfolio of businesses. The group reported a decent set of results for the six months ended December 2010, despite a stronger average Rand and weak economic activity in a number of geographic regions. Revenue increased by 4%, while headline earnings came in 12% higher. Cash generation was poor for the period, as working capital increased to R1-billion due to normal seasonal demands and increased requirements as the business returned to growth. The interim dividend was 9% higher than the previous period. We can expect the group to continue to acquire quality companies as the opportunities arise and drive further efficiencies out of existing operations. The group's diversified nature should also continue to mitigate industry specific risks. In the current environment cost management will remain imperative against these reduced activity levels. Due to the size of the group's portfolio of international businesses the movement in the currency is going to become a more important feature in future results. The group also boasts a significant property portfolio, running into billions of Rands, where management can unlock value in the future. At current levels we consider the share to be fairly valued trading on a historical PE ratio of 14.1 times. Accordingly, we recommend that investors should hold the shares. The chart shows the long-term bullish trend for Bidvest. In the short-term, however, it is moving sideways and drifting lower into oversold territory. Watch for a bounce from the support level at R153 to confirm a change in trend.    

Competition is good. Constant competition ensures that your marketplace continues to evolve and that your product offering continues to evolve with it. Competition forces a business to figure out how to be different than their competition. In the long-term, competition will help any business build a better business. While Bidvest’s business model hinges on acquisitions for growth, it is not concerned about competition in its markets.

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