While sifting through the wreckage of the JSE’s smaller listed companies we often stumble across a star performer. Today’s “gamble” is one such company – Midrand-based Pinnacle Technology Holdings (JSE: PNC). Pinnacle’s a well-diversified player that’s been plying its trade in the information technology arena since 1993. It offers hardware, software and services, and represents an inspiring range of international branded products. These include Microsoft, VMWare, Sony, Apacer, Hewlett-Packard, Intel, Dell, IBM and the group’s own Proline range of computers.
There won’t be too many complaints about the group’s latest interim results. In the six months to December 2008, turnover surged 39% to R1.354bn. Of the four operating divisions, Pinnacle Micro weighed in with more than half the revenue (R767.3m). But an unpleasant R33m loss due to the rand’s swift decline in October 2008 reduced the divisions contribution to EBITDA from R51.055m to just R22.333m. The group has since revised its currency risk strategy to avoid future shocks.
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Other divisions are firing on all cylinders. WorkGroup had an impressive year and more than doubled its contribution to EBITDA from R16.6m to R36.3m. Gross profit at DataNet was 71% higher and the group moved from a loss in the previous period to R5.077m profit. And RentNet posted good gains to recover to pre-H2 2008 revenue levels with EBITDA of R4 958m. The Pinnacle Micro foreign exchange debacle led to a decline in group headline earnings per share, from 34.3c to 30.4c.
What does the future hold? Management says that: “Expectations for the remainder of the year are moderated by the volatility of the rand and the effect of global markets on South Africa”. There are also concerns about contraction in liquidity as banks cancel facilities at many small and emerging enterprises. Cash flow is tight as average outstanding sales increased to 65 days over December. As a result, the group’s investment in working capital increased markedly, by R89.8m to R250.4m. Management will have to monitor cash flow carefully in the coming six months!
Cash flow concerns aside, there are opportunities for further revenue growth in the coming period. Pinnacle says it’ll focus on expanding annuity revenues and selling support technologies that make information technology ownership more affordable. And there’s plenty to be done in government departments with systems in the education, home affairs and law enforcement departments in need of ongoing support.
Recommendation: BUY at 186c Market capitalisation R348.020m
