Tip of the week:
Give recession the cold shoulder, the Financial Mail
If you’re looking for a star performer in the unloved information technology (IT) sector then EOH Limited (JSE: EOH) could be just the ticket. “This IT group has not noticed the recession,” writes Larry Claasen in the Financial Mail. He points to the group’s 32% increase in revenue (to R1.22bn) and 27% surge in pre-tax profit (to R116.5m) in FY2009. To underline its sector dominance, EOH ended the year with R206m cash on hand. In a year when many blue-chip companies were forced to pass their final dividend, EOH rewarded shareholders with 30c/share.
EOH was established in 1998 – and listed on the JSE late in the same year – to bridge the gap between business and information technology. The dawn of the Internet age means technology is an integral part of every modern business. Without comprehensive IT strategies and the systems to implement them, companies simply fall behind the curve, giving up ground to the competition. The growing need for an IT ‘edge’ has helped EOH to grow revenues and profit over the past decade. The group boasts in excess of 40% per annum compound growth since inception, with growth in headline earnings per share of more than 20% each year to boot. That’s not a bad track record over 11 financial years!
The group operates three core departments, namely consulting, technology and outsourcing, but prefers to report under the headings software, services and infrastructure. The bulk of its revenue is earned in the infrastructure category where R649.583m in sales generated R29.982m in pre-tax profit. But the services division is the most profitable, turning R382.352m revenue into pre-tax profit of R83.981m! EOH earned R4.865m in pre-tax profit from its software activities.
2010 Should be a good year for EOH. The company has survived the recession unscathed and expects local consumers to shift focus from maintenance and support of existing systems to new implementations. The group will leverage its ‘end to end’ solution capability, 2 500 clients and respected brand to maximise revenue and profit. Prospective investors will also appreciate the group’s strong balance sheet and annuity income.
Although EOH will reward shareholders through 2010 Claasen urges caution. He points to the doubling in share price since March 2009 and warns: “At a PE of 9.92 times there might not be lot of upside left.” Upside potential or not, the group’s long-term record is exemplary. Buy.
Recommendation: BUY at 1030c Market capitalisation: R780.910m
Start your 3 week risk-free trial today
Turkey of the week:
Not so (in) sure - Finweek
Investors in short-term insurance companies learnt a tough lesson through 2008 and early-2009. They watched helplessly as annual reports bled billions of rand to fancy terms like ‘fair value adjustments’. In plain English, the investments held by the insurers had been decimated by market fallout in the wake of the international credit crisis. Some of these losses have been clawed back since the equity recovery began in earnest in March 2009.
You get a feel for the extent of the recovery when you consider the latest trading update from Santam Limited (JSE: SNT). Last year November the group confirmed underwriting conditions remained challenging. Setting these difficulties aside, management is confident of a turnaround in margins during the second half of FY2010. Investment portfolio performance remains positive and in line with the strengthening of equity markets, they said. But they also warn that headline earnings will be affected by the “inherent volatility of underwriting and investment activities” going forward.
Santam is the undisputed leader in the domestic market for short-term insurance. If you like the sector then this is the share you’ll be buying. Not that you have much choice. Other sector favourites include Mutual & Federal (which will de-list on 8 February 2010 following Old Mutual’s minority shareholder buyout) and Zurich. Although still listed, Zurich’s shares are tightly held. In its last update before delisting Mutual & Federal predicted a massive R800m swing in its investment book… The question is whether Santam will perform similarly, and if it does, whether it represents value at its current share price.
“Santam is quite expensive on an earnings multiple of 13.5 times,” reckons Shaun Harris in Finweek. He also suggests the 30% jump in the group’s share price over the last year could be as good as it gets. “Investors holding Santam should continue to hold on to the shares tightly, but I’d be reluctant to buy now,” writes Harris. Why the caution?
Operational concerns aside, insurers are at risk of a second market pullback. The JSE All Share index is already looking expensive on an historic price-toearnings measure, and if companies don’t report solid earnings in FY2010 the market could lose steam. Harris reckons another bout of market weakness will trigger fresh losses on insurance company investment portfolios – and that’s when investors should buy the shares. We share his sentiment and remain sceptical about prospects at the group over the short-term. Avoid.
Recommendation: Avoid Market capitalisation: R11.672bn
