David Le Page
TAKING STOCK
As dot.coms scream up the graphs in the United States and Europe, it’s hard for local investors to ignore the lure of the information technology sector. Media stories about the Y2K problem have been replaced by predictions for likely IT developments in the next 20 or 30 years that would resemble science fiction – such as sentient robots – were it not for the apparent consensus about them. Interest in developing the Internet remains undiminished. And if the South African Internet dial-up subscriber market is largely saturated, business-to-business e- commerce has only just begun to boom.
Leading local analysts agree that the sector holds excellent opportunities for investment. PEs (ratio of shareprice to share dividends) are one standard tool for assessing stocks, they indicate the number of years of earnings needed to match the shareprice. One analyst compares local IT price-earnings (PE) ratios to those of overseas companies, pointing out that while local PEs average around 25 to 30, international IT stocks are likely to brandish at least a three-digit PE, making the local shares comparatively inexpensive.
Foreign investors have been trickling back into the South African financial markets for a few months now. This increasing demand, coupled with the New Year boom on international markets, has seen leading local securities such as Usko and Softline waltz up close to 25% in just the last six weeks.
But will it last? For some these advances will be painful reminders of the ultimately precarious heights local IT stocks reached in 1998 and 1999. On January 7, at the end of the year’s first week of trading, most of the stocks listed in the IT sector of the main board of the Johannesburg Stock Exchange (JSE) were far off their 12-month highs. Those highs were mostly reached in March to April 1999. Then the local commodities boom hit. This, coupled with a dawning realisation that, as one analyst (whose company won’t allow him to be named) said, “valuations were stretched, and there were some very dubious business models in the venture capital sector”. IT stocks were knocked off their pedestal.
Now investors are hoping that the current boom in the international tech sector will underpin advances for several of the larger IT companies on the JSE. Following a series of mergers and acquisitions, such as Dimension Data’s R8,1-billion acquisition last year of a European networking business, the fortunes of at least the top five local IT companies are increasingly tied into those of companies listed on Nasdaq and other international markets.
One analyst sounds a caution however: “Overseas investors have to be convinced that business plans from the likes of Didata are based on a value-added model, rather than a distribution model.” In other words, investors prefer to put money in a company that sells skills, rather than a company that re-sells things. This is because technology prices are constantly dropping, making hardware sales a comparatively unreliable source of income. Only 15% of Didata’s costs are human; the figure for comparable European companies is 50%.
The IT sector droop last year not only left many companies looking like bargains, but to some degree sorted the wheat from the chaff. The sector went through a rapid boom period in the three years from 1996, when the number of IT-related JSE stocks increased nearly ten-fold. The subsequent slump saw companies “with sustainable long- term value propositions outfly those created for speculative purposes”. Now, investors will focus more and more on management’s ability to deliver the goods, said one industry expert. Analysts are often not allowed to be quoted by name.
If there were any distortions induced in the markets by the need to deal with the Y2K problem, those too, are behind us. General agreement is that concern about Y2K held back income from consulting and new systems implementation over the last quarter of 1999. Businesses hunkered down and waited for the storm, if any, to pass before investing in upgrades and expansions. This may have affected sales towards the end of last year, but turnover should now be recovering.
Among the experts, the consensus seems to be that if you look hard at company fundamentals in choosing a basket of IT stocks, your portfolio stands an excellent chance of performing well this year. On quality stocks, there should be a fair degree of correlation with the Nasdaq and other international tech indices and markets.
Given the Internet-driven convergence of IT and telecoms, the latter has become one of the related sectors worth watching, along with development stage stocks such as M-Web. M-Web has been spending its way to having a large customer base and plans to make a profit only in 2001.
There are concerns about the market’s longer-term direction. Some local and international marketwatchers expect a crash, pointing to highly publicised and expensive international tech stocks such as Amazon.com which appear to have wildly inflated values. Other analysts point out that many less well-known companies represent real value propositions. “US tech stocks are very resilient. It’s easy to focus on high-flyers, but many other companies have strong fundamentals,” said one local analyst.
IF A CORRECTION COMES TO THE MOST INFLATED PRICES THIS YEAR AS A SERIES OF CONTROLLED PRESSURE RELEASES RATHER THAN A HARD AND PAINFUL OVERNIGHT CRUNCH, SUCH OVERLOOKED IT BOYS AND GIRLS WHO HAVEN’T YET ACHIEVED MEDIA PROMINENCE MAY FINALLY HAVE THEIR DAY.