This one-time glamour stock has fallen from R22 to R1. But is it a fundamentally sound business and is it offering value at these levels?
Belinda Anderson
Nicolaas Vlok, the CEO of Idion, has successfully managed to turn what was once a family business into a global software group.
The catalyst was the purchase of a United States software developer that would catapult Idion into the global market Vision Solutions. But just after the purchase, the IT market did its nosedive and Idion went with it. Vlok has, nonetheless, always maintained that the buy was a good one and there are no regrets. But he has had the tough task of trying to convince the market of its value in the face of a continual stream of negativity sparked mainly by market conditions and a lack of understanding.
Although Vlok speaks with overwhelming enthusiasm about Idion, he has in the past battled to explain the business that he knows so well to the market. One of Warren Buffet’s investing philosophies is not to invest in anything you don’t understand. And the golden rule for any listed company is not to disappoint the market particularly not in a bear market and as a technology company in the current environment.
At face value Idion has done that on numerous occasions, the latest being by warning that revenue forecasts for Vision could come down if the US market continued on its downward trend. And at the same time postponing its five-month-old negotiations with an international software company. Idion views such an announcement as good disclosure to shareholders. Which it is. But comments on public notice boards such as the Moneyweb forum reflect a cynicism likely to come from shareholders who trusted Vlok in the first place and lost money on the way down from R22 to R1.
But if we remove emotion from the equation and take a mature investor’s approach, then we must step back and ask whether the stock represents good value now. Two highly rated portfolio managers believe it does. And one offers the explanation for the recent downward price pressure.
Coronation portfolio manager Sunil Shah confirmed that Coronation, once one of the biggest holders of Idion stock, has been lightening its exposure to the share. Shah says this is part of a decision to reduce the small-cap exposure in a few of its investments and is not confined to selling Idion. Nor has the sale of Idion shares got anything to do with how the institution views the company. On the contrary, Shah sees Idion being worth more than R3 within a year.
Shah says Idion is one of the “most misunderstood stocks on the JSE” Securities Exchange. He recently returned from a visit to the US to see Vision in operation and has come back convinced of the “credibility of the software and the durability of the sales channels”.
To test it Shah spent some time talking to clients in the US using the Simbiator software about its functionality. He says he is convinced that the Vision acquisition has been bedded down and that the long-term prospects for the software are rosy.
Vision’s Simbiator is a software product launched in mid-March that enables different businesses and business units to communicate between servers and across language barriers. In other words, a company that has 10 different systems or databases can use the Simbiator product to integrate them without having to change nine of the 10 systems to conform to one another.
Independent fund manager Chris Logan agrees that Idion, the one-time glamour stock, is misunderstood by the market. Logan says Idion must be worth a buy at the current levels. The company forecasts that Vision will earn revenue of between $33-million and $35-million this year, and although the group’s interim numbers are expected to be poor, it is expecting bottom-line growth for the year from Vision. So, in spite of some more bad news likely to come in the short term, Logan says: “I think there is quite a bit of value left in it.”
Both Shah and Logan stress that the seasonal nature of the business is key to understanding its financial results the bulk of revenue comes from the second half of the year and the first quarter is almost always loss-making. So a comparison using annualised first-quarter numbers for this year would be inaccurate, bearing in mind that only nine months of Vision were included in the figures last year (so they excluded the loss-making first quarter). Shah says the important thing is that Vision is cash-flow positive.
Vlok is now based in California and travels to South Africa when necessary. The South African operations are run by recently appointed local CEO Ken Jarvis. From next week the company will enter a closed period before the release of its results and then Vlok returns to the country for the presentation of the interim numbers in early August.
Shah says it is not an ideal situation to have Vlok working from the US and trying to act as the main investor relations representative for South African investors.
“They need someone informed and influential to fulfil this role locally,” he says. Logan agrees, but says they are working on better communication with the market.
Logan is a buyer of Idion shares at the current levels, not as too significant a portion of his portfolio but as a more speculative investment. Shah may have been a seller for technical reasons, but says he is satisfied with the prospects and is hanging on to the shares in a number of Coronation’s portfolios.
And the beauty of the market is, of course, that for every seller there must be a willing buyer. Word is that a certain top performing unit trust fund, the African Harvest Rainmaker Fund, has been more than happy to snap up large volumes of the excess stock at current levels. After falling to less than R1 on Monday, Idion gained 8c on Tuesday as about 1,6-million shares changed hands.