There was a time, not too long ago, when all the experts said the IT sector was not to be touched. Maybe it’s time for exploratory feelers.
Since the beginning of the year the IT index on the JSE Securities Exchange has risen by 27,5%, and its outlook remains bullish.
Khulekani Dlamini, an analyst at Investec Asset Management, attributes the growth to two main drivers. ”Growth has occurred across the board, but has come primarily from the small and medium cap,” he says.
This is because when the rand was strong, resource stocks were the flavour of the month and many small IT companies were neglected and looked ”ridiculously cheap”, Dlamini says.
These companies include erp.com, which he believes is ”the best IT company we’ll see in South Africa for the near future”, and Mustek, which this week announced a R224-million purchase of 25% of its equity by Safika.
Dlamini implies that Safika must have seen growth potential in the stock, which in the past six months has risen from R4,20 a share to above R7.
Growth in this sector is driven by bullish mood in IT expenditure. This is because there is an expected increase in spending on equipment replacement, since companies have to replace Y2K compliant equipment purchased three to five years ago.
The strength of the rand has also brought purchases forward, both for those who import and because even locally-produced components are priced in dollars.
For once, rand strength does not inspire loud lamentations, like those we have been hearing from the tourism sector.
In the case of larger companies, like the recovering Didata, Dlamini attributes growth to the fact that the shares have to adjust to a re-rating of international peers, against which they were relatively cheap.
And then there is sector heavyweight, Telkom, by far the most impressive story in the telecommunications sector this year.
The fixed-line monopoly listed in March this year at R28 a share, with a backdrop of misgivings that were mildly rather than loudly muttered out of politeness to the government.
This week the company delivered its first set of results as a floating entity, and saw its share price reach an all-time high of R61,50 on the back of a 171% growth in earnings a share to 335,9c.
Dlamini attributes Telkom’s performance to revenue integrity — the ability to grow revenue across all areas of its business. He also praises the company’s ability to ”cut costs responsibly”.
Finally, the company will continue to benefit from its 50% holding in Vodacom, which also announced a 33,4% jump in operating profit this week. Vodacom, Telkom’s fastest-growing area of business that contributes 30% of its operating profit, remains the jewel in the utility’s crown.