Mustek – a great value stock in the SA tech sector

Mustek is one of the best value stocks on the Johannesburg Stock Exchange (JSE), with strong revenue growth and good prospects.

Mustek was founded in 1987 and grew to become one of South Africa’s largest assemblers and distributors of personal computers and complementary ICT products.

The company has many top-tier ICT brands in its portfolio, including Acer, ASUS, Samsung, Lenovo, Brother, Microsoft, and Huawei.

Mustek enjoyed strong growth during the lockdown, and its share price followed suit, increasing from R5.73 in July 2020 to R17.34 in August.

All eyes were on the company’s latest results to see if it could maintain its 2021 growth fuelled by the work-from-home shift.

Mustek’s results for the 2022 financial year showed that it recorded exceptional revenue growth – up 11% from its lockdown-fuelled base.

Seen in a historical context, Mustek’s average revenue growth from 2010 to 2020 was 6.2%. The latest revenue growth is, therefore, a standout result.

The company said the strong growth is due to an increase in remote working and learning and a significant increase in demand for network products.

Despite the higher revenue, Mustek experienced a decline in its profit margins. From 2021 to 2022, its gross and net margins pulled back from 14.9% to 14.3% and from 3.7% to 2.5%, respectively.

Mustek financial director Shabana Aboo Baker Ebrahim explained that the company had two main detractors to its profitability.

• In 2021 there was a shortage of notebook computers available in the market, which allowed the company to increase its margins and record higher-than-usual profitability levels.
• In 2022, the market experienced an oversupply of entry-level notebook computers. It drove prices down, putting pressure on Mustek’s profitability.

The company also experienced a significant loss of R73.3 million due to foreign currency movements compared to the previous year’s R10.5 million gain.

Although the company’s net profits decreased from R294 million in 2021 to R220 million in 2022, it is still a very strong result compared to its historical profits.

Mustek experienced significant supply chain constraints due to the Russian/Ukraine war. Ukraine is a large supplier of microchip raw materials.

Mustek CEO Hein Engelbrecht explained that the railway that connects Europe and China moves through Russia and Ukraine and is used to transport 60,000 to 80,000 containers per annum.

This railway is currently not running, putting pressure on harbours in China which causes massive congestion and further supply chain issues.

The risks that these factors impose on Mustek can have big consequences on its operations. In response, the company has significantly increased its inventory levels.

The increase in inventory was also fuelled by the oversupply of entry-level notebooks that filled orders originally placed for later in the year.

The increase in inventory was met with an equally significant increase in trade payables (inventory purchased on credit) which increased the company’s debt.

If the Russian/Ukraine tension worsens or further strict lockdowns are imposed on China, Mustek may be in a favourable position with its high stock supply.

Mustek increased its dividend payments from R0.26 per share in 2021 to R0.90 per share in 2022 on the back of its strong results.

Mustek has constantly met dividend payments since 2011, with only three periods of declining dividends.

The company has also constantly maintained a low payout ratio of less than 0.5 times earnings per share, indicating a stable and sustainable dividend income.

Mustek is currently trading at a price-to-earnings (P/E) ratio of 4.4, which is lower than its previous 5-year average of 5.4.

The company’s strong performance, good dividends, and low P/E ratio makes it one of the best-value stocks on the JSE.