Mustek is extremely cheap – Alex Duys

Alex Duys, chief investment officer at Umthombo Wealth, says Mustek provides a good buying opportunity at the current share price.

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.

However, its most recent results were not good. Revenue declined by 13% and basic earnings per share was down 59%.

The bad results caused the share price to plummet to around R9.00 per share, the lowest it has traded since the pandemic.

Duys believes there are good things in store for Mustek and that it is worth a look at the current price.

He highlighted that Mustek is the second cheapest it has been since 2008, when it was priced for liquidation. The same risk does not currently exist.

Duys said the poor set of results was partly a result of Mustek being overstocked on renewables.

However, there is still demand for these products, and they are still selling them – albeit at lower margins.

“They used to sell them at gross profit margins of over 20%. They are now selling them at margins of 12% to 14%. They are still making money from them,” he explained.

He said the key for Mustek is to reduce its working capital – the inventory and accounts receivable – which have piled up over the last few years.

Mustek’s management promised the market that they would actively address the working capital issue.

If they are successful in reducing Mustek’s working capital, a significant amount of cash will be released.

The higher cash flow will reduce the company’s debt and interest payments. In turn, earnings will increase. This is expected in a year or two.

“The next set of results will not be pretty. Earnings will be down significantly,” he said. “However, this will be the new low base to build on.”

“If management can reduce working capital and reduce debt, Mustek is extremely attractive,” Duys added.

A further option is for Mustek to de-gear its balance sheet and do share buybacks at these low levels. “I can see Mustek rally a lot from that,” he said.

Mustek’s low liquidity has caused the share price to fall further than expected in recent weeks.

However, for those in it for the long term, Duys believes Mustek’s low share price provides a good buying opportunity.

Mustek interim revenue

Mustek interim net income