Mustek’s growth strategy

Mustek is looking at various opportunities to grow organically and through acquisitions, group financial director Shabana Aboo Baker Ebrahim has told MyBroadband.

“Mustek has been executing on a strategy to strengthen our balance sheet by reducing working capital and debt,” Ebrahim said.

“While progress has been made, the current economic climate and slowdown in the sustainable energy market has impacted these initiatives.”

Ebrahim was responding to questions about their strategy after Umthombo Wealth’s chief investment officer, Alex Duys, said Mustek was an attractive investment at its current share price.

The company recently released a rough set of results, sending its share price to lows last seen before the pandemic.

Founded in 1987, Mustek has grown into one of South Africa’s largest assemblers and distributors of personal computers and complementary ICT products.

The company’s portfolio includes many top-tier ICT brands, including Acer, Asus, Samsung, Lenovo, Brother, Microsoft, and Huawei.

Mustek enjoyed strong growth during the 2020–2021 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 decreased by 59%.

The bad results caused the share price to plummet to around R9.00 per share.

Duys noted that Mustek’s working capital — the company’s inventory and accounts receivable — has piled up over the last few years.

He said Mustek was overstocked on renewables, which saw a decline in demand as the market saturated and the levels of load-shedding declined.

However, there is still demand for these products, and distributors and retailers 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.

Duys said that if Mustek’s management succeeds in reducing its working capital, it will release a significant amount of cash.

The higher cash flow will reduce the company’s debt and interest payments. In turn, earnings will increase.

Duys said this is expected to happen 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.”

In addition to reducing working capital, Duys said Mustek could de-gear its balance sheet and do share buybacks at these low levels.

“I can see Mustek rally a lot from that,” he said.