Faritec`s plan to raise R30 million to R35 million, to fund short-term working capital, raises questions about the sustainability of the business, one analyst says.
Daniel Malan, an analyst at asset management firm Regarding: Capital Management, says Faritec is in the situation that many of the smaller IT implementation companies find themselves in: with limited annuity income and having to continuously seek new business.
"IT spending is among the first to be cut within the corporate world and this leaves a company like Faritec very vulnerable to market conditions. Also, their annuity income is not a long-term prospect as it has to be renewed every year. It is not income that can be banked on for a far longer term," he says.
Retrenchments looming
Yesterday, Faritec announced it would seek to raise R20 million through a rights offer of 77.42 new shares for every 100 already held by investors. Another R10 million to R15 million would be raised through the release of cash that currently underpins various guarantees.
Faritec CEO Simon Tomlinson says the company has embarked on a cost-cutting exercise that will include the retrenchment of almost 20% of the staff.
"We will retrench 25 staff in the first phase and another 25 in the second. In total, we expect to reduce our workforce from around 520 people to about 420 eventually," he says.
Tomlinson says the company will be more selective on what contracts it will bid for and rather focus on those where it has better established relationships. This includes trimming its participation in public sector tenders.
"The pubic sector requires a lot of work for a tender. The process is often uncertain and erratic, but we will continue to focus on those public entities where we have well established relationships," he says.
Faritec`s latest offering, Google Search, which is an appliance-based, enterprise search solution, accounts for less than 5% of the company`s current business. Its status as a Microsoft reseller continued to help the company maintain its head above water, while hardware revenue plunged 21%.
Create own competition
Malan points out that people are the biggest asset a company such as Faritec has and its plans to retrench means it is creating its own opposition.
"In such cases, the first people to leave are the best, because they know they will be able to either get new jobs or start up their own businesses. They often know their former employer`s weaknesses and are able to capitalise on them. There is no loyalty in this market," he says.
Malan also feels Faritec`s plan to use the capital for short-term funding means the company has a serious cash flow problem and it does not bode well for the long-term outlook.
"This is not going to be used for investment into new products or services, but to pay for their retrenchments and to pay themselves. In some ways, it would be better to shut down the company now," he says.
In terms of the rights offer, the subscription rate will be 10c per share and it will be underwritten by Cornastone Enterprise Systems, and management, which includes Tomlinson and executive director Peter Winn.
Faritec`s share price was last seen at 10c, a gain of 1c over yesterday`s close, with about 257 000 shares having traded.
Related story:
Share