Telkom weighs on BCX results

Johannesburg, 20 Feb 2007

JSE-listed services company Business Connexion's (BCX's) latest results indicate the impending Telkom deal is weighing on the company's ability to sign up long-term contracts, says an analyst.

BCX saw flat revenue growth year-on-year, at R1.726 billion, in its latest interim results. Attributable profit was up from R63.9 million at the six months to end November, to R104.9 million in its latest results.

CEO Peter Watt says the sale of commercial property aided attributable profit. Stripping this out and looking at operating profit, the company lost some ground, as operating profit year-on-year went from R72.6 million to R54 million.

Watt says this is a result of the company being inwardly focused, with both the SAP implementation and data centre taking up valuable time and resources. The data centre is complete and the last client - the JSE - moved in two weeks ago.

Reluctance

The results show customers' reluctance to sign long-term deals with BCX while Telkom's acquisition of the company looms, says an analyst.

As a result, says the analyst, companies are signing shorter-term contracts, which still require BCX to incur expenses in order to seal deals. "There is a lot of uncertainty.... There is no doubt Telkom is weighing them down."

Watt says the Telkom deal, which will be heard by the Competition Tribunal in mid-March, has caused an element of holding back from potential clients. He expects the hearings to continue for a month, with an answer from mid- to end-May.

The analyst says the figures are "not a fair result" as BCX is not operating under ideal conditions. In addition, the analyst says some staff may be hedging their bets in terms of job security. "All that weighs negatively on the company."

Should the deal fall through, the analyst does not see another company offering R9 a share, as BCX's tangible net asset value is currently around R4 a share. Watt says taking the deal to its logical conclusion is essential to give shareholders the opportunity to benefit from the offer. BCX shares opened this morning at R7.55, after closing yesterday at R7.58.

Should the deal proceed, BCX would continue to operate as a standalone entity without interference, so Watt believes there is no need for clients to put off signing long-term deals with the company due to the pending takeover.

Divisional breakdown

The company's overall operating profit is "down a lot", says the analyst. The services division, which recorded revenue of R918.6 million and operating profit of R77.1 million, saw its margin go from 10.4% at the full year to 8.4% in the half year.

The analyst points out the company's business applications and technology infrastructure divisions were flat in terms of revenue and both divisions made an operating loss. Business applications reported revenue of R231 million and an operating loss of R200 000, while technology infrastructure reported revenue of R541.8 million and an operating loss of R5.6 million.

Watt says the business applications division has been through a process to restore it to profitability and the company is now focused on building the business. The team slowed down on aggressive sales while the data centre was completed, he notes.

Technology infrastructure, says Watt, has long sales cycles and, although it has not performed well, tenders are coming in and the loss is narrowing. The analyst says expected healthy profit from technology infrastructure failed to materialise, suggesting more work may be required in this division.

Africa, which went from an operating loss to a R5.1 million profit, suffers from the long lead times that typify business on the continent. As a result, the company has adopted a more proactive response to business opportunities, cutting costs in the process.

Communication, Watt says, was impacted by the Telkom deal as some clients delayed signing contracts with the hopes of cutting out the middleman. This division saw revenue of R34.9 million and a R7 million operating loss.

Looking forward, Watt says new business is coming in, with deals signed for the data centre and a renewal contract due in the next financial year. He expects the second half to be an improvement over the first half.