On Mustek’s latest earnings call, CEO Hein Engelbrecht made clear that the group no longer sees itself simply as an IT hardware distributor. Over the years it has expanded into training, software, cloud, cybersecurity and IT support, while also taking stakes in technology manufacturing businesses. Management now describes Mustek as a “technology investment house” and wants to push further in that direction.
Moving the needle, however, will not be easy. Distribution still accounts for about 98% of group revenue and remains the overwhelming core of the business. It is also typically low-margin and working-capital intensive, which helps explain why Mustek’s return on equity is still only about 7%. Engelbrecht told investors he would like to lift that substantially over time to almost double. The goal is therefore not simply to grow turnover but to improve the mix of businesses and the returns they generate. As he put it: “We do believe that we can be more profitable by even being smaller and not necessarily chasing revenue for the sake of chasing revenue.”
That strategy becomes clearer when the group is broken into its four main segments: distribution; training; manufacturing and assembly; and services.
The distribution arm consists mainly of Mustek itself and wholly owned Rectron. The two overlap but are not identical. Mustek combines the distribution of international technology brands with the local assembly and configuration of its own Mecer computers. Rectron is closer to a broad technology wholesaler, historically strong in PC components and the reseller channel, but now also spanning software, networking, data centre equipment, storage and cloud solutions.
The second leg is training, principally Mecer Inter-Ed. It had a difficult year as customers cut discretionary training spend, but Engelbrecht still sees opportunity in South Africa’s shortage of technology skills.
Then comes manufacturing and assembly. Mustek assembles Mecer products locally, as before, while CPS Technologies makes server cabinets and related enclosures. More interesting is YOA Cables, an optical fibre cable manufacturer in which Mustek owns 25.1% alongside China’s YOFC. YOA was one of the group’s standout performers over the past year, benefiting from both new fibre network rollouts and the replacement of ageing infrastructure. Demand has tightened globally, and Engelbrecht said fibre cable prices have “shot through the roof”.
The fourth leg is services, to which Mustek has been adding businesses that potentially offer better margins and more recurring revenue. These include Business AI, desktop maintenance and support specialist Khauleza, and CyberAntix, which monitors clients’ networks around the clock for signs of cyber intrusion and has expanded into cybersecurity consulting. Engelbrecht said that for most organisations, a cyberattack is increasingly “more a case of when and not if”.
The core distribution business had to contend with a much softer PC market in the latest financial year, with management estimating that South African unit sales were down at least 20% over the past few quarters from a year earlier. Group revenue nevertheless edged 1% higher to R7.26bn as higher selling prices offset weaker volumes.
Much of that inflation reflects pressure further up the supply chain. AI-related demand is absorbing memory and storage manufacturing capacity, keeping component prices elevated even as consumer PC demand remains subdued. The upside for Mustek is that the same trend could create opportunities at the higher end of the market, where demand for AI-ready PCs, servers and storage is growing.
Profitability improved more sharply than sales, with ebitda rising 12% to R277m, while trade finance debt fell from about R1.2bn to R820m, helping cut net finance costs by a third to R93m. That balance sheet repair, together with cost savings, sizeable forex gains and stronger associate earnings, helped lift headline earnings per share 181% to 204.6c and NAV to just more than R30 per share.
Cash generation remains a priority. Mustek generated R116m from operations, even after about R360m of trade finance repayments, while its cash conversion cycle improved from 109 to 97 days.
The clean-up is not quite finished. Mustek is still working through the hangover from its renewable energy push, which left the group sitting on about R660m of batteries, inverters and solar equipment when load-shedding eased and demand fell away. That exposure has since been reduced to about R185m, helped by hefty writedowns.
One small-cap analyst says the numbers look good on the surface, but much of the improvement reflects restructuring rather than strong underlying growth. Even so, at a share price of about R16, Mustek trades on an undemanding historic earnings multiple of about eight. The dividend yield of about 2.3% is modest, but management has raised the possibility of special dividends if it cannot find sufficiently attractive opportunities for surplus capital.
The bigger challenge is to lift group returns through further diversification, a process that will now unfold under new majority shareholder Novus. Its direct stake has climbed to almost 58%, while it and its concert parties control close to 78%. Engelbrecht said Novus is, for now, “pretty much hands off” and prefers Mustek to remain listed. But if its holding increases further once the mandatory offer process is resolved, an even thinner free float could reopen the question of whether a separate JSE listing still makes sense.
