CAPE TOWN-based technology conglomerate Ayo is still battling to erase lingering scepticism about its business model and longer term prospects.
The JSE – which many feel is an accurate barometer of prospects – has already smashed Ayo’s initial valuation. The company – strongly (and contentiously) backed by the Public Investment Corporation – was listed in December 2017 with a market value of almost R14 billion. At the time of writing Ayo’s market value had dribbled down to less than R600 million.
Recently released results to end August showed – on paper – some encouraging signs. Revenue – thanks largely to new acquisitions – increased by 207% to R1.9 billion, and profit before tax shot up 47% to R288 million.
Ayo’s total assets increased by 11% to R5.2 billion, and shareholders were given a generous dividend payout.
Ayo CEO Howard Plaatjes said the positive results were a testament to the tenacity and professionalism of the group’s teams as well as the excellent products and services the group companies continue to deliver to a wide range of local and international clients.
He said the improved financial performance was predominately derived from significant organic growth as a result of a contract with a multi-national company (presumably energy giant Sasol) that commenced in July 2018, and acquisitive growth in from recently bought companies like Sizwe IT and SGT Solutions.
Other acquisitions included interests in Global Command and Control Technologies (GCCT) – a company specialising in the niche field of security, defense and maritime technology – as well buying up 100% in Puleng Technologies.
Plaatjies said the group – which still has over R3.5 billion of cash left from its initial public offering in December 2017 – has also identified a number of niche sectors for investment in 2020 and beyond.
At face value, Ayo looks a sizeable and vibrant technology contender. But a closer look at the numbers reveals some strain…and some reason for fretting.
The year to end August financial report noted that a Master Service agreement between AYO and a “significant customer” (concluded May 2018) was under notice of termination. CBN believes this contract is the multibillion rand agreement that was signed with energy giant Sasol.
Termination of this agreement would have a profound negative effect on Ayo’s turnover and – more importantly – its annuity income.
AYO has invoked the arbitrations provisions under the agreement and anticipated the matter would be arbitrated in the first quarter of 2020.
While the loss of the Sasol contract would undoubtedly be a blow, Ayo’s financial report does at least show that the company is well diversified operationally.
Managed Services – which makes up about 65% of the business – reported revenue of around R1.4 billion with gross profit of R360 million. The Healthcare segment generated revenues of R11 million and gross profit of R38 million, while Security Services reported markedly lower turnover ofR276 million and gross profit of R106 million.
The smaller divisions – Unified Communications, Software and Consulting and Tracking Solutions – collectively generated revenues of R161 million and gross profit of R53 million.
While these top line numbers may look robust there was a serious hitch in that the growth in Ayo’s gross profit was more than offset by a growth cost-of-sales (from R440 million to over R1.4 billion) and operating expenses (from R199 million to R562 million).
Were it not for the R316 million in finance income earned of Ayo’s large cash balance, the group would have operated at a loss. This is borne out in the cash flow statement – which showed a negative cash outflow from operations of R46 million.
This is a scary situation for Ayo because one of its biggest shareholders, the PIC (and the Government Employees Pension Fund), has issued summons against the group for the funds invested with it at listing in late 2017.
Basically the PIC is trying to convince the courts that the (share) subscription agreement entered into by the PIC and AYO be declared unlawful and set aside. Worst still, is that the PIC is looking for an order to make AYO pay back the almost R4.3 billion invested in the group ahead of the listing (together with a not insubstantial interest re-payment set at 10.25% a year).
AYO, understandably, has instructed its attorneys to oppose the action.
Some believe that the PIC is unlikely to succeed in its actions as it would set a precedent that would leave any companies that raised funds on listing vulnerable to a ‘re-payment recourse’ from dissatisfied shareholders. Others hold that Ayo’s listing price was grossly over-valued and prospects over-stated – even though most observers agree that a professional investor like the PIC should have tested the prospectus forecasts more rigorously.
Whether Ayo are just putting on a brave face is not clear at this point. But Ayo has indicated that in the event that the PIC and GEPF are successful in their court application, management will be able to reconfigure the group into a pure investment holding company.
The group noted: “AYO has several subsidiaries that have been in existence for more than 20 years, delivering both satisfactory trading performance and dividend income for AYO. These subsidiaries are expected to continue trading at an optimal level independent of the PIC funding.”
Looking ahead, Plaatjies said Ayo would continue to focus on additional acquisitions and increasing the diversification of its service and product offerings. “The group expects an increased contribution to the performance of the group for the 2020 financial year resulting from the acquisition of Sizwe, SGT Solutions and GCCT…”
But Plaatjies conceded deal-making would be tricky under current conditions. “AYO has been operating in an extremely difficult market environment, exacerbated by the current narrative arising from the PIC Commission of Inquiry as well as the litigation instituted by the PIC and CIPC against the group. These trying conditions are significantly impeding on our acquisition growth plans and operational performance.”
Clearly a testing time lies ahead for Ayo.
