Ringing profitable times at Celsys


Royal Bank

Highlights Attributable profit rises 2 340% to $7,6 billion from $313 million over the comparable period prior year; Turnover up 1 035% to $10,3 billion from $908 million; Headline EPS

appreciates 1 620% to $5,34 from $0,32.


Background


Celsys Ltd is a recently listed communications company comprising three divisions namely Celsys Comms, Celsys Print and Celsys C-Phone.


Celsys Comms is the nation’s largest retailer of cellular phone handsets; it also sells lines and airtime to end users on a cash and credit basis.


Celsys Print division is the largest independent printer of security documents for banks and financial institutions in Zimbabwe and is now also the major producer of cellular phone recharge cards.


Celsys C-Phone is the recently launched community payphone division.

It is designed to develop entrepreneurial spirit and create employment opportunities.


Having listed by way of introduction on April 30, the company has released an exceptional set of maiden results that is well ahead of market expectations.


Results commentary


Group turnover shot up 1 035% from $908 million to $10,3 billion as a strategy to aggressively increase market share, expand the product range and establish a new division paid off.


Over the same period, attributable earnings increased by 2 340%, buoyed by an increase in margins and an exceptional contribution from the C-Phone division to group bottom line.


Investment income also increased 731% as part of a strategy to raise funds to fund the network financing schemes over the short-term at which point airtime income is expected to have increased enough to replace investment income.


On a divisional level, volumes for Celsys Print went up 1 000% on recharge cards as the company continues to get business from Net One and Telecel.

Future prospects are promising, especially in light of news that negotiations are currently in progress with networks in the region to print and export recharge cards to them.


Growth in the number of cheques printed has also grown substantially and the company now controls 75% market share in this sector.


Celsys Comms adopted an aggressive growth strategy and achieved significant volume growth on the back of increased access to borrowed funds.


Management is planning to have a branch network of 60 outlets by December, this in our opinion should translate into greater finance income from credit sales.


Of concern is the intention by Econet Wireless Holdings Ltd to terminate the bulk supply agreement which was entered into in November 2001.


Market perception is that this will negatively affect Celsys Comms but management has maintained that the agreement is currently contributing less than 1% of Celsys Ltd’s profits.


The group’s shining star is the new C-Phone division.

The division’s contribution to profit was enormous, providing in excess of 50% of group revenue.


Management intends to target semi-urban and rural areas with the community payphones.


Demand for this new product is substantial and the division has, according to management, the potential to cater for an estimated 90% of the population that does not have access to telecommunications.


With only 300 payphones having been sold in the second half of the year, we expect volumes to increase substantially over the new financial year and this in turn should translate into higher earnings.


Valuation and recommendation


Management is confident that margins will be maintained.

Export earnings from Celsys Print are set to be substantial.

Having a strong acquisitive focus, the company is likely to acquire a number of companies and establish a fourth division.


Forecasting conservative earnings of $20 for the next six months, the counter is undervalued and is a strong buy.


Technical analysis


The 15-day moving average in the bottom graph (left) is also generating a strong short-term buy signal.

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