Taking stock

In his latest column, titled `Good growth prospects in 2007`, First National Bank`s chief economist Cees Bruggemans is upbeat.

"Whichever way one turns this cookie jar, output growth (GDP) keeps grinning at you at about 5%. Possibly even a tad faster in 2007, if households take their time slowing down. Only new shock potential - geopolitically and driving oil prices higher once again - might change the playing field more noticeably," he explains.

"The outlook for 2007, therefore, continues to expect an accommodating global environment. It is an environment in which earnings of quoted companies could show another annual gain of 15%-20%, and for the stock market to make further good gains, also helped along by undiminished global appetite [sic]."

PLACE YOUR BETS

Adrian Saville, executive director and chief investment officer for Cannon Asset Managers, also says the IT and telecommunication sectors are in for a good year.

"There is much for these sectors to benefit from: infrastructure spend looks set to continue on the back of a robust economy; businesses are growing and the market is seeing a shift in lead from consumer to investor. As gross domestic fixed investment gears up, we will see several sectors getting a boost and the ICT markets should find themselves included," he says.

When it comes to investment, Saville says the company holds several promising ICT stocks in its portfolio.

After years of sluggish spend, multinational player Datatec is well geared to benefit from the global uptake in IT, he says, and despite its not meeting expectations in its listing on London`s Alternative Investment Market, the company still has a strong cash pile, robust balance sheet and, importantly, has started to pay dividends.

Next up is software developer InfoWave. "InfoWave is a largely unknown stock, but investor neglect has led to better dividend yields," says Saville. "Moreover, it has a stable client base with good growth prospects and very strong cash generation capabilities."

Dividend-hungry Saville adds Bytes Technology Group and Pinnacle to his hot list.

"Bytes is a generous dividends payer and should reach price - earning multiples of 12 to 13. The company should also benefit from the upswing in gross domestic fixed investment to which IT is closely linked. Pinnacle`s earnings have grown many, many times and we expect the company to benefit from Microsoft`s new offerings which, when added to its own push into software, could provide an upswing," he explains.

As for stocks to avoid, Saville says that Spescom, Zaptronix and Vesta Technology Holdings are extremely difficult to analyse at the moment, and that he would like to see if current directions will actually provide the promised returns.

ANTE UP

Dealstream derivatives trader Daniel Roy concurs with Saville on Datatec, adding that the company`s strong focus on Cisco offerings could benefit from greater demand for the range. However, Roy`s additional picks bring a new selection to the table.

Despite an arduous few years, Roy believes that GijimaAst`s recent turnaround could bear fruit in the coming year. Another company he highlights is Reunert, which he says is reasonably priced and is expected to benefit from Telkom`s R30 billion infrastructure roll-out.

Interestingly, international media house Naspers also features on his list of top ICT stocks. Roy explains: "Naspers is an interesting company to follow, particularly as it chases opportunities from communication convergence. While not a traditional IT company, Naspers is growing its interests in the IT, communications and online arenas - especially in its foreign investments - and looking to bring new opportunities home to roost."

Cautioning that Dealstream does consult to DataPro from time to time, Roy`s enthusiasm is saved for the voice and data provider: "To my mind, Datapro is the most exciting in the ICT market: it has a good business model, led by an exceptionally good management team and a strategy for further acquisitions which should result in returns over the next eight to 15 months."

STAKES ARE HIGH

Kaplan Equity Analysts MD Irnest Kaplan is less inclined to the ongoing market euphoria than most, but agrees that the economic outlook is broadly positive. Nevertheless, he warns that successful investing will require careful stock selection.

"Stock markets always tend to overshoot on both the up and downside. We feel that local technology shares are generally fairly valued now. There are some shares that will no doubt overshoot on the upside and generate spectacular returns from here, but we don`t like taking these types of bets. Rather, we prefer investing in undervalued situations, but not many of these exist," he says.

Accordingly, Kaplan has listed GijimaAst, Faritec, ERP.com, Simeka BSG and AltX newcomer, SilverBridge.

Kaplan explains: "GijimaAst is a great turnaround story and, we believe, well positioned to benefit from increased government spend on IT. Faritec is undervalued and the recent Enterprise Connection acquisition bodes well for the group," he reveals.

"ERP.com is a longer-term turnaround story. The recent shedding of its loss-making enterprise applications division should return the group to strong performance. In the interim, we believe the stock has been `hit` too hard and offers good value. Simeka BSG, on the other hand, is still somewhat `undiscovered` and undervalued, yet it has a well diversified mix of solid businesses and looks well positioned for good growth. Finally, we like SilverBridge`s management, their business model and their sector. We believe it has above-average growth prospects and believe that the share is currently undervalued."

As for stocks to avoid in the short term, Kaplan says that Business Connexion (BCX) - "although a blue chip IT player and business of exceptional quality" - has had its share price pushed up to unrealistic levels due to the Telkom bid.

"We are of the opinion that the deal will not go ahead, in which case the stock will likely fall," he warns.

Kaplan, like Saville, also has concerns regarding Spescom. "Years ago, this company was a solid technology player. However, more recently, we feel the company has lost some direction... Until we get a clear strategic direction from the group, together with a few periods of good results, we recommend that investors avoid the share."

While several analysts recommend a buy on African and Middle East cellular operator, MTN, Kaplan disagrees. "Arguably the best mobile telecoms player in emerging markets, we simply feel that MTN shares have risen too high, trading well above our current valuation. On a short-term view, we think investors should take profits or avoid investing further. However, on a longer term view... we still like the group and believe it will do well for investors."

GREATER EFFICIENCY

Kaplan is not the only analyst to have negative sentiment towards MTN. An analyst who prefers to remain unnamed reveals that the cellular operator`s share price has not been adequately discounted to account for its entry into high-risk regions such as Iran, Afghanistan and Syria.

Telkom, on the other hand, has a fair amount of support from the investor market, if not its customers. Cannon Asset`s Saville values Telkom`s share at around R200 - well above its current price of around R145.

"We love the stock everyone loves to hate: Telkom has a great cash pot and a very attractive dividend yield. We also believe that the introduction of competition during the year will be good for Telkom, encouraging greater efficiency within the group and benefiting the sector as a whole. However, we do have some concerns about its expansion strategy," he contends.

PICK A CARD

Of course forecasting is a less-than- perfect science and analysts warn that market conditions can change, bringing new dynamics to trading. Nevertheless, while major slips are unlikely to occur, FNB`s Bruggemans adds a final warning.

"For South Africa there is one more, homegrown, risk. The political leadership succession later this year, and the general election of 2009, may generate some heat which could be reflected in financial market uncertainty."