Slower global mar­ket but di­verse rev­enue sources

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

The thing that makes you strong can also be a weak­ness. This turned out to be some­what true for tech­nol­ogy group Datatec.

It op­er­ates in more than 60 coun­tries — many of which are de­vel­op­ing coun­tries — in Latin Amer­ica, Africa, North Amer­ica, Europe, the Mid­dle East and Asia-Pa­cific. This means it has to con­vert its earn­ings from th­ese re­gions’ lo­cal cur­ren­cies to its re­port­ing cur­rency, the US dol­lar.

Hav­ing di­verse ge­o­graph­i­cal oper­a­tions shields it from be­ing de­pen­dent on one mar­ket but also leaves it vul­ner­a­ble to fluc­tu­a­tions in its re­port­ing cur­rency.

That is ex­actly what hap­pened to Datatec. A strength­en­ing dol­lar re­sulted in a 30% drop in op­er­at­ing prof­its to $110.5m for the year to end-Fe­bru­ary, while rev­enue stood still at $6.4bn.

Cur­rency strength cer­tainly played a part in the fall in earn­ings but it got par­tic­u­larly knocked by cap­i­tal con­trols in An­gola, which have made the con­ver­sion from kwanza to US dol­lars “un­pre­dictable”.

Over the past few years An­gola has grown in im­por­tance for Wescon, a sub­sidiary which re­sells IT hard­ware and ac­counts for 75% of to­tal rev­enue. Its An­golan op­er­a­tion brought in $61m in rev­enue for the 2015 fi­nan­cial year, but the cur­rency re­stric­tions re­sulted in a $14.7m for­eign ex­change loss.

The prob­lems in An­gola were re­flec­tive of other mar­kets that had taken strain from the slump in prices for oil and other com­modi­ties.

Usu­ally Datatec’s ge­o­graph­i­cal spread in­su­lates it from the fluc­tu­a­tions in par­tic­u­lar mar­kets but it says some­thing about the world econ­omy that there has been weak­ness across sev­eral re­gions. It was one of the main rea­sons Wescon saw two quar­ters of de­clin­ing sales for the first time since 2009.

Datatec is not the only tech­nol­ogy com­pany tak­ing strain. Even sec­tor heavy­weight Ap­ple is see­ing signs of a slow­down with sales for its iPhones fall­ing for the first time since the prod­uct’s launch in 2007.

The out­look for ICT does not look promis­ing. Ac­cord­ing to re­search group For­rester’s The Global Tech Mar­ket Out­look for 2016 to 2017 re­port, global spend­ing on tech­nol­ogy by busi­ness and gov­ern­ments will rise only 4.5% to $2.9-tril­lion in 2016. This is down from the pro­jected 5.6% growth es­ti­mate in Au­gust 2015.

For­rester says weaker growth in Europe, Brazil, China and the Mid­dle East (all im­por­tant mar­kets for Datatec) is the rea­son it down­graded its growth pro­jec­tions.

“The global tech mar­ket in con­stant cur­rency terms will con­tinue to grow mod­estly through­out 2016 and 2017 at 4.5% and 4.7%, re­spec­tively. The strong US dol­lar will per­sist in 2016, re­sult­ing in lower dol­lar-de­nom­i­nated growth rates. How­ever, we ex­pect the dol­lar to lose some steam by 2017, so we project 4.9% growth in US dol­lar terms,” says For­rester vice-pres­i­dent An­drew Bar­tels.

The global tech­nol­ogy sec­tor might not be in good shape but it does not mean there are no bright spots. For­rester notes that “the US will re­main the strong­est mar­ket by size and adop­tion”.

This is good for Wescon and Datatec’s other key op­er­a­tion, Log­i­calis, an IT so­lu­tions and man­aged ser­vices provider, as the US ac­counts for a sub­stan­tial share of their busi­ness.

This in ef­fect means Datatec is ex­posed to a mar­ket that is not only show­ing ro­bust growth, it is also get­ting a boost from a rise in the dol­lar’s value.

The go­ings-on in An­gola and the slump in com­mod­ity prices have damp­ened its lat­est num­bers, but this does not mean in­vestors should turn their backs on Datatec.

For one thing, it is main­tain­ing its div­i­dend de­spite the fall in its earn­ings. It also thinks the “neg­a­tive events” that hurt it in 2016 will not be re­peated in 2017.

Datatec CEO Jens Mon­tanana says he is con­fi­dent that its di­ver­si­fi­ca­tion and ge­o­graph­i­cal port­fo­lio strat­egy as well as its global po­si­tion­ing is a sound strat­egy. It is also well placed in trend­ing growth niches like cloud-based in­fra­struc­ture de­liv­ery, man­aged ser­vices, se­cu­rity and uni­fied com­mu­ni­ca­tions so­lu­tions.

At R44.38 with a for­ward PE of 7.44 it ac­tu­ally looks rea­son­ably priced.

And con­sid­er­ing that Datatec is in ef­fect an in­dex of the global ICT sec­tor, it is not a bad counter for in­vestors who want a share that pro­duces steady num­bers year af­ter year.

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