Datatec, Pioneer, Delta Property, Holdsport, Sabvest
Trading on a 19 p:e Datatec looks more than fully valued. But then valuations taken at face value can often be deceptive.
This appears especially true of Datatec, described by its CE Jens Montanana as having been on a “bumpy road” for several years.
There have been some big bumps for the global value-added technology equipment distributor Montanana, founded in 1986. These have hammered Datatec’s headline EPS (HEPS) to way below a normalised level. Initially falling by 14% in the three financial years to February 2015, HEPS went into free fall in the most recent year, slumping 48% to US19.4c.
Datatec set out on the bumpy road when it was decided to install an SAP enterprise resource planning system. “After nearly 30 years we had to replace our old systems,” says Montanana.
The process, which has so far cost US$100m, began in North America. It proved to be easier said than done. “Adaptation to the new system has been difficult for staff,” says Montanana.
More critically, Warren Jervis, manager of Old Mutual Small & Mid Cap Fund, says: “Datatec made some big errors in its rollout of SAP in North America.”
In its latest financial year, a bigger setback confronted Datatec: a collapse of emerging market currencies against the US dollar in the second half of 2015. In Latin America, which normally generates about a quarter of group gross profit, Datatec was particularly hard hit by a 30% fall in the Brazilian real.
Reflecting the impact of currency weakness, reported revenue in the past year came in flat at $6.5bn. On a constant currency basis revenue was up 8.6% at $7bn.
SAP and currency collapses made for what Montana describes as a “perfect storm”. But storms pass and are doing so for Datatec.
Roll-out of SAP is now behind it in North America and will be completed group-wide in the current financial year. Emerging market currencies are also rebounding. The real, for example, gained 28% against the dollar since the end of February.
It points to a strong rebound in Datatec’s results in the year to February 2017. For investors the key question is: by how much?
A starting point is EPS adjusted for unrealised foreign exchange losses and one-off restructuring costs in the key Westcon and Logicalis divisions in the past year. These fell from US41.8c the previous year to US32c, yielding a p:e of 11.7.
Indicating what can be expected in the current year, the consensus forecast of analysts polled by Thomson Reuters looks to EPS rising to US45c. It indicates that Datatec is trading on a HEPS-based forward 10 p:e rating or lower.
Montanana is upbeat on prospects, terming conditions in the technology industry “robust”.
For Datatec, a major growth sector is cloud computing, an area of focus of the Logicalis division, says Montanana.
Boding well for Datatec’s future profits, Logicalis has a far higher element of service and consulting value-add than the largely “box-pushing” Westcon. Operating margins in the 2015 financial year reflect this: 4.8% from Logicalis and 2.1% from Westcon.
Logicalis has also emerged as Datatec’s fastest-growing division, now contributing 51% of operating profit, just short of Westcon’s 56% contribution. Huge growth in cloud computing is setting the stage for Logicalis to overtake Westcon.
International Data Corp (IDC) predicts that global spending on cloud services will grow at an annual average of 19.4%, from $70bn in 2015 to $141bn in 2019. This is almost six times the predicted rate of overall IT spending growth.
Montanana is also enthusiastic about prospects in the IT security sector. “We are seeing an explosion in demand for security products,” says Montanana. Drivers include growth in cloud computing, broadband services and wireless communications.
According to IDC, global spending on IT security products grew 9.9% in 2015 to $10.6bn. The biggest player in the security sector is Cisco, with a market share of almost 15% in 2015. Cisco is Datatec’s leading partner and accounts for 43% of Westcon’s product sales and 52% of those of Logicalis.
In a global technology distribution sector that has had huge consolidation in recent years, Datatec’s ownership of key routes to market in more than 60 countries across six continents makes it a valuable asset.
It is an asset well undervalued on a forward 10 p:e or even less, and could make Datatec a sitter as an acquisition target. Hammering home just how undervalued Datatec is, its US-listed peer group is, according to Morningstar, trading on an average p:e of 15.7