Financial Mail - Investors Monthly - - Contents - Stafford Thomas

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

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