All ducks in a row

Datatec seems well placed to grow steadily

Finweek English Edition - - Companies & markets - BELINDA AN­DER­SON

WITH ITS SEC­ONDARY list­ing on Lon­don’s AIM mar­ket four months un­der the belt, its black eco­nomic em­pow­er­ment (BEE) deal done, and al­most R800m in ammo for strate­gic ac­qui­si­tions, Datatec has never been bet­ter po­si­tioned as a global, grow­ing tech­nol­ogy com­pany with its roots in South Africa.

And, with its pres­ence in fast grow­ing mar­kets like the Mid­dle East and Africa, the group has plenty of growth op­por­tu­ni­ties out­side of its tra­di­tional, more de­vel­oped mar­kets.

Datatec’s 2007 fi­nan­cial year closes out at the end of Fe­bru­ary and it will present fi­nal re­sults to Jo­han­nes­burg and Lon­don in May, with the in­vest­ment com­mu­nity no doubt hop­ing for fur­ther op­er­at­ing mar­gin im­prove­ments, as promised.

Fi­nan­cial di­rec­tor David Pfaff, out from Lon­don re­cently for the for­mal launch of African Leg­end Indigo – the BEE en­tity it cre­ated out of a merger be­tween sub­sidiary RangeGate and two of Mashudu Ro­mano’s African Leg­end IT ser­vices busi­nesses – said the Lon­don list­ing had been a “thor­ough and de­tailed” process. Global co­or­di­na­tor and ad­viser Dres­d­ner Klein­wort had proven a hard taskmas­ter, Pfaff said. But, it was im­por­tant to get the stamp of ap­proval on the list­ing from a re­spected in­sti­tu­tion like Dres­d­ner.

The list­ing brought on 14 new off­shore share­hold­ers, tak­ing the in­ter­na­tional share­holder base to around 27%. Pfaff said there had also been in­ter­est from other in­sti­tu­tions and bro­kers to ini­ti­ate cov­er­age of the share, and Datatec would use its fi­nal re­sults to road­show the com­pany to po­ten­tial new Lon­don in­vestors.

Among the aims of the list­ing were to en­able Datatec to gain greater ac­cess to cap­i­tal to sup­port the con­tin­ued growth of its in­ter­na­tional busi­nesses, or­gan­i­cally and by ac­qui­si­tion. The list­ing was aimed at pro­vid­ing an in­ter­na­tion­ally ac­cepted ac­qui­si­tion cur­rency.

Datatec had $83,3m (R591m) in net cash, af­ter long- and short­term debt, at the end of the in­terim pe­riod to Au­gust, and raised £13,9m ($25,8m or around R183m) be­fore ex­penses with the list­ing in late Oc­to­ber, giv­ing it an es­ti­mated “war-chest” of $109m (around R775m).

Over the past few years, Datatec has toned down its once-ag­gres­sive ac­qui­si­tion strat­egy, mak­ing mostly rel­a­tively small, but strate­gi­cally im­por­tant pur­chases to bulk up its ser­vices op­er­a­tions.

The most re­cent ac­qui­si­tion in the UK of a data cen­tre and some of the as­sets of IT so­lu­tions provider CSF So­lu­tions is a good ex­am­ple. The deal, worth a rel­a­tively small £6m (R84m), would aug­ment sub­sidiary Log­i­calis in the UK, en­hanc­ing its re­la­tion­ships with IBM and HP, and its data-cen­tre pres­ence, Datatec said at the time.

An­other im­por­tant cog in Datatec’s ex­pan­sion strat­egy has been a ge­o­graphic one.

In De­cem­ber, it an­nounced a strate­gic part­ner­ship be­tween value-added dis­tri­bu­tion sub­sidiary West­con and Cisco in the Mid­dle East, with a ded­i­cated op­er­a­tion called Com­stor Mid­dle East. A new CEO, for­mer Tech Data man­ag­ing di­rec­tor of the UK and Mid­dle East, Steve Lockie starts in April.

Al­ready, how­ever, Datatec’s Dubai-based op­er­a­tions – which also act as a base from which to sell into other coun­tries in the re­gion – are en route to be­com­ing a mean­ing­ful con­trib­u­tor to the bot­tom line of the group, Pfaff said.

Mean­while, back home, Datatec is pleased with its BEE deal with African Leg­end, which it an­nounced in the mid­dle of last year. It sees sig­nif­i­cant growth po­ten­tial for the new sub­sidiary (it owns 55%, African Leg­end; the re­main­ing 45%) given that it’s start­ing out from a low base. Datatec es­ti­mates the lo­cal mar­ket share of its com­bined South African in­ter­ests is around 2%.

Group mar­ket­ing man­ager Wilna de Vil­liers said the busi­nesses had al­ready been in­te­grated, and the re­spec­tive client bases com­ple­mented each other.

But, while strate­gi­cally im­por­tant given its South African roots, the SA-based busi­nesses, RangeGate and West­con AME, are not sig­nif­i­cant con­trib­u­tors to group prof­itabil­ity. In fact, “other” hold­ings – as th­ese op­er­a­tions are grouped – added $52,9m to rev­enue (R375,6m out of a to­tal of $1,67bn or around R11,9bn) in the six months to Au­gust, and made a small pos­i­tive con­tri­bu­tion to EBITDA (al­though af­ter head of­fice costs, this was re­flected as a neg­a­tive $1m).

Datatec shares staged a dra­matic re­cov­ery from R9 in 2005 af­ter it be­came ap­par­ent that the group would be able to im­prove its op­er­at­ing mar­gins. Th­ese had ticked up steadily to 3,1% by the in­terim pe­riod to Au­gust last year. And with CEO Jens Mon­tanana’s medium-term tar­get of around 4% in sight, the com­pany promised fur­ther growth in the sec­ond half, helped by an in­creas­ing con­tri­bu­tion from Europe.

The shares rose as high as R36,45 ear­lier this month, and were last seen trad­ing just be­low R35 each.

At the time of re­port­ing the in­terim re­sults, two months into the sec­ond half, Datatec re­ported that trad­ing had been strong.

And with a pol­icy of an­nual div­i­dends now in place, it’s likely that Datatec will build on the maiden div­i­dend de­clared in the 2006 fi­nan­cial year.

List­ing process was thor­ough and de­tailed. David Pfaff

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