All ducks in a row
Datatec seems well placed to grow steadily
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