Still con­fi­dent

De­cent re­sults ex­pected. Can we ex­trap­o­late that out­look to the rest of the sec­tor?

Finweek English Edition - - Companies & Markets - BELINDA AN­DER­SON be­lin­daa@fin­

THE LAT­EST TRAD­ING UP­DATE from Di­men­sion Data reads like some­thing out of a bull mar­ket, with words such as “good de­mand, con­fi­dent, strong” and “in line with man­age­ment ex­pec­ta­tions”. Com­men­ta­tors say you must none­the­less tem­per short- and medium-term ex­pec­ta­tions with some cau­tion. But prospects for Di­data as a long-term hold­ing are favourable.

The up­date – is­sued un­der the guise of an “In­terim man­age­ment state­ment”, as re­quired by the Lon­don Stock Ex­change – is meant to guide share­hold­ers mid­way through a re­port­ing pe­riod as to how the com­pany is trad­ing. If things were not looking great, it would act as an early warn­ing no­tice.

How­ever, in Di­data’s case things for the four and a half months from April to midAu­gust are looking good – per­haps sur­pris­ingly so, given that the econ­omy world­wide is in the throes of a credit crunch. But man­age­ment doesn’t give spe­cific num­bers.

Steve Min­naar, head of re­search at Old Mu­tual In­vest­ment Group (OMIGSA), says the state­ment was a bit of a damp squib in terms of pro­vid­ing guid­ance. But the cur­rent man­age­ment team learnt from the mis­takes of the past, in terms of over-promis­ing and un­der­de­liv­er­ing. So it’s a good thing and re­flec­tive of a more sober, down-to-busi­ness man­age­ment team.

Head of small caps at San­lam In­vest­ment Man­age­ment (SIM) Jo­han de Bruijn sounded up­beat about the up­date. He says Di­data “ticked all the boxes” he’d been looking for re­as­sur­ance from: rev­enue, mar­gins, work­ing cap­i­tal and strat­egy.

Di­data re­ported good de­mand for its ser­vices, gross mar­gins were sta­ble and costs had been con­tained. Im­por­tantly, it said it had a solid net cash po­si­tion, re­flect­ing on­go­ing fo­cus on work­ing cap­i­tal man­age­ment.

The full-year to Septem­ber re­sults will be re­leased on 12 Novem­ber (see ta­ble for an­a­lysts’ ex­pec­ta­tions).

De Bruijn says he’d also been able to score a tick in the “strat­egy” box, with the buy­out of the Dat­acraft mi­nori­ties. He says the mar­ket has long un­der­val­ued Dat­acraft and al­though there may be some pres­sure on the com­pany’s prospects in the short term (as ar­tic­u­lated by

its man­age­ment in its most re­cent re­sults) over the long term those still looked very pos­i­tive.

How­ever, given there’s a share­hold­ers’ vote com­ing up with re­gard to sell­ing the com­pany, you’d hardly ex­pect man­age­ment to over-hype the com­pany’s prospects.

Di­data owns 55% of Dat­acraft and has of­fered mi­nor­ity share­hold­ers US$1,33/share, a 33% pre­mium to the av­er­age share price over the three months pre­ced­ing the of­fer.

But De Bruijn says Dat­acraft man­age­ment’s slightly neg­a­tive un­der­tones echoed those of some com­peti­tors. He also has the “high­est re­gard” for Dat­acraft man­age­ment and says its in­ter­ests are aligned with those of share­hold­ers, so there’s no rea­son it would want to sell the com­pany too cheaply.

But then why haven’t Di­data’s shares rerated more sig­nif­i­cantly? De Bruijn says in the cur­rent mar­ket, share­hold­ers just don’t want to see ac­qui­si­tions, which makes the price dif­fi­cult to call. But it’s a good deal for Di­data, he says, and rates the share as a good long-term buy. “We take a long-term view of the sec­tor. Di­data is a lever­age play on the phe­nom­e­nal growth of data trans­fer that the world is ex­pe­ri­enc­ing.”

On top of that, De Bruijn says Di­data still has the op­por­tu­nity to ex­pand mar­gins plus other value un­lock­ing op­por­tu­ni­ties, such as its Bryanston-based Cam­pus prop­erty, where de­mand for space con­tin­ues to grow. Di­data is also well ex­posed to a range of emerg­ing mar­kets, and its man­age­ment is very fo­cused on un­lock­ing value for share­hold­ers, as ev­i­denced in its div­i­dend pol­icy.

Di­data’s two big­gest share­hold­ers are Ven­Fin and Al­lan Gray and both again ex­pressed their con­fi­dence in it by agree­ing to un­der­write the share of­fer un­der­taken in part-pay­ment for the Dat­acraft deal. Post the share is­sue Ven­Fin and Al­lan Gray held 25,4% and 23,1% of Di­data re­spec­tively.

What can we ex­trap­o­late from Di­data’s out­look for the rest of SA’s IT sec­tor? Not much, it seems. The ser­vices and so­lu­tions com­pa­nies all have dif­fer­ent mixes of ven­dors and dif­fer­ent niches within those (Net­work­ing in the case of Di­data. Among those, only Di­data and Datatec op­er­ate world­wide.

How­ever, Irnest Ka­plan, MD of Ka­plan Eq­uity An­a­lysts, says he’s still bullish about the sec­tor. “The IT sec­tor gen­er­ally is in the health­i­est shape it’s been in over the past five or six years. I do ex­pect it to come un­der a bit of pres­sure in gen­eral as the econ­omy slows.”

But Ka­plan re-em­pha­sised that “the pub­lic sec­tor should al­le­vi­ate the pri­vate sec­tor slow­down – so those well po­si­tioned for pub­lic sec­tor busi­ness should fare slightly bet­ter”.

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