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