Un­der­per­form­ing but at­trac­tive

Datatec, an in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy group with operations around the world, is cur­rently lag­ging be­hind its peers, although it ap­pears the group’s for­tunes are go­ing to change.

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re­search team in t

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ICT group Datatec, a ma­jor dis­trib­u­tor of Cisco prod­ucts, has had a tough year, with weak­en­ing emerg­ing­mar­ket cur­ren­cies against the US dol­lar and a loss in An­gola in the year to end Fe­bru­ary weigh­ing on its share price.

The group’s lat­est re­sults, for the six months to end Au­gust, showed a 19.3% de­cline in profit to $22.67m, while un­der­ly­ing earn­ings per share de­creased to 12.5 US cents from 16.6 US cents in the same pe­riod in 2015. It cut its div­i­dend from 114.32 South African cents to 60c. Datatec’s share price is down 37% since its Au­gust 2015 high.

Datatec, with operations in more than 60 coun­tries across North Amer­ica, Latin Amer­ica, Europe, Africa, the Mid­dle East and Asia-Pa­cific, con­sists of three core busi­ness units: West­con (a value-added dis­trib­u­tor of tech­nol­ogy and com­mu­ni­ca­tions so­lu­tions in the en­ter­prise, small busi­ness and con­sumer mar­kets) and Log­i­calis (which pro­vides global tech­nol­ogy so­lu­tions and man­aged ser­vices) as well as Con­sult­ing and Fi­nan­cial Ser­vices. In the lat­est in­terim pe­riod, West­con ac­counted for 75% of group rev­enue and Log­i­calis for 24%. North Amer­ica and Europe are the key re­gions for Datatec, con­tribut­ing 30% and 33% re­spec­tively to profit.

De­spite its weak per­for­mance in the six months to end Au­gust, CEO Jens Mon­tanana was con­fi­dent that the group would re­port bet­ter re­sults in the sec­ond half of the fi­nan­cial year, driven by im­proved con­fi­dence in emerg­ing mar­kets and an ex­pected “con­tin­ued slow re­cov­ery”, with more sta­ble cur­ren­cies, he said.

Though the JSE’s South African Tech­nol­ogy In­dex has made up all losses re­sult­ing from the 2000 IT bub­ble, it pulled back in Au­gust last year, as it cor­rected from an overex­tended po­si­tion within its pri­mary bull trend. It’s now show­ing signs of em­bark­ing on a new bull phase. This could be aided by bullish ICT spend in South Africa in 2017, based on re­cent fore­casts from In­ter­na­tional Data Cor­po­ra­tion (IDC).

Ac­cord­ing to the IDC, SA is ex­pected to have the high­est ICT spend across the Mid­dle East, Tur­key and Africa re­gions in 2017, with an es­ti­mated $10.5bn spend. The spend­ing will be driven by in­vest­ments in cloud, big data, so­cial, and mo­bil­ity, ac­cord­ing to the IDC. Over­all, ICT spend­ing in these re­gions is ex­pected to top $243bn next year, fin24.com re­ported.

Though Datatec is cur­rently un­der­per­form­ing its peers, a pos­i­tive break­out on the chart is likely to make it an at­trac­tive buy. Its global dis­tri­bu­tion busi­ness of­fers a de­gree of di­ver­si­fi­ca­tion and its ICT dis­trib­u­tor has a global reach. Datatec’s long-term op­por­tu­nity lies in im­prov­ing its mar­gins, which ex­perts believe should be driven through ef­fi­ciency gains from its en­ter­prise re­source plan­ning (ERP) soft­ware and busi­ness process out­sourc­ing (BPO) ini­tia­tives.

What next?

Pos­si­ble sce­nario: Datatec is con­sol­i­dat­ing in the form of a sym­met­ri­cal tri­an­gle. Re­cently bounc­ing on the lower slope of the pat­tern, gains to the up­per slope seem pos­si­ble. A pos­i­tive break­out would be con­firmed above 5 355c/ share, with the up­side tar­get sit­u­ated at 7 235c/share. Po­si­tions may have to be re­vised at 6 430c/ share – if Datatec should strug­gle to re­sume its pre­vi­ous bear trend. Oth­er­wise stay long, even more so above 7 445c/share. Al­ter­na­tive sce­nario: A neg­a­tive break­out of the pat­tern would be con­firmed below 6 400c/share. In which case, go short as Datatec could ex­tend its losses to­wards 2 720c/share.

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