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.
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.
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.