Hard­ware and ser­vices — a cir­cus act for sur­vival

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

Though com­pa­nies in the tech­nol­ogy sec­tor are prone to wild up­swings and sud­den dips, such an ac­cu­sa­tion can­not be made against Dat­a­cen­trix. Over the years it has made a habit of mak­ing steady progress.

This in it­self is re­mark­able, given the rapid changes in the tech space. One minute a new de­vice is the must-have for ev­ery busi­ness; the next mo­ment it has been re­placed by some­thing new.

With this kind of change, tech­nol­ogy com­pa­nies in ef­fect have to be like a cow­boy who has to strad­dle two horses at the same time.

One foot is on a horse that rep­re­sents its ex­ist­ing busi­nesses

while the other is on the horse that rep­re­sents what it wants to do in the fu­ture.

A few years ago Dat­a­cen­trix sensed that it needed to go through such a tran­si­tion. It started out selling com­put­ers but when ev­ery­one was do­ing the same it started of­fer­ing IT ser­vices like cloud com­put­ing.

Look­ing at its per­for­mance over the past few years, this shift has paid off.

Though its num­bers have not been spec­tac­u­lar, the move to ser­vices has given it a more than ad­e­quate rev­enue stream.

Its latest set of num­bers, how­ever, shows a com­pany that is tak­ing some strain from a soft econ­omy but also de­mon­strat­ing some re­silience. Though rev­enue was flat at R2,24bn, op­er­at­ing profit had in­creased al­most 15% to R143,8m for the 12 months to end Fe­bru­ary.

It has no debt to speak of, cash from op­er­at­ing ac­tiv­ity rose from R142m to R199m and it has cash and cash equiv­a­lent of R291,4m, up from R202,5m.

Its move into of­fer­ing ser­vices can be seen in its man­aged ser­vices now mak­ing up 45% of earn­ings, up from 19% in 2010. Though ser­vices have made a healthy con­tri­bu­tion to the bot­tom line, they present chal­lenges: the group had to in­vest heav­ily in cre­at­ing and main­tain­ing new skill sets.

It is also vul­ner­a­ble to cus­tomer com­pa­nies want­ing to bring IT ser­vices back in-house.

This is ex­actly what hap­pened, which is why Dat­a­cen­trix’s man­aged ser­vices earn­ings were flat for the year.

Busi­ness so­lu­tions, its other IT ser­vice-ori­en­tated busi­ness di­vi­sion, fared bet­ter. Earn­ings rose 10% to R10,8m.

The group’s shift to of­fer­ing ser­vices has paid off over the past few years but it was the hard­ware re­selling di­vi­sion which was a sig­nif­i­cant driver of earn­ings growth for this pe­riod.

Earn­ings were not only up 38% to R45,5m, mar­gins rose from 2,9% to 4,1%.

Though the move into IT ser­vices has not come with­out chal­lenges, Dat­a­cen­trix’s ef­forts have been recog­nised. Re­search group Frost & Sul­li­van awarded it the 2015 South­ern African IT Sys­tems In­te­gra­tion Com­pet­i­tive Strat­egy In­no­va­tion & Lead­er­ship Award.

Judg­ing by its per­for­mance over the past few years, the group looks well placed to con­tinue on its steady growth tra­jec­tory.

Even so, in­vestors have been cau­tious. Though its share price has risen about 24% over the past year to R4,70, it is on a PE ra­tio of only 8,68.

And when com­pared over the past three and five years, the share price has risen only 9,3% and 17,5% re­spec­tively and is still far from its high of R59 in Jan­uary 2011.

Its share price might not be a stel­lar per­former but there are other rea­sons to like it. For one, it has a re­spectable re­turn on eq­uity of 16,9% and a de­cent div­i­dend yield of 3,82%.

The group’s re­cent per­for­mance sug­gests that it will not be shoot­ing out the lights when it comes to earn­ings, but in­vestors look­ing for a steady per­former which pays out reg­u­lar div­i­dends could do worse than Dat­a­cen­trix.

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