Slower global market but diverse revenue sources

The thing that makes you strong can also be a weakness. This turned out to be somewhat true for technology group Datatec.

It operates in more than 60 countries — many of which are developing countries — in Latin America, Africa, North America, Europe, the Middle East and Asia-Pacific. This means it has to convert its earnings from these regions’ local currencies to its reporting currency, the US dollar.

Having diverse geographical operations shields it from being dependent on one market but also leaves it vulnerable to fluctuations in its reporting currency.

That is exactly what happened to Datatec. A strengthening dollar resulted in a 30% drop in operating profits to $110.5m for the year to end-February, while revenue stood still at $6.4bn.

Currency strength certainly played a part in the fall in earnings but it got particularly knocked by capital controls in Angola, which have made the conversion from kwanza to US dollars “unpredictable”.

Over the past few years Angola has grown in importance for Wescon, a subsidiary which resells IT hardware and accounts for 75% of total revenue. Its Angolan operation brought in $61m in revenue for the 2015 financial year, but the currency restrictions resulted in a $14.7m foreign exchange loss.

The problems in Angola were reflective of other markets that had taken strain from the slump in prices for oil and other commodities.

Usually Datatec’s geographical spread insulates it from the fluctuations in particular markets but it says something about the world economy that there has been weakness across several regions. It was one of the main reasons Wescon saw two quarters of declining sales for the first time since 2009.

Datatec is not the only technology company taking strain. Even sector heavyweight Apple is seeing signs of a slowdown with sales for its iPhones falling for the first time since the product’s launch in 2007.

The outlook for ICT does not look promising. According to research group Forrester’s The Global Tech Market Outlook for 2016 to 2017 report, global spending on technology by business and governments will rise only 4.5% to $2.9-trillion in 2016. This is down from the projected 5.6% growth estimate in August 2015.

Forrester says weaker growth in Europe, Brazil, China and the Middle East (all important markets for Datatec) is the reason it downgraded its growth projections.

“The global tech market in constant currency terms will continue to grow modestly throughout 2016 and 2017 at 4.5% and 4.7%, respectively. The strong US dollar will persist in 2016, resulting in lower dollar-denominated growth rates. However, we expect the dollar to lose some steam by 2017, so we project 4.9% growth in US dollar terms,” says Forrester vice-president Andrew Bartels.

The global technology sector might not be in good shape but it does not mean there are no bright spots. Forrester notes that “the US will remain the strongest market by size and adoption”.

This is good for Wescon and Datatec’s other key operation, Logicalis, an IT solutions and managed services provider, as the US accounts for a substantial share of their business.

This in effect means Datatec is exposed to a market that is not only showing robust growth, it is also getting a boost from a rise in the dollar’s value.

The goings-on in Angola and the slump in commodity prices have dampened its latest numbers, but this does not mean investors should turn their backs on Datatec.

For one thing, it is maintaining its dividend despite the fall in its earnings. It also thinks the “negative events” that hurt it in 2016 will not be repeated in 2017.

Datatec CEO Jens Montanana says he is confident that its diversification and geographical portfolio strategy as well as its global positioning is a sound strategy. It is also well placed in trending growth niches like cloud-based infrastructure delivery, managed services, security and unified communications solutions.

At R44.38 with a forward PE of 7.44 it actually looks reasonably priced.

And considering that Datatec is in effect an index of the global ICT sector, it is not a bad counter for investors who want a share that produces steady numbers year after year.