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Currency in ZAR
Last close As at 02/06/2023
ZAR39.00
▲ 0.97 (2.55%)
Market capitalisation
ZAR8,772m
Research: TMT
In H122 Datatec saw strong growth globally, with elevated demand for networking, cyber security and cloud infrastructure. The H122 results show good operational growth across the group, with a notably stronger performance from Westcon after its turnaround. Semiconductor supply-chain issues remain challenging, with the group seeing growing inventory levels and a building backlog of unfulfilled work. However, with technology trends continuing from H122, the outlook for H222 looks promising. Trading on 15.4x FY22 earnings and 3.6x FY22 EV/EBITDA, Datatec looks attractively priced, bolstered by the 512 ZAR cents (c 33 US cents) per share special dividend and with the results of management’s ongoing strategic review as potential upside for 2022.
Datatec |
Attractive value play with upside potential |
H122 results |
IT services |
3 November 2021 |
Share price performance
Business description
Next events
Analysts
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In H122 Datatec saw strong growth globally, with elevated demand for networking, cyber security and cloud infrastructure. The H122 results show good operational growth across the group, with a notably stronger performance from Westcon after its turnaround. Semiconductor supply-chain issues remain challenging, with the group seeing growing inventory levels and a building backlog of unfulfilled work. However, with technology trends continuing from H122, the outlook for H222 looks promising. Trading on 15.4x FY22 earnings and 3.6x FY22 EV/EBITDA, Datatec looks attractively priced, bolstered by the 512 ZAR cents (c 33 US cents) per share special dividend and with the results of management’s ongoing strategic review as potential upside for 2022.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
02/20 |
4,214 |
79.1 |
9.9 |
7.0 |
27.4 |
2.6 |
02/21 |
4,109 |
73.1 |
13.6 |
6.7 |
20.0 |
2.5 |
02/22e |
4,514 |
84.6 |
17.6 |
40.3 |
15.4 |
14.8 |
02/23e |
4,757 |
107.6 |
25.9 |
8.6 |
10.5 |
3.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H122 results: Strong performance across the group
H122 group revenue rose 15% (against a weak comparator) to US$2.26bn, with EBITDA up 24% to US$75m and underlying EPS surging 113% to 8.3 US cents. By division, Logicalis showed 19% revenue growth to US$823m. Despite EBITDA margin compression (5.7% in H122 vs 6.2% for H121) due to supply chain issues and backlog, Logicalis’s EBITDA still rose 8% to US$46.5m. Westcon’s revenues rose 12% to US$1.39bn, with its operational gearing meaning that EBITDA margins expanded to 2.2% in H122, driving its EBITDA up 62% to US$31m. Analysys Mason saw a 37% increase in revenues to US$43.6m, with EBITDA climbing 25% to US$7.1m. Group net debt rose to US$152.5m (FY21: US$60.9m) as the business absorbs cash as it grows, and with elevated inventory levels.
Estimates revised upwards by c 5%
Following Datatec’s strong H122 performance, we have upgraded our FY22 sales estimates by assuming each division matches its H122 revenues in H222, leading to group revenues of US$4.51bn in FY22, an upward revision of c 5%. This then forms a base for future years, with c 5% top-line growth in FY23 and FY24, leading to revenues of US$4.76bn and US$5.03bn, respectively. We have raised EBITDA by c 4% to US$169m in FY22 and US$193 in FY23. With FY22 operating cashflow restrained by inventory build-up, we estimate closing net debt of US$166m.
Valuation: Defensive growth with upside potential
With IT trends set to continue (Datatec’s focus on networking, cyber security and cloud infrastructure looks set to support growth for some time to come) and trading on 15.4x revised FY22 earnings and 3.6x FY22 EV/EBITDA, Datatec looks attractively priced. The shares also offer the c 33 US cents per share special dividend together with potential upside from management’s value realisation initiatives – quantified in our August note, Strategic review to unlock embedded value – which may lead to a crystallisation of value in 2022.
H122 results: Strong performance across the group
In H122, Datatec saw strong growth globally with elevated demand for networking, cyber security and cloud infrastructure, benefiting much of the industry. However, the global semiconductor shortage led to extended hardware lead times, restricting revenue growth and resulting in a significantly higher closing backlog for both Logicalis and Westcon. Without the effect of these supply issues, growth at both Logicalis and Westcon could have been even higher.
Despite this headwind, the H122 results show good operational growth across the group, with a notably stronger performance from Westcon after its turnaround. H122 group revenue rose 15% (against a relatively weak comparator at the start of the COVID-19 pandemic) to US$2.26bn (H121: US$1.96bn), with EBITDA up 24% to US$75m (H121: US$61m) and underlying EPS rising 113% to 8.3 US cents (H121: 3.9 US cents). Group central costs (including board and head office staff remuneration, consulting and audit fees) rose 23% y-o-y to US$9.1m (H121: US$7.4m), largely as a result of share-based payment charges, including LTIPs. As the business absorbs cash as it grows, as well as reflecting elevated inventory levels, group net debt at 31 August 2021 rose to US$152.5m (FY21: US$60.9m).
Exhibit 1: Interim results summary
US$m |
H121 |
H221 |
FY21 |
H122 |
H222e |
FY22e |
Revenue |
1,963 |
2,147 |
4,109 |
2,257 |
2,257 |
4,514 |
Cost of Sales |
(1,638) |
(1,780) |
(3,419) |
(1,883) |
(1,866) |
(3,749) |
Gross Profit |
324 |
366 |
691 |
374 |
391 |
765 |
EBITDA |
61 |
58 |
119 |
75 |
94 |
169 |
Reported operating profit |
28 |
22 |
50 |
39 |
64 |
103 |
Profit before tax (reported) |
15 |
10 |
25 |
25 |
51 |
76 |
EPS - Company underlying uEPS (c) |
3.9 |
9.7 |
13.6 |
8.3 |
9.3 |
17.6 |
Gross Margin (%) |
16.5 |
17.1 |
16.8 |
16.6 |
17.3 |
17.0 |
EBITDA Margin (%) |
3.1 |
2.7 |
2.9 |
3.3 |
4.2 |
3.7 |
Closing net debt/(cash) |
73 |
61 |
61 |
153 |
166 |
166 |
Source: Company accounts, Edison Investment Research
Special dividend of c 33 US cents per share
Following the sale of Westcon Americas to SYNNEX in September 2017, Datatec made an inter-company loan to Westcon International to fund working capital as the business was restructured. During H122, Westcon International repaid the amounts outstanding (c US$70m) to Datatec. This amount is to be paid to shareholders by way of a cash dividend with a scrip alternative. This special dividend equates to 512 ZAR cents (c 33 US cents) per share, payable to shareholders on the register at the close of business on 26 November 2021.
In addition to the special dividend, Datatec still expects to pay a final dividend for FY22 in line with its policy of ensuring that the dividend is covered 3x by uEPS.
Strategic review, developments not anticipated until 2022
As announced in August 2021, Datatec has engaged Lazard & Co. to assist with a strategic review of the group to address the persistent gap between Datatec's valuation and the perceived value of its underlying assets. As part of the strategic review, the board is considering a number of potential options, including private equity participation; joint ventures; international listings; divisional asset unbundling; and other value-creating structures. We quantified the size of the opportunity in our August note, Strategic review to unlock embedded value, and look forward to an update on progress in 2022.
Divisional review: All segments delivering in H122
|
Exhibit 2: H122 gross profit by division |
Exhibit 3: H122 vs H121 gross margins |
|
|
|
Source: Datatec |
Source: Datatec |
|
Exhibit 2: H122 gross profit by division |
|
|
Source: Datatec |
|
Exhibit 3: H122 vs H121 gross margins |
|
|
Source: Datatec |
Logicalis
Logicalis contributes the majority of Datatec’s profitability and has the widest geographical spread. Datatec intends to continue to grow Logicalis globally, both organically and through M&A.
The global semiconductor shortage led to extended hardware lead times in H122, restricting revenue growth and resulting in a significantly higher closing backlog particularly in Latin America and EMEA. Despite this, Logicalis’s revenue increased by 19% to US$823m (H121: US$693m). There was some margin compression, with a gross margin of 24.2% in H122 versus 25.5% in H121 and an EBITDA margin of 5.7% in H122 versus 6.2% for H121, due to the supply chain issues and growth in backlog. Despite this, Logicalis’s gross profit still rose 13% to US$199m (H121: US$177m) and EBITDA rose 8% to US$46.5m (H121: US$43.0m).
Global trading uncertainties are expected to persist in the near future, with emerging market currencies and interest rates expected to remain volatile. Prospects within cloud, IoT, software, security, data management and intelligent networks for Logicalis remain attractive as Logicalis seeks to provide full lifecycle IT infrastructure solutions to its customers.
Westcon International
Westcon, Datatec’s distribution business, accounts for 62% of group revenues. Following its restructuring in 2017/18, Westcon remains focused on improving profitability through revenue growth and margin expansion, coupled with tight cost control. As with Logicalis, Westcon’s backlog also rose significantly in H122 due to semiconductor shortages and supply chain constraints.
In H122, Westcon’s revenue increased by 12% to US$1.4bn (H121: US$1.2bn), particularly reflecting strong demand for networked cloud computing, remote access solutions for virtual office environments, unified collaboration and enhanced network security. Gross margins increased to 11.1% (H121: 10.8%) driving gross profit up 16% to US$155m (H121: US$134m). EBITDA increased by 61% to US$31.0m (H1 FY21: US$19.2m), as margins rose to 2.2% in H122 vs 1.9% in H121 with improving operating leverage.
We expect to see continued progress from Westcon in H222 and in the longer term, with growth supported by the unwinding of the backlog and margins by effective cost management.
Management Consulting
Datatec Financial Services has been moved under Westcon International, so Management Consulting now comprises Analysys Mason, which is focused on the convergence of telecoms and IT, driving digitisation, accelerated by the move to cloud computing. Although Analysys Mason is Datatec’s smallest division, it remains important in the group context. Management is targeting revenues of US$100m within the next three years, with geographical expansion in North America and Asia-Pacific likely options.
Analysys Mason revenue increased by 37% to US$43.6m (H121: US$31.8m), with gross profit increasing by 53% to US$20.1m (H121: US$13.1m). Despite EBITDA margins decreasing to 16% compared to 18% in H121, EBITDA rose 25% to US$7.1m (H121: US$5.7m).
Outlook: More of the same in H222
In H122, Datatec benefited from pent-up demand around the world, with semiconductor shortages and the resulting supply chain issues acting as a brake on growth. These issues led to inventory build-up and significant growth in backlogs across the group. We expect a very similar set of dynamics to apply in H222, implying a continued strong performance across all divisions driven by continuing demand for software and services in networking, security and cloud infrastructure.
We do not envisage a solution to the semiconductor supply chain issues in FY22, but rather anticipate this issue will persist into FY23, with inventory build-up and backlog growth only starting to reverse in FY23.
Estimates: FY22/FY23 revised upwards, FY24 introduced
Exhibit 4: Revised estimates
Year end 28 February |
2021 |
2022e |
Y-o-y |
2023e |
Y-o-y |
2024e |
Y-o-y |
||||
US$m |
Reported |
Old |
New |
growth |
Change |
Old |
New |
growth |
Change |
New |
growth |
Revenue |
4,109 |
4,317 |
4,514 |
10% |
5% |
4,548 |
4,757 |
5% |
5% |
5,029 |
6% |
Gross profit |
691 |
727 |
765 |
11% |
5% |
775 |
816 |
7% |
5% |
871 |
7% |
EBITDA |
119 |
163 |
169 |
43% |
4% |
185 |
193 |
14% |
4% |
215 |
12% |
Normalised operating profit |
98 |
106 |
112 |
14% |
6% |
130 |
138 |
23% |
6% |
162 |
18% |
Profit before tax (norm) |
73 |
79 |
85 |
16% |
7% |
102 |
108 |
27% |
6% |
131 |
21% |
Net income (normalised) |
27 |
33 |
36 |
32% |
7% |
50 |
53 |
48% |
4% |
71 |
34% |
EPS - underlying (c) |
13.6 |
16.5 |
17.6 |
30% |
7% |
24.9 |
25.9 |
47% |
4% |
34.8 |
34% |
Dividend (c) |
6.7 |
5.5 |
40.3 |
501% |
633% |
8.3 |
8.6 |
(79)% |
4% |
11.6 |
34% |
Revenue growth (%) |
(2.5) |
5.0 |
9.8 |
5.4 |
5.4 |
5.7 |
|||||
Gross margin (%) |
16.8 |
16.8 |
17.0 |
17.0 |
17.1 |
17.3 |
|||||
EBITDA margin (%) |
2.9 |
3.8 |
3.7 |
4.1 |
4.0 |
4.3 |
|||||
Normalised operating margin (%) |
2.4 |
2.4 |
2.5 |
2.9 |
2.9 |
3.2 |
|||||
Operating cash flow |
173 |
95 |
84 |
(51)% |
(11)% |
100 |
131 |
55% |
31% |
178 |
36% |
Closing net debt/(cash) |
61 |
84 |
166 |
173% |
98% |
113 |
166 |
(0)% |
47% |
125 |
(25)% |
Source: Datatec accounts, Edison Investment Research
We have made some small changes to our FY22 and FY23 estimates following Datatec’s strong H122 performance and take the opportunity to introduce our FY24 estimates.
■
Revenues: we have upgraded our FY22 sales estimates by assuming each division repeats its H122 revenues in H222, leading to group revenues of US$4.51bn in FY22, an upward revision of c 5%. This forms a base for future years, with c 5% top-line growth in FY23 and FY24, leading to revenues of US$4.76bn and US$5.03bn, respectively. We have raised our EBITDA estimate by c 4% to US$169m in FY22 and US$193m in FY23.
■
Net debt: we estimate closing net debt at 28 February 2022 of US$166m, having factored in the US$70m special dividend, together with an allowance for inventory build-up.
■
FY24: we have also introduced our FY24 estimates, with revenue of US$5.03bn, 5.7% growth over FY23. The assumed gross margin remains relatively stable at 17.3%, with the EBITDA margin ticking up to 4.3% as the group continues to deliver operating leverage. This leads to gross profit of US$871m, with EBITDA of US$215m and underlying EPS of 35 US cents.
Exhibit 5: Financial summary
28-February |
US$’000 |
2020 |
2021 |
2022e |
2023e |
2024e |
|
INCOME STATEMENT |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
Revenue |
|
|
4,214,421 |
4,109,463 |
4,514,000 |
4,757,030 |
5,028,776 |
Cost of Sales |
(3,472,843) |
(3,418,926) |
(3,748,700) |
(3,941,430) |
(4,157,507) |
||
Gross Profit |
741,578 |
690,537 |
765,300 |
815,601 |
871,269 |
||
EBITDA |
|
|
158,657 |
118,632 |
169,200 |
192,607 |
215,235 |
Normalised operating profit |
|
|
105,157 |
97,868 |
111,742 |
137,503 |
162,239 |
Amortisation of acquired intangibles |
(11,297) |
(8,635) |
(8,586) |
(8,046) |
(7,279) |
||
Exceptionals |
(3,700) |
(27,771) |
(6) |
(6) |
0 |
||
Share-based payments |
(7,623) |
(11,493) |
0 |
0 |
0 |
||
Reported operating profit |
82,537 |
49,969 |
103,150 |
129,451 |
154,960 |
||
Net Interest |
(25,874) |
(25,692) |
(27,097) |
(29,900) |
(31,729) |
||
Joint ventures & associates (post tax) |
(204) |
908 |
0 |
0 |
0 |
||
Exceptionals |
2,029 |
55 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
79,079 |
73,084 |
84,646 |
107,603 |
130,510 |
Profit Before Tax (reported) |
|
|
58,488 |
25,240 |
76,053 |
99,551 |
123,232 |
Reported tax |
(31,809) |
(19,540) |
(34,224) |
(39,821) |
(43,131) |
||
Profit After Tax (norm) |
34,615 |
30,035 |
46,555 |
64,562 |
84,832 |
||
Profit After Tax (reported) |
26,679 |
5,700 |
41,829 |
59,731 |
80,101 |
||
Minority interests |
(13,772) |
(3,103) |
(10,989) |
(11,899) |
(14,119) |
||
Discontinued operations |
1,332 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
20,843 |
26,932 |
35,566 |
52,663 |
70,713 |
||
Net income (reported) |
14,239 |
2,597 |
30,840 |
47,832 |
65,982 |
||
Average number of shares outstanding (m) |
210.5 |
198.6 |
201.8 |
203.2 |
203.2 |
||
EPS - normalised (c) |
|
|
9.90 |
13.56 |
17.62 |
25.92 |
34.80 |
EPS - diluted normalised (c) |
|
|
9.74 |
13.20 |
17.16 |
25.25 |
33.90 |
EPS - basic reported (c) |
|
|
6.77 |
1.31 |
15.28 |
23.54 |
32.47 |
EPS - Company underlying uEPS (c) |
|
|
9.90 |
13.56 |
17.62 |
25.92 |
34.80 |
Dividend (c) |
7.00 |
6.71 |
40.33 |
8.64 |
11.60 |
||
Revenue growth (%) |
(2.7) |
(2.5) |
9.8 |
5.4 |
5.7 |
||
Gross Margin (%) |
17.6 |
16.8 |
17.0 |
17.1 |
17.3 |
||
EBITDA Margin (%) |
3.8 |
2.9 |
3.7 |
4.0 |
4.3 |
||
Normalised Operating Margin |
2.5 |
2.4 |
2.5 |
2.9 |
3.2 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
512,598 |
554,690 |
586,356 |
620,633 |
657,790 |
Intangible Assets |
291,279 |
314,486 |
333,525 |
349,507 |
363,128 |
||
Tangible Assets |
43,300 |
39,987 |
39,469 |
41,600 |
46,255 |
||
Right-of-use assets |
83,953 |
94,837 |
107,983 |
124,147 |
143,027 |
||
Investments & other |
94,066 |
105,380 |
105,380 |
105,380 |
105,380 |
||
Current Assets |
|
|
2,083,928 |
2,242,568 |
2,355,163 |
2,488,265 |
2,644,149 |
Stocks |
253,271 |
242,005 |
292,707 |
307,755 |
294,285 |
||
Debtors |
1,110,510 |
1,108,105 |
1,245,944 |
1,329,991 |
1,425,243 |
||
Cash & cash equivalents |
347,189 |
488,632 |
411,607 |
444,426 |
517,223 |
||
Other |
372,958 |
403,826 |
404,905 |
406,093 |
407,399 |
||
Current Liabilities |
|
|
(1,765,823) |
(1,980,013) |
(2,174,777) |
(2,285,960) |
(2,411,522) |
Creditors |
(1,259,013) |
(1,385,208) |
(1,523,053) |
(1,600,041) |
(1,687,368) |
||
Tax and social security |
(16,677) |
(16,596) |
(16,596) |
(16,596) |
(16,596) |
||
Short term borrowings |
(338,945) |
(392,877) |
(431,552) |
(454,786) |
(480,766) |
||
Lease liabilities |
(34,325) |
(36,398) |
(39,981) |
(42,134) |
(44,540) |
||
Other |
(116,863) |
(148,934) |
(163,595) |
(172,403) |
(182,251) |
||
Long Term Liabilities |
|
|
(187,610) |
(176,624) |
(192,883) |
(202,650) |
(213,572) |
Long term borrowings |
(18,638) |
(42,371) |
(46,542) |
(49,048) |
(51,850) |
||
Lease liabilities |
(95,148) |
(77,847) |
(85,510) |
(90,114) |
(95,262) |
||
Other long term liabilities |
(73,824) |
(56,406) |
(60,830) |
(63,488) |
(66,460) |
||
Net Assets |
|
|
643,093 |
640,621 |
573,860 |
620,288 |
676,845 |
Minority interests |
(70,778) |
(57,465) |
(68,454) |
(80,353) |
(94,472) |
||
Shareholders equity |
|
|
572,315 |
583,156 |
505,406 |
539,935 |
582,374 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
169,980 |
157,896 |
169,206 |
192,613 |
215,235 |
||
Working capital |
57,231 |
79,903 |
(50,696) |
(22,107) |
5,546 |
||
Exceptional & other |
(11,642) |
(28,293) |
(6) |
(6) |
0 |
||
Tax |
(36,941) |
(36,597) |
(34,224) |
(39,821) |
(43,131) |
||
Operating cash flow |
|
|
178,628 |
172,909 |
84,280 |
130,679 |
177,650 |
Capex |
(28,036) |
(35,145) |
(36,036) |
(36,971) |
(37,953) |
||
Acquisitions/disposals |
(9,179) |
(3,694) |
0 |
0 |
0 |
||
Net interest |
(25,874) |
(25,692) |
(27,097) |
(29,900) |
(31,729) |
||
Equity financing |
(51,683) |
(2,808) |
0 |
0 |
0 |
||
Dividends |
(15,137) |
(4,905) |
(81,934) |
(17,553) |
(23,571) |
||
Other |
20,019 |
1,880 |
(44,459) |
(45,830) |
(43,329) |
||
Net Cash Flow |
68,738 |
102,545 |
(105,246) |
425 |
41,068 |
||
Opening net debt/(cash) |
|
|
100,753 |
139,867 |
60,861 |
166,106 |
165,682 |
FX |
(9,270) |
(11,312) |
0 |
0 |
0 |
||
Other non-cash movements |
(98,582) |
(12,227) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
139,867 |
60,861 |
166,106 |
165,682 |
124,614 |
Source: Datatec accounts, Edison Investment Research
|
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Research: TMT
YOC develops software for the digital advertising market, with the aim of optimising the advertising experience for advertisers, publishers and users of mobile internet and applications. Central to this is YOC’s proprietary ad formats, as well as its VIS.X platform, launched in 2018 to create a scalable and automated exchange. The platform’s operating costs are largely fixed, providing scope for margin expansion as revenues build. YOC’s H121 results provide early evidence of this, where revenues increased by 22% y-o-y to €7.7m with net income from continuing operations of €228k. Tailwinds within digital advertising support the company’s positive outlook and its new partnership with Oracle bolsters its positioning for the upcoming withdrawal of third-party cookies.
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