Datatec — Focus on Westcon International

Datatec (JSE: DTCJ)

Last close As at 21/05/2024

ZAR37.65

−0.34 (−0.89%)

Market capitalisation

ZAR8,633m

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Research: TMT

Datatec — Focus on Westcon International

Since embarking on a restructuring of the Westcon International (Westcon) division in FY18, management has grown divisional revenue at a CAGR of 5.7% (FY18–22) and improved profitability. Westcon has set ambitious targets in its latest medium-term plan (FY23–27), supported by its ongoing digital transformation programme. With our valuation of Westcon higher than the current enterprise value of the group, we believe that successful achievement of this plan could unlock significant shareholder value.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Datatec

Focus on Westcon International

Divisional update

Software and comp services

24 February 2023

Price

ZAR32.5

Market cap

ZAR7.3bn

ZAR18.21:$1

Net debt ($m) at end H123*
*Continuing operations

111

Shares in issue

224.9m

Free float

86%

Code

DTCJ

Primary exchange

JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.2

(25.5)

(12.6)

Rel (local)

2.6

(31.1)

(15.5)

52-week high/low

ZAR47.87

ZAR29.81

Business description

Datatec is a South Africa-listed multinational ICT business, serving clients globally, predominantly in the networking and telecoms sectors. The group operates through three main divisions: Westcon International (distribution); Logicalis International (IT services); and Logicalis LatAm (IT services in Latin America).

Next events

FY23 trading update

March 2023

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Datatec is a research client of Edison Investment Research Limited

Since embarking on a restructuring of the Westcon International (Westcon) division in FY18, management has grown divisional revenue at a CAGR of 5.7% (FY18–22) and improved profitability. Westcon has set ambitious targets in its latest medium-term plan (FY23–27), supported by its ongoing digital transformation programme. With our valuation of Westcon higher than the current enterprise value of the group, we believe that successful achievement of this plan could unlock significant shareholder value.

Year end

Revenue
($m)

PBT*
($m)

Diluted EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

02/21**

4,109

73.1

13.2

6.6

13.5

3.7

02/22

4,546

69.1

14.2

39.3

12.6

22.0

02/23e

5,017

74.3

20.2

69.9

8.9

39.2

02/24e

5,282

95.6

23.3

7.5

7.7

4.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Includes Analysys Mason.

Westcon: Specialist technology provider

Management has repositioned Westcon as a specialist technology provider, offering an increasing proportion of value-added services, subscription and cloud capability in complex solutions for networking and cybersecurity vendors across EMEA and Asia-Pacific. Successful restructuring of Westcon since FY18 has positioned the business well for its next five-year plan, which sets ambitious revenue growth and EBITDA margin targets for FY23–27 as well as factoring in ESG requirements to help the division and the group meet their net zero targets.

Digital capabilities support growth strategy

To support the changing needs of customers as they shift from capex to opex buying and more technology is consumed ‘as-a-service’ and in the cloud, Westcon has invested in data and analytics, sales process optimisation and its PartnerCentral platform. As well as improving internal efficiency and productivity, the focus on digital transformation enables Westcon to provide data-driven insights to vendors and partners to help them grow their businesses.

Valuation: Significant value to unlock

We value Westcon at an enterprise value of $776m on a standalone basis (based on EV/EBITDA multiples), which compares to Datatec’s current enterprise value of $512m before any value is assigned to the Logicalis businesses. Management initiated a strategic review in August 2021 to try to unlock this embedded value; it has since sold Analysys Mason, returning the proceeds to shareholders. Continued growth and margin improvement in Westcon and Logicalis International and a resumption in revenue growth in Logicalis LatAm will be key to reducing the discount to peers.

Spotlight on Westcon International

Since the sale of Analysys Mason in September 2022, Datatec operates through three divisions:

Westcon International (Westcon): provides specialist technology distribution through two principal brands, Westcon and Comstor.

Logicalis International: provides IT services in Europe, North America, Asia-Pacific and Africa.

Logicalis Latin America: provides IT services in Latin America.

In this pre-close update, we focus on Westcon to update its progress since we last wrote on the division a year ago, including an analysis of its valuation.

Largest contributor to group results

Westcon is the group’s largest business, in terms of both revenue and EBITDA. The charts below show Westcon’s contribution to H123 revenue and gross profit from continuing operations. Of H123 EBITDA before central costs of $68.8m, Westcon contributed $51.5m (75%) compared to $18.3m from Logicalis International and -$1.0m from Logicalis Latin America.

Exhibit 1: H123 revenue breakdown

Exhibit 2: H123 gross profit breakdown

Source: Datatec

Source: Datatec

Exhibit 1: H123 revenue breakdown

Source: Datatec

Exhibit 2: H123 gross profit breakdown

Source: Datatec

The current management team (David Grant, CEO and Callum McGregor, CFO) assumed operational responsibility for Westcon in 2017, with the business positioned as an information and communications technology (ICT) distributor. Management’s strategy has been steadily to reposition Westcon as a specialist technology provider, offering an increasing proportion of value-added services, subscription and cloud capability in complex solutions for networking and cybersecurity vendors across Europe, the Middle East, Africa and Asia-Pacific. This is intended to drive Westcon’s EBITDA margins higher as management establishes Westcon as a leading technology provider in its markets.

Westcon: Transitioning to become a technology provider

Management’s ambition is for Westcon to be the leading value-added distributor for cybersecurity and networking vendors across Europe, the Middle East, Africa and Asia-Pacific.

Westcon is Datatec’s specialist technology distributor with c 3,500 employees, spread across 50 countries worldwide, with 15 logistics and staging facilities globally. The division works with more than 12,000 channel partners, including a portfolio of market-leading vendors, such as Cisco, Palo Alto Networks, Check Point, F5, Broadcom, Zscaler, CrowdStrike, Pure Storage, Extreme Networks, Juniper and AWS. The business distributes technology solutions across cybersecurity, network infrastructure, cloud collaboration and data centre, provides channel support services as well as financial solutions to Datatec Group customers.

Europe represents almost two-thirds of divisional revenues

Although it is listed in Johannesburg, the Datatec group has limited exposure to the South African market, with the equity story being a dollar-denominated global ICT play. This can be seen in the geographic breakdown of Westcon revenues. With good geographic diversification, Westcon has sizeable exposure to Asia-Pacific (26% of H123 revenues) and the Middle East and Africa (notably South Africa) at 13% of H123 revenues. However, the weight of both revenues and gross profit lies in Europe (61% of H123 revenues), with its principal territories including Germany, the UK and the Netherlands.

Westcon’s position in the market value chain

The global IT market is large (Gartner estimates IT spending at US$4.6tn in 2023) and complex, with roles defined by positioning in the value chain, as well as by territory, region and end-user client type. In terms of Westcon’s position in this market, it can best be described as an IT channel management organisation and distributor: a business that acts as an intermediary between vendors and resellers, service providers (SP) or systems integrators (SI) in the provision of software, subscription, cloud and hardware solutions.

Exhibit 3 illustrates the two-tier distribution model used by cybersecurity and networking vendors and Exhibit 4 shows how Westcon fits into the value chain.

Exhibit 3: Two-tier distribution model

Source: Datatec

As a specialist technology provider, Westcon supports the largest enterprise channel clients, as well as regional and national partners, SIs, SPs and resellers. However, Westcon does not directly serve the end-user of the technology, but almost exclusively serves another intermediary in the value chain. In H123, 53% of gross revenues were from resellers, 31% from SIs and 16% from SPs. As anything as a service (XaaS) grows in popularity, many value-added resellers are becoming managed service providers and we would expect the split of revenue by type of customer to shift more towards SPs from resellers. The division has a balanced customer mix, with 22% of gross revenue from the top 10 customers, 9% from the top 11–20 customers, 14% from the top 21–50 and 55% from remaining customers. Exhibit 5 shows some of Westcon’s partners in each category.

Exhibit 4: Simplified channel overview

Source: Datatec

Exhibit 5: Westcon partner segmentation

Source: Datatec

Five-year strategic plan

After a period of transforming the business since 2017, management has set out its strategic priorities for the next five years (Exhibit 6). We discuss in more depth how the company plans to meet the targets outlined in the chart.

Exhibit 6: Goals for FY23–27

Source: Datatec

Building the right portfolio of vendors

The division markets itself under two brands, Comstor (for Cisco solutions) and Westcon (for other vendors) – see Exhibit 7. Although Westcon is an independent supplier serving a range of vendors, its key relationships remain concentrated. Cisco, with a relationship going back 25 years, accounted for 41% of H123 group revenues. Comstor is solely focused on Cisco, distributing the full suite of Cisco solutions to more than 100 countries globally. These include Cisco security, collaboration, data centre, enterprise networking and services (customer support for over 160 countries in 17 languages). Management estimates that Comstor consistently delivers higher growth rates than Cisco’s general distribution, partly due to expanding into new Cisco territories and partly due to gaining market share. Other vendors’ products are distributed under the Westcon brand, which offers dedicated or focused vendor teams for the market’s top-tier technology vendors in cybersecurity, advanced networking and collaboration (see Exhibit 9 for the different categories of vendors). Across the two divisions, cybersecurity is the largest contributor to revenue (Exhibit 8).

Exhibit 7: H123 revenue by brand

Exhibit 8: H123 revenue by technology

Source: Datatec

Source: Datatec

Exhibit 9: Westcon vendor profiles

Source: Datatec

Rising exposure to emerging vendors

Key to driving the division towards gross revenues of $6bn is having a portfolio of best-in-class solutions that cover current and emerging technology trends. The company continually looks to add to its portfolio of high-growth, cybersecurity and cloud-based enterprise networking vendors; the chart below shows vendors signed up since FY20.

Exhibit 10: New vendors added since FY20

Source: Datatec

As Westcon has developed its relationships with strategic vendors such as Palo Alto, F5 Networks and Check Point as well as signing up more ‘born-in-the-cloud’ vendors, such as CrowdStrike and Zscaler, it has grown faster than the Comstor part of the business. Assuming that Westcon continues to add vendors, we would expect this trend to continue.

Overall, based on the division’s focus and capability for delivering emerging technologies, subscription, cloud and recurring solutions, it has won 30 vendor and industry awards so far in FY23.

Adapting to changing market dynamics

The way in which end-customers are adopting technology is changing, with software making up a greater proportion of overall technology spend, and subscription and cloud-based services replacing one-off purchases of hardware and software. Solutions combining hardware devices, software and subscriptions are more complex to design, deliver and deploy. Subscription services and support contracts require efficient lifecycle management to ensure that renewals and upsells happen at the right time and that there is sufficient focus on customer retention.

Recurring revenues growing towards 65% target

Management expects the proportion of software-related revenues and subscriptions to continue to increase significantly in the coming years with the digital transition and the ongoing shift to the cloud, having already increased from 31% in FY19 to 44% in H123.

Exhibit 11: Revenue mix by type

Source: Datatec

Digital enablement to support partner channel and profitability

A key part of the restructuring process that started in 2017 was a focus on stabilising and improving the processing of transactions after a difficult ERP implementation. Taking control of the process from order entry to cash collection helped the division provide faster fulfilment of orders and better customer service, generate fewer errors, and have better visibility over and ultimately reduce working capital. The new medium-term target for 90% of transactions to be digitally enabled builds on this work and extends further across the business, encompassing the sales process, the relationship with vendors and the interaction with channel partners.

The division is keen to ensure it can support its partners as they shift from selling on a one-off basis to an as-a-service basis and meet their end-customers’ requirements for opex- rather than capex-type purchasing. It is also working to automate as many processes as possible to help it reach its target of converting 35% of gross profit to adjusted EBITDA (from 24% in FY22).

PartnerCentral: The go-to marketplace for partners

For several years, Westcon has provided two platforms for partners to manage their relationship with the company: 1) PartnerView, a platform where partners can browse and order online; confirm pricing, availability and delivery; and manage quotes, renewals, order tracking and history; and 2) BlueSky, a platform to support partners delivering and selling cloud products and services. Over the last two years, it has developed a single platform, PartnerCentral, for partners to buy and manage hardware, software and services in one place. PartnerCentral is currently being piloted by c 90 partners in South Africa, New Zealand and the UK, and roll-out to other English-speaking partners is expected in April followed by translations into other key languages such as French and German.

The platform includes vendor partner portals, partner learning, a hybrid cart (which supports physical and as-a-service offerings in one transaction), application programming interface and electronic data interchange management tools, partner reporting and insights, and various dashboards.

Optimising the sales process

The division has focused on digitally enabling its sales processes, using digital tools to automate as much as possible, to drive better efficiency and productivity. Management has embedded the Technology and Services Industry Association’s land, adopt, expand, renew model into its processes and is focused on making sales processes more data driven than intuition driven. As an example of automation, its 1View Quote and 1View Order Entry tools allow a partner to configure a quote and then push it to the vendor without any input from Westcon. RenewView is a renewal automation tool fed by data from vendors to help partners manage renewal cycles.

Increasing use of data and analytics

Over the last three years, Westcon has invested in people and tools to better manage and analyse data on its vendors, partners and the market in general. By analysing what partners are selling, it is possible to present sales opportunities to both vendors and partners.

ESG: Responsible business agenda

As a group, Datatec is committed to developing and executing a global responsible business strategy that includes consideration of the group’s social and community development responsibilities (‘our communities’), environmental performance (‘our planet’) and commitment to its people (‘our people’). While the board has set group-level targets, here we discuss Westcon-specific activity. The division has formalised its ESG programme and joined the SBTi Business Ambition for 1.5°C campaign, committing to reducing its emissions by 90% to reach net zero emissions by 2050 at the latest.

Our communities: Divisional CSR policy established

In FY22, the division established its own CSR policy. Its goal is to improve education for the next generation and to support local charities in the communities in which they operate. Westcon supports a variety of corporate and employee-led charitable initiatives, providing time and resources to improve the communities where its employees live and work.

Our people: ESG training ongoing

This division has c 3,500 employees, with 47% in Europe, 33% in Asia-Pacific, 18% in MEA and 2% in North America. Westcon training programmes help promote an inclusive workplace and ensure the health and safety of employees. Currently training is being provided to staff to help them understand the division’s ESG strategy and a Sustainability Employee Resource Group has been set up. Westcon’s ‘Level up’ programme is designed to enhance the ability of interns, graduates and apprentices to follow their chosen career path.

Our planet: ESG targets set; third-party ratings ongoing

As a distributor, Westcon has limited control over the emissions generated by vendors and partners. However, it has committed to setting a net zero strategy across its entire value chain. Partners are increasingly asking for ESG data when seeking quotes, and Westcon is working with its vendors (which have varying levels of maturity regarding ESG strategies) to provide this information. It has established baseline scope 1, 2 and 3 emissions and developed a five-year roadmap towards decarbonisation.

Weston has undertaken an audit of its top vendors, giving each of them a rating, and is developing a Supplier Code of Conduct that ensures sustainability best practices across the supply chain. Working with those vendors, it is able to provide them with data on what they need to do to improve their ratings.

Westcon has selected EcoVadis as its ESG rating platform. EcoVadis assesses the business over four main areas: environment, labour and human rights, ethics and supply chain sustainability. In FY22, EcoVadis conducted an independent gap analysis and outlined recommendations for a multi-year improvement plan. Implementation is underway and Westcon Europe has since received an improved score and a bronze rating. Since then, the Asia-Pacific region has received a bronze rating and the division is working on certifying the MEA region.

Specific initiatives to reduce emissions include recycling (internally and for customers), improving energy efficiency of logistics centres, using renewable energy, electrifying the car fleet and implementing and certifying operations to ISO 14001 standard (done for Europe, ongoing for Asia-Pacific).

Market context

The division continues to benefit from the IT trends that became apparent in FY21, including:

flexible and hybrid working;

constant cyber threats – from geopolitical uncertainty and the security risks associated with flexible working;

ongoing digitalisation – as businesses continue to leverage technology to drive efficiency and resilience;

ongoing shift to the cloud; and

regulation around data protection.

Worldwide IT spending is projected to increase 2.4% to US$4.5tn in 2023, compared to a small decline of 0.2% in 2022 (source: Gartner, 18 January 2023), which was mainly due to supply chain issues for technology hardware. In 2023, software is forecast to be the highest growth area at 9.3%, helped by strong growth in the SaaS software market (per Statista, +14% in 2022 and +17% in 2023), followed by IT services at 5.5%.

Westcon expects to see higher growth from its focus on networking, cybersecurity and cloud infrastructure. The cybersecurity market is forecast to grow 11% to $173.5bn in 2023 and at a CAGR of 11% over CY22–27 (source: Statista). While the network infrastructure market overall is forecast to grow at a CAGR of 3.9% over CY22–27 (Statista), cloud-managed networking is expected to grow at a much faster rate (market researchers quote 20%+ rates). The cloud collaboration software market is expected to see more modest growth, after the exceptional boost to demand during COVID, with a CAGR of 5.4% forecast for CY22–27 (source: Statista).

International market with fragmented competition by region

As mentioned earlier, the ICT market is complex and highly fragmented, with companies fulfilling subtly different roles in the value chain by geography, product segment and client base. As a result, it can be difficult to identify competitors and directly comparable companies to Westcon International. However, in Exhibit 12, we identify a number of companies which Westcon’s management team consider to be direct competitors in specific local or regional markets, with positioning based on revenue and gross margin. A number of these are public companies (eg Arrow, Exclusive Networks, TD SYNNEX) and included in our valuation analysis, but many more are private companies, with many private equity-owned (Infinigate owned by Bridgepoint, Ingram owned by Platinum, Redington owned by Phoenix).

Exhibit 12: Competitive positioning

Source: Datatec

The company believes its competitive advantages include the ability to manage global deployments and international business, its evolving portfolio of technology solutions, and its Partner Success programme, which focuses on helping its partners to be successful.

Financial performance

Successful turnaround with rising margins

Following its restructuring in 2017/18, Westcon has delivered consistent annual rises in gross profit and EBITDA. The charts below track the division’s performance since FY19. Reported and adjusted EBITDA margins have increased over this period, and in H123 the company reported an adjusted EBITDA margin of 4.0% compared to 0.9% in FY19. As this included unrealised FX gains, our FY23 adjusted EBITDA margin forecast is 3.0%, reflecting the unwind of the gains in H223.

Exhibit 13: Westcon revenue growth and gross margin, FY19–25e

Exhibit 14: Westcon reported and adjusted EBITDA margins, FY19–25e

Source: Datatec. Note: FY20 revenue affected by restatement.

Source: Datatec

Exhibit 13: Westcon revenue growth and gross margin, FY19–25e

Source: Datatec. Note: FY20 revenue affected by restatement.

Exhibit 14: Westcon reported and adjusted EBITDA margins, FY19–25e

Source: Datatec

Strong H123 performance

Westcon generated strong revenue growth of 16% y-o-y in H123 (constant currency growth 23%). The business saw strong demand for cybersecurity and network infrastructure (up 22% and 16% respectively). Reflecting the currency impact of the strong US dollar versus sterling and the euro, gross profit declined 1% y-o-y resulting in a 1.7pp decline in gross margin to 9.5%. Foreign exchange hedging gains reported within operating expenses ($12.8m realised gains, $19.3m unrealised gains) meant that EBITDA increased 66% y-o-y, with the EBITDA margin increasing 1pp to 3.2%. Adjusted EBITDA (the main adjustment was for $12m in share-based payments) increased 84% y-o-y and the adjusted EBITDA margin increased by 1.5pp to 4.0%.

Driving down net working capital

Semiconductor shortages and supply chain issues continued to constrain the division’s ability to deliver orders, resulting in another increase in the backlog (+95% y-o-y, +18% h-o-h) as per Exhibit 15. Software in the backlog tends to be part of a larger order that also includes hardware and cannot be installed until the hardware is available. Semiconductor availability has started improving and freight costs have fallen, and management believes that the backlog is likely to start to unwind through the course of H223. The division managed working capital well during the period (see Exhibit 16), with net working capital days reducing to 16 from 22 in H122 and divisional net debt reducing by $63m y-o-y. The main benefit came from suppliers, particularly Cisco, extending payment days. We expect that as the delivery of hardware by vendors speeds up, they will start to reduce the payment days offered to Westcon, but this is likely to be offset by Westcon not needing to hold as much inventory and being able to invoice for finished projects.

Exhibit 15: Westcon backlog, H122–H123

Exhibit 16: Working capital progression, H122–H123

Source: Datatec

Source: Datatec. Note: *DSO = days sales outstanding, DPO = days purchases outstanding.

Exhibit 15: Westcon backlog, H122–H123

Source: Datatec

Exhibit 16: Working capital progression, H122–H123

Source: Datatec. Note: *DSO = days sales outstanding, DPO = days purchases outstanding.

Outlook: Strong growth supported by unwinding of backlog

As discussed above, Westcon had a high level of backlog entering H223. As supply chain issues start to recede, we expect Westcon to be able to ship more hardware to customers, which in turn will enable related software and services to be delivered. We maintain our net revenue growth forecast of 12.9% for FY23, moderating to 5% in FY24 and FY25 to take into account the uncertain economic environment.

One of the company’s medium-term targets is to grow gross revenue to $6bn by FY27. The company generated gross revenue of $4bn in FY22, which would imply a target CAGR of 8.4% over FY23–27. If gross revenue grows at the same rate as net revenue in FY23, this would imply a CAGR of 7.4% for FY24–27 compared to our conservative 5% forecast for FY24 and FY25.

The division has also set the target to convert 35% of gross profit to adjusted EBITDA. In FY22, the conversion rate was 24% and we maintain our forecasts for it to increase to 32% in FY23, 30% in FY24 and 32% in FY25. Assuming that gross margins are not likely to rise above a normalised level of 10–11% (as vendors and partners are aware of this margin), this would imply adjusted EBITDA margins rising to 3.5–4.0%.

Valuation: Westcon EV c US$775m

In August 2021, management engaged Lazard & Co as part of a strategic review to address the persistent gap between Datatec's valuation and the perceived value of its underlying assets. Under the strategic review, the board has been considering 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 note, Strategic review to unlock embedded value, published on 31 August 2021. Since then, Datatec has sold Analysys Mason and returned the £135m proceeds to shareholders in the form of a special dividend in December 2022.

We have updated the valuation we undertook a year ago. We have principally drawn Westcon’s peer group from North America and Europe. For the current year, Westcon’s peers have average gross margins of 10.1%, with EBITDA margins of 4.4%, compared to our estimates for Westcon of 9.5% and 3.0% respectively. The peer group trades on average multiples of 0.4x FY1 and 0.3x FY2 sales and 8.3x FY1 and 8.1x FY2 EV/EBITDA. Applying these multiples to Westcon, factoring in Datatec’s 92% economic interest (8% is held by SYNNEX), indicates an enterprise valuation for Datatec’s interest of c US$1.07bn based on sales, or US$776m based on average EBITDA, our preferred multiple. The valuation has risen from $1.02bn and $630m respectively since we wrote about Westcon a year ago; while valuation multiples have come down, this is more than compensated for by higher revenue and EBITDA forecasts.

Exhibit 17: IT distribution companies and resellers

Share price

Quoted ccy

EV ($m)

Gross margin FY1 (%)

EBITDA margin FY1 (%)

EBIT margin FY1 (%)

EV/
sales FY1 (x)

EV/
sales FY2 (x)

EV/
EBITDA
FY1 (x)

EV/
EBITDA FY2 (x)

P/E
FY1 (x)

P/E
FY2 (x)

Yield
FY2 (%)

Datatec

32.5

ZAR

512

14.3

3.5

2.2

0.1

0.1

2.9

2.7

8.9

7.7

4.2

Westcon International

-

-

776

9.5

3.0

-

0.3

0.3

8.3

8.1

-

-

-

Also Holding

172.2

CHF

2168

7.6

2.3

1.9

0.2

0.2

7.2

6.5

13.8

12.2

3.0

Arrow Electronics

119.60

USD

10632

12.3

5.2

4.6

0.3

0.3

6.0

6.4

7.1

7.4

0.0

Avnet

45.44

USD

7017

11.6

4.8

4.3

0.3

0.3

5.7

6.8

6.2

8.1

2.7

Esprinet

6.59

EUR

772

4.9

1.9

1.5

0.2

0.1

8.0

7.0

7.0

5.8

7.8

Exclusive Networks

20.2

EUR

2225

10.9

5.0

4.7

0.6

0.6

12.9

11.3

17.7

15.5

1.5

Scansource

31.13

USD

1105

11.8

4.7

3.8

0.3

0.3

6.2

5.9

7.6

6.9

N/A

Sesa

125.3

EUR

1945

N/A

7.1

5.0

0.6

0.6

9.0

7.9

19.0

16.3

1.1

TD Synnex

97.33

USD

12863

6.2

3.0

2.7

0.2

0.2

6.7

6.4

8.0

7.3

1.6

Wesco International

161.81

USD

13153

21.8

8.0

7.4

0.6

0.6

7.2

7.0

9.2

8.6

0.5

WPG Holdings

49.2

TWD

7729

3.8

2.2

1.9

0.3

0.3

13.7

15.7

7.8

11.8

7.6

Mean

 

 

 

10.1

4.4

3.8

0.4

0.3

8.3

8.1

10.3

10.0

2.9

Median

 

 

 

10.9

4.7

4.0

0.3

0.3

7.2

6.9

7.9

8.3

1.6

Source: Refinitiv (priced at 23 February 2023). Note: Westcon multiples are based on an enterprise value before adjusting for the SYNNEX minority.

To put this valuation in context, Datatec’s enterprise value (based on the H123 net debt figure) is US$512m, well below the valuation for Westcon International, even before considering the worth of Logicalis.

Westcon’s management has delivered a strongly improving operational performance since 2018, despite the impact of the COVID-19 pandemic in FY21/22. Assuming that operating performance improvements continue, with EBITDA margins rising towards 4.0% in the medium term, Westcon represents an increasingly valuable asset within Datatec, whose value is not fully recognised by shareholders.

We expect Datatec’s peer group discount to narrow materially over time, but recognise that full closure of the discount to fair value may require further simplification of the group’s corporate structure. Management remains committed to unlocking this underlying value.

Exhibit 18: Financial summary

Year end 28 February

$'000s

2020

2021

2022*

2023e

2024e

2025e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

4,214,421

4,109,463

4,546,398

5,017,420

5,282,239

5,533,573

Cost of Sales

(3,472,843)

(3,418,939)

(3,816,630)

(4,300,518)

(4,487,752)

(4,691,632)

Gross Profit

741,578

690,524

729,768

716,903

794,488

841,941

Adjusted EBITDA

 

 

166,280

152,490

158,922

175,242

191,787

214,703

EBITDA

158,657

118,619

143,457

129,509

185,287

208,203

Normalised operating profit

 

 

105,157

97,859

100,540

111,432

136,857

159,815

Amortisation of acquired intangibles

(11,297)

(8,635)

(10,100)

(5,200)

(3,941)

(2,987)

Exceptionals

(3,700)

(27,771)

0

(9,840)

0

0

Share-based payments

(7,623)

(11,493)

(15,465)

(32,056)

(6,500)

(6,500)

Reported operating profit

82,537

49,960

74,975

64,336

126,416

150,327

Net Interest

(25,874)

(25,692)

(31,051)

(37,607)

(41,301)

(43,728)

Joint ventures & associates (post tax)

(204)

908

(427)

480

0

0

Exceptionals

2,029

59

540

45

0

0

Profit Before Tax (norm)

 

 

79,079

73,075

69,062

74,304

95,556

116,086

Profit Before Tax (reported)

 

 

58,488

25,235

44,037

27,253

85,115

106,599

Reported tax

(31,809)

(19,540)

(9,470)

(12,731)

(29,790)

(37,310)

Profit After Tax (norm)

34,615

30,034

36,179

48,298

62,112

75,456

Profit After Tax (reported)

26,679

5,695

34,567

14,522

55,325

69,289

Minority interests

(13,772)

(3,103)

(6,431)

(2,892)

(9,051)

(9,953)

Discontinued operations

1,332

0

5,766

120,137

0

0

Net income (normalised)

20,843

26,938

29,748

45,406

53,061

65,503

Net income (reported)

14,239

2,592

33,902

131,768

46,274

59,336

Average number of shares outstanding (m)

210.5

198.8

203.2

219.1

221.7

221.7

EPS - diluted normalised (c)

 

 

9.7

13.2

14.2

20.2

23.3

28.7

EPS - basic reported (c)

 

 

6.8

1.3

16.7

60.1

20.9

26.8

EPS - Company underlying uEPS (c)

 

 

9.9

13.5

16.0

6.8

22.6

28.1

Dividend (c)

7.0

6.6

39.3

69.9

7.5

9.4

Revenue growth (%)

(2.7)

(2.5)

10.6

10.4

5.3

4.8

Gross Margin (%)

17.6

16.8

16.1

14.3

15.0

15.2

Adj. EBITDA Margin (%)

3.9

3.7

3.5

3.5

3.6

3.9

Normalised Operating Margin

2.5

2.4

2.2

2.2

2.6

2.9

BALANCE SHEET

Fixed Assets

 

 

512,598

554,690

613,155

576,358

570,877

565,631

Intangible Assets

291,279

314,486

320,089

279,971

276,812

273,735

Tangible Assets

43,300

39,987

32,517

27,998

25,676

23,507

Right-of-use assets

83,953

94,837

80,639

80,639

80,639

80,639

Investments & other

94,066

105,380

179,910

187,750

187,750

187,750

Current Assets

 

 

2,083,928

2,242,568

2,399,078

2,731,334

2,830,448

2,976,642

Stocks

253,271

242,005

309,227

435,943

430,332

449,883

Debtors

1,110,510

1,108,105

1,223,824

1,402,128

1,490,605

1,561,529

Cash & cash equivalents

347,189

488,632

453,926

480,174

495,336

549,860

Other

372,958

403,826

412,101

413,089

414,175

415,371

Current Liabilities

 

 

(1,765,823)

(1,980,013)

(2,152,175)

(2,444,686)

(2,488,694)

(2,570,320)

Creditors

(1,275,690)

(1,401,804)

(1,544,198)

(1,777,881)

(1,788,816)

(1,839,052)

Short term borrowings

(338,945)

(392,877)

(433,176)

(478,055)

(503,286)

(527,233)

Lease liabilities

(34,325)

(36,398)

(32,870)

(32,870)

(32,870)

(32,870)

Other

(116,863)

(148,934)

(141,931)

(155,880)

(163,722)

(171,165)

Long Term Liabilities

 

 

(187,610)

(176,624)

(229,112)

(237,183)

99999(241,721)

(246,028)

Long term borrowings

(18,638)

(42,371)

(56,440)

(62,287)

(65,575)

(68,695)

Lease liabilities

(95,148)

(77,847)

(61,523)

(61,523)

(61,523)

(61,523)

Other long term liabilities

(73,824)

(56,406)

(111,149)

(113,373)

(114,623)

(115,810)

Net Assets

 

 

643,093

640,621

630,946

625,823

670,910

725,924

Minority interests

(70,778)

(57,465)

(67,516)

(70,408)

(79,459)

(89,412)

Shareholders’ equity

 

 

572,315

583,156

563,430

555,416

591,451

636,513

CASH FLOW

Op Cash Flow before WC and tax

169,980

157,888

162,842

171,405

191,787

214,703

Working capital

57,231

79,903

(76,807)

(56,152)

(62,838)

(31,609)

Exceptional & other

19,330

(3,453)

10,677

(11,389)

(1,087)

(1,195)

Tax

(36,941)

(36,597)

(26,282)

(12,731)

(29,790)

(37,310)

Operating cash flow

 

 

209,600

197,741

70,430

91,132

98,072

144,590

Capex

(28,036)

(35,145)

(24,841)

(25,395)

(25,977)

(26,588)

Acquisitions/disposals

(9,179)

(3,694)

(16,424)

127,770

0

0

Net interest

(30,972)

(25,745)

(31,265)

(37,607)

(41,301)

(43,728)

Equity financing

(51,683)

(2,808)

0

(1,929)

0

0

Dividends

(15,137)

(4,905)

(43,136)

(155,086)

(16,738)

(20,775)

Other

20,019

1,880

(8,184)

(27,861)

(27,413)

(26,042)

Net Cash Flow

94,612

127,324

(53,420)

(28,976)

(13,357)

27,457

Opening net debt/(cash)

 

 

100,753

139,867

60,874

130,096

154,574

167,931

FX & non-cash movements

(133,726)

(48,331)

(15,802)

4,498

0

0

Closing net debt/(cash)

 

 

139,867

60,874

130,096

154,574

167,931

140,474

Source: Datatec, Edison Investment Research *From FY22, continuing operations only (excludes Analysys Mason sold September 2022).


General disclaimer and copyright

This report has been commissioned by Datatec and prepared and issued by Edison, in consideration of a fee payable by Datatec. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Datatec and prepared and issued by Edison, in consideration of a fee payable by Datatec. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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