Strong end demand and gross profit conversion

Datatec saw a 9.3% increase in gross invoiced income (GII) and 9.6% growth in gross profit. Good cost management resulted in 18% growth in adjusted EBITDA, which dropped through to 35% growth in uEPS. Westcon and Logicalis International saw strong GII and gross profit growth and increasing conversion of gross profit to adjusted EBITDA. While Logicalis Latin America saw weaker demand, good operational management saw adjusted EBITDA up 21%. The company declared a final dividend of 225 ZAR cents/14 US cents, for a full year dividend of 400 ZAR cents/24 US cents (+45.5%). Year-end net debt reduced 10.5% to $46.7m.

Upgrading FY27 and FY28

We have upgraded our gross profit and adjusted EBITDA forecasts for both years on better performance in FY26, and this results in an upgrade to uEPS of 8% in FY27 and 6% in FY28, with similar increases in our dividend forecasts (company policy is to pay out 50% of basic uEPS). We forecast good cash generation, with the group moving to a net cash position of $28.8m by the end of FY27 from net debt of $46.7m at end-FY26.

Valuation: profit upgrades drive upside

Datatec currently trades on EV/adjusted EBITDA multiples of 4.1x in FY27 and 3.8x in FY28, well below its peer group (average of 8.3x across both years). On a conservative sum-of-the-parts valuation using peer group averages, we estimate that Datatec could be worth 42% more than the current share price. Sustained recovery in trading in Logicalis Latam, gross profit growth and improving the conversion of gross profit to EBITDA across the group will be key to reducing the discount to peers. Management continues to focus on unlocking shareholder value through its ongoing strategic review.

Review of FY26 results

Datatec reported strong FY26 results, with earnings ahead of our expectations. While the company reports revenue, this has become less meaningful as a performance metric due to the shift to reporting a large proportion of revenue on an agency rather than principal basis. GII is a better measure of underlying volume growth, which we discuss in more detail below, and gross profit growth is a better measure of performance as this is independent of revenue accounting. Gross profit was 9.6% higher year-on-year, and adjusted EBITDA was 17.8% higher year-on-year, coming in 4% ahead of our forecast. This flowed through to headline EPS growth of 56.5% and underlying EPS growth of 35.0%, with underlying EPS 6% ahead of our forecast. Net debt reduced 10.5% y-o-y to $46.7m due to good working capital management. The company declared a final dividend of 225 ZAR cents/14 US cents making a full year dividend of 400 ZAR cents/24 US cents (+45.5%), with a scrip option available. Gross profit to EBITDA conversion improved from 27.0% to 29.1%, helped by better conversion in all three divisions.

Divisional performance

Exhibit 2 shows gross invoiced income, gross profit, EBITDA and adjusted EBITDA on a divisional basis.

Westcon: Resilient demand and strong gross profit conversion

Investment in AI infrastructure drove demand for network upgrades and cybersecurity solutions. GII increased 9.6% y-o-y, with growth across all regions (Exhibit 3). Gross profit increased 13.1% y-o-y, and the gross margin expanded 2.4pp to 25.8%. Gross profit included a $15.5m credit from the reversal of tax provisions after cases were concluded in Datatec’s favour with tax authorities in certain jurisdictions including Saudi Arabia. Excluding the credit, gross profit increased 9.6% y-o-y to a gross margin of 25.0%. Adjusted EBITDA, which strips out the tax credits, restructuring charges of $9.6m, acquisition, integration and corporate action-related costs of $7.9m and share-based payments of $7.4m, grew 15.0% y-o-y, and the margin was 0.9pp higher at 8.9%. Adjusted EBITDA/gross profit expanded from 34.0% to 34.5% (or 35.6% excluding the tax credit).

Cybersecurity continues to show the strongest demand, making up 52% of GII. GII by product type (Exhibit 7) shows software increasing from 37% to 42% of GII. Recurring GII increased by 12.8% to make up 67.8% of GII in FY26.

Working capital increased in absolute terms over the year, reflecting the growth of the business, and net working capital days increased by five days (as year-end fell on a weekend, this delayed large collections). Net debt at the end of FY26 was $102.5m (excluding lease liabilities) compared to $5.9m net cash at the end of FY25.

The division acquired REAL Security in January to expand into the Balkan region. This cost $8.1m in cash upfront with a $7m earn-out over three years.

Logicalis International: Strong gross profit growth and conversion

GII increased 11.8% y-o-y, with growth across all regions. Gross profit increased 8.0% y-o-y, and the margin increased 0.5pp to 30.9%, helped by annuity services and product mix. Adjusted EBITDA grew 21.9% y-o-y, and the margin was 1.2pp higher at 9.2%. Adjusted EBITDA to gross profit increased from 26.3% to 29.7%.

The business saw strong order intake and growth in multi-year contracts. Hardware and professional services slightly declined as a proportion of total GII, with recurring GII increasing 17.2% from 60.0% of total GII in FY25 to 62.9% in FY26. Cloud-based GII increased 23.4% y-o-y and made up 23.5% of FY26 GII.

Net working capital benefited from structural improvements in inventory as product mix has evolved and good control of working capital boosted cash in the year. Net cash at the end of FY26 of $32.2m (excluding lease liabilities) increased from $35.9m net debt at the end of FY25.

Logicalis International has recently made two small acquisitions:

• Maple Woods was acquired in February to strengthen its US cybersecurity offering. The company paid $1.5m cash on completion and there is a $1.4m earnout over three years.
• NetworkedAssets was acquired in March to expand the footprint into Poland and add engineering expertise. The company paid $2.1m cash on completion, and there is a $2.7m earnout over two years.

Logicalis Latin America: Diversifying the customer base

Despite a small decline in demand, the business improved gross and adjusted EBITDA margins. GII declined 1.3%, with a 2% decline in Brazil, 23% growth in the SOLA (southern Latin America) region driven by Chile and a 53% decline in the NOLA (northern Latin America) region due to weakness in Mexico. In Mexico, work is underway to reshape the business and diversify the customer base. Despite the GII decline, gross profit increased 1.3% y-o-y, and the margin increased 0.7pp to 23.5%. As a result of good cost control, adjusted EBITDA grew 20.9% y-o-y, and the margin was 1.2pp higher at 5.5%. The conversion of gross profit to adjusted EBITDA improved from 19.4% in FY25 to 23.2% in FY26.

The mix of GII by type moved in favour of annuity managed services (from 35% of total GII in FY25 to 40% in FY26), and recurring GII increased 6% from 54.5% of total GII in FY25 to 58.7% in FY26. Cloud-based GII fell 17% and made up 12% of FY26 GII as the division saw a reduction in low margin Microsoft licences.

Net working capital reduced due to a reduction in accounts receivable, partly due to the more diversified customer base. Net cash at the end of FY26 of $50.8m (excluding lease liabilities) increased from $15.9m at the end of FY25.

Outlook and changes to forecasts

The ongoing enterprise adoption of AI is driving the need for infrastructure investment, including more networking and on-premise computing, and the growing threat from AI is driving stronger demand for cybersecurity. These more complex IT environments are also driving demand for Datatec’s managed services.

Management noted that despite geopolitical tensions and energy constraints causing supply chain volatility, trading to date has remained resilient, and it expects continued improved financial performance in FY27.

Post year-end, the company concluded a case with the Brazilian tax authorities. This confirmed that the company had overpaid tax for the years 2013–22. The company has been awarded a total tax credit of $38.4m, split as $21.3m in overpaid tax and $17.1m in interest. This will offset federal tax payable in the Brazilian business over the next five years and will be accounted for as a credit to both tax and interest.

Exhibit 16 summarises the changes to our forecasts and the introduction of forecasts for FY29. We have upgraded our gross profit and adjusted EBITDA forecasts for both years on better performance in FY26, and this results in an upgrade to uEPS of 8% in FY27 and 6% in FY28, with similar increases in our dividend forecasts.

Valuation

On a group basis, Datatec is valued on minority-adjusted EV/adjusted EBITDA multiples of 4.1x in FY27 and 3.8x in FY28 and on a normalised P/E basis of 8.5x in FY27 and 7.6x in FY28. To more accurately reflect the dynamics of the different divisions, we continue to value Datatec on a sum-of-the-parts basis.

We use the EV/EBITDA peer multiples in Exhibit 17 and FY26 net debt (we add $150m to this as the group typically operates at a higher level of net debt across the year). We have left the South Africa sovereign risk and holding company discount unchanged at 30%, but we will reassess this discount going forward. This results in a per-share valuation of ZAR112.37 (up from ZAR103.59), which implies 42% upside from the current share price. The increase in valuation is mainly due to rolling forward forecasts by one year (average forecast adjusted EBITDA across FY27/28 is 16.8% higher than the average across our previous FY26/27 forecasts).