Adjusted EBITDA growth across all divisions

Westcon and Logicalis International are seeing strong growth in underlying demand, with gross invoiced income (GII) year-on-year growth of 10% and 11% respectively, while Logicalis Latam saw flat demand during H126. This translated to adjusted EBITDA growth of 7% y-o-y for Westcon and 36% for Logicalis International. Higher gross margins and strong cost containment allowed Logicalis Latam to report a 110.7% increase in adjusted EBITDA despite flat GII. Gross profit to EBITDA conversion increased to 26.7% from 24.5% in H125. uEPADR increased 43% to 19.3c, and based on the policy of paying out 50% of uEPADR, the company announced an interim dividend per ADR of 20c.

Material earnings upgrades

We have reflected the strong H126 performance and positive outlook in our forecasts. Due to a change in policy by the company, we now exclude share-based payments from our uEPADR forecasts. Adjusted EBITDA upgrades of 2.4% in FY26, 7.4% in FY27 and 10.2% in FY28 drive the majority of the uEPADR uplift, with the remainder from the change in policy. This feeds through to increased dividend forecasts in all years.

Valuation: Discount narrows but significant upside remains

The ADR has gained 28% since we wrote on the FY25 results in June and Datatec currently trades on EV/adjusted EBITDA multiples of 4.4x in FY26e and 3.9x in FY27e, well below its peer group (average of 8.6x across both years). On a conservative sum-of-the-parts valuation using peer group averages, we estimate that Datatec could be worth 35% more than the current ADR 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 H126 results

In the table below we summarise Datatec’s H126 results. Exhibit 2 summarises divisional performance. 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 11.7% higher y-o-y, resulting in adjusted EBITDA 21.9% higher y-o-y. This flowed through to headline EPADR growth of 109.5% and underlying EPADR growth of 43.0%. Net debt reduced 50% y-o-y to $54.4m due to better working capital management. The company announced an interim dividend per ADR of 20c, with a scrip option available.

Westcon: Growth in all regions

GII increased 9.8% y-o-y, with growth across all regions. Gross profit increased 13.8% y-o-y and the margin expanded 2.9pp to 25.1%. 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 6.6% y-o-y to a gross margin of 23.5%. Adjusted EBITDA, which strips out the tax credits and share-based payments, grew 7.3% y-o-y and the margin was 0.5pp higher at 7.8%. Adjusted EBITDA/gross profit fell slightly from 32.9% to 31.1%, although stripping out the tax credit in H126 would increase the conversion to 33.2%.

Cybersecurity showed the strongest demand, making up 52% of GII and increasing 16.5% y-o-y. This is evident in the split of revenue by product type, with software increasing from 35% to 41% of GII. Recurring GII increased by 17.6% from 63.1% of total GII in H125 to 67.6% in H126.

Working capital increased in absolute terms over the year, reflecting the growth of the business, although net working capital days were down year-on-year. Net debt at the end of H126 of $38.1m (excluding lease liabilities) compared to $0.0m net debt at the end of H125.

Logicalis International: Strong adjusted EBITDA growth

GII increased 11.4% y-o-y, with growth across all regions. Gross profit increased 11.3% y-o-y and the margin increased 1.3pp to 29.8%. Adjusted EBITDA grew 36.5% y-o-y and the margin was 1.9pp higher at 8.3%. Adjusted EBITDA to gross profit increased from 23.4% to 28.7%.

The business saw strong order intake with several multi-year contracts. The mix of GII by type did not vary significantly year-on-year, but recurring GII increased 15.4% from 59.9% of total GII in H125 to 62.1% in H126. Cloud-based GII increased 17% y-o-y and made up 23.6% of H126 GII.

Net working capital benefited from flat accounts receivable, lower inventory and higher accounts payable year-on-year. Net cash at the end of H126 of $12.7m (excluding lease liabilities) compared to net debt of $60.3m at the end of H125.

Logicalis Latam: Profit improvement despite flat demand

GII saw a very small decline of 0.4% y-o-y, with recovery in Brazil and growth in the SOLA (southern Latin America) region offset by a decline of 34.7% in the NOLA (northern Latin America) region due to weakness in Mexico and Colombia. Despite the effectively flat GII, gross profit increased 6.2% y-o-y and the margin increased 0.5pp to 22.9%. Adjusted EBITDA grew 110.7% y-o-y and the margin was 2.7pp higher at 5.3%.

The mix of GII by type moved in favour of managed services (from 36% of total GII in H125 to 41% in H126) and recurring GII increased 20% from 38.5% of total GII in H125 to 46.4% in H126. Cloud-based GII increased 43% y-o-y and made up 4% of H126 GII. The company noted that a broader sales mix is reducing customer and business concentration, and that Chile made a positive contribution after a period of generating losses.

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 H126 of $17.7m (excluding lease liabilities) compared to net debt of $15.6m at the end of H125.

Outlook and changes to forecasts

Management expects all divisions to deliver a better financial performance in FY26, helped by higher margin recurring revenues from software and services. By division:

• Westcon: continues to see robust demand for cybersecurity. Cloud connectivity is driving demand for next generation networks and AI-driven spend is fuelling demand across all technology segments. Demand remains strong despite the challenging geopolitical landscape.
• Logicalis International: cybersecurity is becoming a core growth area and as for Westcon, AI is driving a technology refresh. Customers are moving to hybrid cloud infrastructure. The business is seeing growing recurring revenues, which improves revenue visibility.
• Logicalis Latam: management expects to keep strong control over opex while scaling the business.

The company recently changed its policy for calculating uEPADR and now excludes share-based payments. Our previous forecasts for uEPADR included share-based payments. The exclusion of share-based payments combined with increased adjusted EBITDA at the group level in all years results in upgrades to our uEPADR forecasts for all three years (FY26e +18.2%, FY27e +21.9%, FY28e +24.6%). This drives upgrades to our dividend forecasts.

Valuation

On a group basis, Datatec is valued on minority-adjusted EV/adjusted EBITDA multiples of 4.4x in FY26e and 3.9x in FY27e and on a normalised P/E basis of 10.1x in FY26e and 8.7x in FY27e. 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 18, FY26e net debt (we add $100m to this as the group typically operates at a higher level of net debt across the year) and 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-ADR valuation of $12.12 (up from $11.02), which implies 35% upside from the current ADR price. The increase in valuation is due to upgrades (we have lifted group adjusted EBITDA by 2% for FY26 and 87% for FY27) partially offset by lower peer multiples for Logicalis International.

The strategic review to close the valuation gap is ongoing. In the current higher interest rate environment, we believe that M&A transactions are less likely. Management is focused on operational improvements across the three divisions, as evidenced by the improving quality of earnings, and has brought senior management into the equity of the individual businesses. We believe further transactions may take place in the medium term when market conditions start to improve.