Datatec — The positives outweigh the negatives

Datatec (JSE: DTCJ)

Currency in ZAR

Last close As at 02/02/2023

ZAR34.21

1.17 (3.54%)

Market capitalisation

ZAR7,431m

Research: TMT

Datatec — The positives outweigh the negatives

Datatec’s H123 results suggest continuing revenue momentum in H123 driven by enterprise demand for cybersecurity, networking and cloud infrastructure, although with a mixed picture across the group. Excluding Analysys Mason, group revenues rose 9% y-o-y to US$2.41bn, while gross profits fell 5% to US$338m and adjusted EBITDA rose by 16% to US$88m. Underlying EPS fell by 67% to 2.2 US cents (3.6 US cents including Analysys Mason), particularly impacted by share-based payment charges. Net debt (for continuing operations) dropped 17% from FY22 to US$111m, reflecting effective working capital management and strong cash flow generation. Although the backlog continued to grow across each division, there are signs that this may be close to peaking as the rate of growth slows, supporting our view that the backlog will start to unwind in H223, through FY24. The global macroeconomic outlook remains uncertain, especially in Europe, but group profit margins would benefit if supply chain issues were to start to ease and the backlog reduced. There are also signs of an improving environment for Logicalis LatAm in H223. The £135.1m special dividend from the sale of Analysys Mason is due to be paid on 5 December 2022.

Richard Williamson

Written by

Richard Williamson

Director, TMT

TMT

Datatec

The positives outweigh the negatives

H123 interim results

IT services

3 November 2022

Price

ZAR42.50

Market cap

ZAR9.4bn

ZAR18.2/US$

Net debt (US$m) (continuing operations) at 31 August 2022

111

Shares in issue

221.8m

Free float

86%

Code

DTCJ

Primary exchange

Johannesburg

Secondary exchange

N/A

Share price performance

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).

Analysts

Richard Williamson

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5700

Datatec is a research client of Edison Investment Research Limited

Datatec’s H123 results suggest continuing revenue momentum in H123 driven by enterprise demand for cybersecurity, networking and cloud infrastructure, although with a mixed picture across the group. Excluding Analysys Mason, group revenues rose 9% y-o-y to US$2.41bn, while gross profits fell 5% to US$338m and adjusted EBITDA rose by 16% to US$88m. Underlying EPS fell by 67% to 2.2 US cents (3.6 US cents including Analysys Mason), affected by restructuring and other one-off costs. Net debt (for continuing operations) dropped 17% from FY22 to US$111m, reflecting effective working capital management and strong cash flow generation. Although the backlog continued to grow across each division, there are signs that this may be close to peaking as the rate of growth slows, supporting our view that the backlog will start to unwind in H223, through FY24. The global macroeconomic outlook remains uncertain, especially in Europe, but group profit margins would benefit if supply chain issues were to start to ease and the backlog reduced. There are also signs of an improving environment for Logicalis LatAm in H223. The £135.1m special dividend from the sale of Analysys Mason is due to be paid on 5 December 2022.

Year end

Revenue
(US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

02/21

4,109

73.1

13.6

6.6

17.2

2.8

02/22

4,637

85.0

18.7

39.3

12.5

16.8

02/23e

4,919

95.9

19.6

6.5

12.1

2.8

02/24e

5,117

107.3

25.2

8.4

9.4

3.6

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

A more detailed note will follow shortly, where we will review our forecasts.

Westcon delivered a notably strong performance, reporting a 16% rise in revenue, leading to an 86% increase in adjusted EBITDA to US$65m (a 4% margin) boosted by the strong dollar, while EBITDA was held back by a high level of IFRS 2 charges for the division’s maturing five-year management incentivisation scheme.

The Logicalis division has been split in two, with Logicalis Latin America being broken out separately from Logicalis International.

Logicalis International experienced good growth in orders, but profitability continues to be disrupted by supply chain issues, with software fulfilment and implementation often dependent on delayed hardware deliveries. Revenues rose 6% to US$576m, while adjusted EBITDA softened by 7% to US$27m (a 4.7% margin). Recurring revenues constituted 43% of divisional revenues (US$245m).

Logicalis LatAm faced challenging trading conditions, suffering from supply chain issues, although with continued growth in cloud-based services. Revenue declined by 21% to US$219m (51% recurring revenue), with adjusted EBITDA falling 78% to US$4m (a 1.8% margin).

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. 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 2022 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

More on Datatec

View All

Latest from the TMT sector

View All TMT content

Research: Investment Companies

Biopharma Credit — A quality dividend play with FY22 yield of 12%

BioPharma Credit (BPCR) is on track to deliver a strong (possibly record-high) annual NAV total return (TR) in FY22 on the back of a high investment level in H122, rising interest rates benefiting its floating rate loans, as well as healthy prepayment and make-whole fees from the early loan repayments in recent months. This has allowed BPCR to announce a US$0.045 special dividend, which implies a 12.0% dividend yield for FY22 on the current share price. The above-mentioned fees also provide BPCR with a good income runway for the re-deployment of prepayment proceeds. Since being fully invested in August 2018, BPCR achieved a net NAV TR of c 8% per year.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free