Underlying EPS growth of 78% in FY25

Datatec reported gross profit growth of 6%, adjusted EBITDA growth of 28% and uEPS growth of 78% in FY25. All divisions reported growth in adjusted EBITDA (Westcon +25%, Logicalis International +27%, Logicalis Latin America +60%). Net debt at year-end was reduced by 58% to $52m, reflecting strong working capital management in all divisions.

Outlook and estimate upgrades

Management expects the trend towards higher software sales and annuity services will continue and sees continued strong demand for its products and solutions. It expects all divisions will continue to improve their financial performance in FY26. We have upgraded our estimates for FY26 and FY27, with better adjusted EBITDA forecasts for Westcon and Logicalis International. This drives upgrades to uEPS of 14% in FY26 and 17% in FY27 and, factoring in the higher payout ratio, dividend upgrades of 72% and 76%, respectively.

Valuation: More to go for

Despite a 66% increase in the share price over the last year, Datatec currently trades on EV/adjusted EBITDA multiples of 3.7x in FY26e and 3.5x in FY27e, well below its peer group (average of 8.9x across both years). On a conservative sum-of-the-parts (SOTP) valuation using peer group averages, we estimate that Datatec could be worth 54% more than the current share price. This factors in rolling the valuation forward by a year and upgrades to our forecasts. 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 FY25 results

In Exhibit 1, we summarise Datatec’s FY25 performance. For the first time, the company disclosed gross invoiced income (GII), which increased 1.5% y-o-y. It also changed the policy for revenue recognition in Westcon, treating software sales as made on an agency rather than principal basis. This means that only commission earned on the sale of the software is recognised as revenue rather than the full value of the software sold. The company restated Westcon revenue for FY24 and applied the new policy for FY25. Based on the new revenue recognition policy, group revenue declined 8.8% y-o-y. Conversely, gross profit increased 5.6% y-o-y and adjusted EBITDA increased 28.2% y-o-y. After share-based payments of $15.8m, restructuring charges of $10.8m, one-off tax credits in EBITDA of $3.3m and acquisition-related costs of $1.6m, EBITDA increased 24.6% y-o-y. Net finance costs increased 4% to $56.9m reflecting higher interest rates and higher utilisation of debt facilities, resulting in profit before tax of $104.0m on a reported basis and $136.6m on a normalised basis. With an effective tax rate of 33.4%, reported net income after minority interests was 29.2% higher year-on-year and normalised net income 76.6% higher year-on-year. Basic EPS increased 26.4% to 25.7 cents and headline basic EPS increased 79.9% to 25.5 cents. Company adjusted underlying EPS (uEPS) increased 78% y-o-y to 30.5 cents. This adds back the adjustments described above, apart from share-based payments.

Very strong operating cash inflow of $246.5m helped the company reduce net debt by 58% y-o-y to $52.1m at year-end.

As operating profitability and working capital management have improved on a consistent basis, the company decided to revise up its dividend payout policy, now aiming to pay out 50% of uEPS compared to the previous target of 33%. Consequently, a final dividend of 200 ZAR cents was announced, which, when added to the 75 ZAR cents interim dividend, makes a full year dividend of 275 ZAR cents or c 15.5 cents.

Trend towards higher contribution from software and services continues

In FY25, 69% of gross invoiced income was from software and services (including annuity revenues), while 31% was from hardware. This compared to a 64%/36% split in FY24.

Divisional performance

Exhibit 2 summarises Datatec’s performance on a divisional basis. As noted above, Westcon revenue was forecast on the previous basis, with software revenue accounted for on a gross basis. On the new basis, Westcon’s gross and EBITDA margins are higher than previously reported/forecast as software-related revenue now drops through at a close to 100% gross margin.

Exhibit 2: Datatec divisional performance

Source: Datatec, Edison Investment Research

Westcon: Strong volume and profit growth

The business reported 3.3% growth in GII; within that, recurring GII made up 66% and was 14% higher year-on-year. The revenue accounting policy change removed $1.465m from FY24 revenue and the same amount from cost of sales. On the new basis, revenue declined 11.3%, reflecting the increased proportion of software in the revenue mix, while gross profit increased 9.4% y-o-y. Reported EBITDA increased 12.7% y-o-y and adjusted EBITDA increased 24.7% y-o-y after adding back share-based payments of $7.2m and restructuring charges of $6.3m. Gross profit to adjusted EBITDA conversion increased from 29.8% in FY24 to 34.0% in FY25.

The business saw strong order intake, up $700m or 15% compared to FY24. Westcon saw good demand for cybersecurity, a rebound in networking demand and customers looking to upgrade their infrastructure for AI applications. Exhibit 3 shows GII growth in Europe and Asia-Pacific with a decline in MEA. Reflecting the increasing proportion of net accounted software sales (Exhibit 7), revenue declined in all regions (Exhibit 4).

Year-end net debt including leases reduced to $30.1m from $88.9m a year ago, due to lower days sales outstanding and higher inventory turns.

Logicalis International: Solid performance

Logicalis International saw a small decline in GII of 0.7%, driven by a decline in EMEA, Germany in particular (Exhibit 8), partially offset by strong growth in the US. Revenue declined by 5.9% through a combination of slightly weaker GII and a higher proportion of net revenue accounted software (Exhibit 10). Despite the revenue decline, gross profit increased by 5.5% and the gross margin increased 3.3pp to 30.4%. Reported EBITDA increased 35.3% y-o-y and adjusted EBITDA increased 26.9% y-o-y after adding back share-based payments of $2.4m and acquisition-related costs of $1.6m. Gross profit to adjusted EBITDA conversion increased from 21.9% in FY24 to 26.3% in FY25.

The business saw solid order intake during the year and continued growth in cloud-based sales (Exhibit 11).

Year-end net debt including leases reduced to $71.6m from $79.3m a year ago, due to working capital improvements.

Logicalis Latin America: Reduced cost base drives profit growth

Logicalis Latin America saw an 11.3% decline in GII, mainly due to a lower backlog at the start of the year. Brazil was the weakest country, reflecting the recent loss of the telco business (Exhibit 12), while Argentina saw improvement (in the SOLA region) helped by the easing of currency controls. Revenue also declined by 11.3% (Exhibit 13). Gross profit declined by 12.1%, while the gross margin was down only 0.2pp to 22.8%. Reduced operating expenditure resulted in reported EBITDA increasing 68.7% y-o-y and adjusted EBITDA increasing 59.8% y-o-y after adding back share-based payments of $0.5m and net one-off costs of $0.3m. Gross profit to adjusted EBITDA conversion increased from 10.7% in FY24 to 19.4% in FY25.

The business saw a strong recovery in orders through the year and an improving trading environment in its Argentina operations. Restructuring has right-sized the cost base post the loss of the Brazilian telco contracts and the business now has lower customer concentration.

Year-end net cash including leases increased slightly to $7.6m from $5.2m a year ago as better import conditions in Argentina reduced inventory requirements.

Management consulting and corporate

This division includes the Mason Advisory consulting business and head office costs. Revenue increased significantly as the company reported a full year of Mason Advisory (fully consolidated from December 2023). Mason Advisory generated a gross margin of 21.1%. Taking account of Mason Advisory opex and head office costs, the reported EBITDA loss of $24.4m increased 13.9% y-o-y and adjusted EBITDA loss of $17.8m increased 20.0%, after adding back share-based payments of $5.6m and one-off costs of $1.0m.

Outlook and changes to forecasts

At a group level, the company looks set to benefit from enterprise adoption of AI as this will require customers to prepare their IT infrastructure for the implementation of AI applications using specialists in digital transformation and cybersecurity. The growing proportion of software and services should improve cash flow and working capital. On a divisional basis:

• Westcon: the division should benefit from lower interest rates, but uncertainty around tariffs could affect customer demand. We forecast 5.0% growth in gross profit in FY26 and, with underlying opex growth of 2.5%, we forecast a 9.8% increase in adjusted EBITDA to $164.6m (5.7% higher than previously forecast).
• Logicalis International: the division is controlling opex and capex tightly and making increasing use of digital technologies internally to improve efficiency. Growing use of hybrid infrastructure should increase demand for cloud solutions, and AI and cybersecurity should drive growth in core solutions. We forecast gross profit growth of 4.7% in FY26 and underlying opex growth of 2.3%, resulting in adjusted EBITDA growth of 11.3% to $104.7m (13.3% higher than our previous forecast).
• Logicalis Latin America: the division now has a better business mix and a more diversified customer base. Recovery in Argentina and improving market share in its main markets should drive demand in FY26. We forecast gross profit growth of 5.0% and a 3.5% increase in underlying opex, resulting in adjusted EBITDA growth of 11.1% to $22.4m, slightly below our previous $23.8m forecast.

We forecast an increase in FY26 group adjusted EBITDA of 10.6% to $272m, 7.8% ahead of our previous forecast. We have reduced our forecast for tax rates from 33% to 31.5%, reflecting the geographic spread of profits. This results in a 26.2% upgrade to uEPS in FY26 and 13.9% in FY27. We introduce estimates for FY28, forecasting uEPS growth of 11.8%. Our dividend forecasts reflect the new target payout ratio of 50% of uEPS, up from 33%.

Exhibit 16: Changes to forecasts

Source: Edison Investment Research

Valuation

On a group basis, Datatec is valued on minority-adjusted EV/adjusted EBITDA multiples of 3.7x in FY26e and 3.5x in FY27e and on a normalised P/E basis of 8.6x in FY26e and 7.7x 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 $150m 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-share valuation of ZAR98.32 (up from ZAR77.0), which implies 54% upside from the current share price. The increase in valuation is due to upgrades (we have lifted group adjusted EBITDA by 8% for FY26 and FY27), the rollover by one year, higher peer multiples and lower net debt.

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.