Datatec — The positives outweigh the negatives

Datatec (JSE: DTCJ)

Last close As at 27/03/2024

ZAR37.76

−0.20 (−0.53%)

Market capitalisation

ZAR8,713m

More on this equity

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.

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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).

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