Data#3 Limited

Company Overview: Data#3 Limited (ASX: DTL) is involved in offering consultancy, software, infrastructure, advanced technology, and managed solutions, aiding its customers to resolve complicated business tasks. DTL offers a unified array of solutions consisting of cloud-based services, security, modern workplace, data & analytics, and improved connectivity.

DTL Details

DTL Rides Strong Fundamentals & Strategic Alliances: The company remains on track to bolster its strategic alliance with more than 400 key vendors, the most important ones being with Microsoft, Cisco, HP, and Dell. The company has recently implemented its new ERP system, which is based on the Microsoft Dynamics 365 cloud platform. The project is likely to be completed in the 3QFY22. These relationships strengthen the company’s cloud position, thus fortifying its market leadership stance.

Key Findings from FY21 Results:

• Rise in Revenues: In FY21, the company’s total revenue soared 20.3% on pcp and came in at $1,956.2 million. The growth was aided by the ever-increasing demand for Data# 3’s solutions in a rapidly evolving market.
• Robust Public Cloud Revenue: The company’s public cloud revenue generated an enormous increase in revenue and went up ~36.2% year over year in FY21. This growing position aided the company in enhancing its recurring revenue model and providing an opportunity to grow its associated services.
• Increase in Net Profit After Tax: NPAT stood at $25.2 million in FY21, representing a rise of 7.5% year over year. The company recorded basic EPS of 16.51 cents in FY21, as compared to 15.35 cents recorded in FY20.
• Gross Profit Expansion: Total gross profit in FY21 came in at $194.7 million, up by 3.6% on a year-over-year basis, owing to robust growth in Software Licensing & public cloud revenues.
• Cost Management Initiatives: Other operating expenses stood at $20.4 million in FY21, depicting a decline of 8.1% year over year, owing to a fall in travel costs due to COVID-19 led uncertainties, rent savings from the withdrawing of the Data# 3 Cloud platform, and other cost-cutting plans.
• Enhancing Shareholder’s Value: The company declared a full-year dividends of 15.0 cents per share, an increase of 7.9% year over year. This represents a pay-out ratio of 90.9%.
• Healthy Balance Sheet & Decent Liquidity: The company has built a decent balance sheet position with cash and cash equivalents of $204.32 million. DTL had nil borrowings in FY21. Its lease obligations amounts to ~$26.9 million.

The below picture depicts a continuous growth trajectory in DTL’s cloud revenues since 2015. 

Trend in Public Cloud Revenues; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported ROE of 46.8%, against the industry median figure of -2%.  In FY21, the company recorded cash cycle days of negative 32.8 compared to the industry median figure of positive 87.3 days. The debt-to-equity ratio in FY21 stood at 0.48x, compared to the industry median figure of 0.69x. 

Growth, and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 19.36% of the total shareholdings, while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. is the entity holding maximum shares in the company at 5.11%. Anacacia Pty. Ltd. is the second-largest shareholder, with a holding of 2.66%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis:

• Loss of key Vendors: DTL faces the risk of dependence on certain key vendors in the Government and corporate sectors for the contracted services and products. This implies that customer concentration risk is higher for the company.
• COVID-19-led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Rising Expenditure: The industry players are facing increasing costs, owing to the higher volume of business being operated through the cloud and the increasing demand for enabling software and services. DTL continue to expand their offerings in the race to grab more business, which might cause fluctuations in profitability.

Outlook:

• DTL remains optimistic about delivering its longer-term strategy on the back of no borrowings, robust supplier alliances, and customer relationships.
• The company expects technology, and digital transformation, to play a key role in Australia’s economic future, thus, aiming for larger infrastructure projects across its corporate and public sector customers.
• The company remains on track to witness higher growth opportunities in the Australian IT market and is well capitalised to enhance customer’s experiences, accelerate the growth of its services businesses and strengthen its leadership position.
• With a steady rise in the pipeline of large integration project opportunities, the company continues to augment its margins and software and infrastructure business units.
• The company’s healthy balance sheet, skilled management team, and long-term nature of customer relationships places DTL for significant long-term growth.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~12.84% in the past three-month. Currently, the stock is trading below the average of its 52-week high and low levels of $7.30 and $4.47, respectively, implying accumulation opportunity. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers’ average P/E multiple, considering high customer concentration risk, the decline in the cash balance, rising expenditure, competition from peers, etc. For the purpose of valuation, peers such as Iress Ltd (ASX: IRE), Pushpay Holdings Ltd (ASX: PPH), TechnologyOne Ltd (ASX: TNE) and others have been considered. Considering the current trading levels, increase in revenue, NPAT in FY21, expected upside in valuation, decent liquidity position, expected earnings growth in FY22, and growth in the Australian IT market, we give a ‘Buy’ rating on the stock at the current market price of $4.75 as on 1 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

DTL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.