Company Overview: Data#3 Limited (ASX: DTL) is engaged in providing Australian IT services and solutions and focuses on aiding its customers to resolve complicated business tasks by applying new and advanced technology solutions. DTL offers a unified array of solutions consisting of cloud-based services, security, modern workplace, data & analytics, and improved connectivity. The company was listed on ASX in 1997 and currently have greater than 1,200 staff. DTL is headquartered in Brisbane and has its operating facilities across 12 locations in Australia and Fiji.

DTL Details

DTL Rides on Strategic Alliances & Decent Liquidity Position: Data#3 Limited (ASX: DTL) is involved in offering consultancy, software, infrastructure, and managed solutions, with a market capitalisation of ~$742.15 million as on 12 March 2021. The company started 2020 on a strong note, with profits increasing ~40% year over year. In 2HFY20, the company remained on track to continue its momentum, despite COVID-19 led pandemic and government restrictions. In response to this uncertain period, the company’s utmost priority remained to safeguard its employees and customers’ health and well-being. In doing so, the company executed a work-from-home model across the business, with ~97% of staff working and supporting customers remotely. During FY20, the company witnessed an increase of 14.9% in revenues on a year over year basis, which came in at $1.6 billion. Earnings per share also went up 30.5% year over year in FY20, depicting a strong financial position.

Key Trends Highlights (Source: Company Reports) 

The company remains on track to bolster its strategic alliance with key vendors, the most important ones being with Microsoft, Cisco, HP, and Dell. These relationships strengthen the company’s cloud position, thus fortifying its market leadership stance nationally. Public cloud is the fastest growing area of DTL’s business. Notably, the importance of the cloud will keep rising in the post-pandemic period, thanks to the cost-effective services, flexibility, and scalability of DTL’s businesses. Furthermore, the assimilation of cloud computing with big data, artificial intelligence, and IoT will assist businesses to attain new heights of innovation. The company’s cloud position generated an enormous 60% increase in revenue and ended FY20 with $581 million. This growing position aided the company in enhancing its recurring revenue model and providing an opportunity to grow its associated services. 

1HFY21 Key Highlights: During the period, the company reported total revenues of $856.7 million, which went up by ~19.2% year over year. Revenues for the period included $346.1 million of public cloud-based revenues, which went up a whopping 37.4% from the prior corresponding period. Total gross profit in 1HFY21 came in at $89.7 million, up by 1.2% on a year over year basis.  Owing to a shift in sales mix, with robust growth in Software Licensing & public cloud revenues, DTL’s total gross margin declined to 10.5% in 1HFY21, from 12.3% reported in 1HFY20. Operating expenses stood at $9.7 million in 1HFY21, depicting a decline of 18.4% 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 initiatives.  Net profit after tax (excluding minority interests) showed an improvement of 7.9% year over year. The company declared an interim fully franked dividend of 5.50 cents per share, an increase of 7.8% year over year, with a record dates of 17 March 2021 and payment date of 31 March 2021, thus depicting the company’s financial performance and strong balance sheet.  This represents a payout ratio of 90.3%.

1HFY21 Key Highlights (Source: Company Reports) 

Healthy Balance Sheet and Decent Liquidity: The company has built a decent balance sheet position with total assets reaching $293.9 million as at 31 December 2020. DTL has cash and cash equivalents of $67.9 million. Total debt at the end of the period amounted to ~27.2 million. The company’s healthy balance sheet and skilled management team along with its long-term nature of customer relationships, places DTL for considerable long-term growth. For 1HFY21, the company reported ROE of 18.7%, against the industry median figure of -1.8%. In 1HFY21, the company’s cash cycle days was negative 29.2.

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 19.97% 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 5.01%. First Sentier Investors is the second-largest shareholder, with a holding of 4.15%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group  

Risk Analysis: Stiff competition in the markets where DTL operates, COVID-19 led disruptions, and regulatory concerns may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions add to the woes. Also, the company’s revenues are heavily dependent on retaining its key vendors. This implies that customer concentration risk is higher for the company. Further, the company’s financial performance can be battered by increasing headcounts and personnel costs. This, in turn, may weigh on margin expansion, going forward. Also, rising expenses add to the woes.

Outlook: The company remains optimistic about the delivery of its long-term strategies. DTL continues to enhance its solutions to adjust to changing market demands and scenario. Its key priorities involve pursuing further improvement in its overall operational efficiency and gaining greater leverage from its effective cost base structure. The company’s robust business, decent long-term customer relationships, no borrowings, and dedicated supplier partnerships, aid it to capitalise on the growing opportunities across the globe. The company remains on track to witness higher growth opportunities in the Australian IT market and opines that it is well placed to capitalise on that opportunity in order to enhance customer’s experiences. The company would achieve its FY21 financial objectives on the strong 1HFY21 performance and pipeline of objectives in the 2HFY21.

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

Data Source: Refinitiv, Thomson Reuters, 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: Over the last three months, the stock went up by ~10.3% and went down 14.1% in the past one month. The stock made a 52-week low and high of $2.5 and $7.3, respectively. On the technical analysis front, the stock has a support level of ~$4.703 and a resistance level of ~$6.191. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight discount to its peer average, considering the COVID-19 led uncertainties, high customer concentration risk, lack of skilled workers and competition from peers. We have taken peers like Computershare Ltd (ASX: CPU), WiseTech Global Ltd (ASX: WTC), to name a few. Considering the above factors, robust customer base, decent 1HFY21 financial performance, increasing gross profit, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $5.02, up by 4.149% on 12 March 2021.  

DTL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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