In today’s daily we have covered stock research on DATA#3 (BUY).









 
The S&P 500 was down by 21.34points or 1.01%on Thursday and closed at 2085.51 points.  U.S. stocks sold off on Thursday, led by a drop in the Nasdaq, as Apple shares declined and results in tech and biotech names disappointed. Upbeat economic reports added to uncertainty about the outlook for interest rates, a day after data showed the U.S. economy slowed to a crawl in the first quarter and the Federal Reserve pointed to weakness in the labor market and other areas of the U.S. economy.

The Nasdaq biotech index   dropped 3.1 percent, led by a 4.5 percent fall in Celgene, which reported lower-than-expected quarterly revenue. Apple was down 2.7 percent at $125.15 and was the biggest drag on the Dow, S&P 500 and the Nasdaq. Among other decliners, Yelp shares slumped 23.2 percent to $39.39 a day after the consumer review website operator forecast second-quarter revenue below analysts' expectations. Baidu declined 8.5 percent to $200.28 after China's dominant Internet search engine provider posted its slowest quarterly revenue growth rate in almost seven years.



BAIDU Daily Chart (Source - Thomson Reuters)
 
S&P ASX 200 was down by 48.6points or 0.83%on Thursday and closed at 5790.0 points. Westpac Banking Corp was the hardest hit among the big banks, sliding 2.5 per cent to $36.46, while Commonwealth Bank of Australia fell 1.9 per cent to $88.87, ANZ Banking Group dropped 2.2 per cent to $33.99 and National Australia Bank declined 1.8 per cent to $36.77. Telstra dropped 1.4 per cent to $6.23. Among the miners,BHP Billiton eased 0.2 per cent to $31.97, Rio Tinto 1 per cent to $57.15, and Fortescue Metals slid another 4.4 per cent to $2.17.

Qantas Airways was the day's best after the shares added 4.6 per cent to $3.39 after the airline reported another month of higher fares. Ten Network shares ended the day flat at 20.5¢ after the broadcaster made a $264.4 million net loss for the six months to the end of February. SPI futures are down 2 points. The Australian dollar is trading at 79.08¢, compared with Thursday's local close of US79.68¢. Ore with 62 per cent content at Qingdao fell 1.7 per cent to $US56.18 a dry metric ton on Thursday.
 



TELSTRA Daily Chart (Source - Thomson Reuters)



 
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DATA#3 VIDEO



 
Stock Of The Day - DATA#3 (BUY)

In today’s daily we cover Data#3 Limited (DTL), which is an information and communication technology company offering software solutions, infrastructure solutions, managed solutions, applications solutions as well as consulting services across Australia and Asia Pacific. In Feb 2015, the company announced its results for the six months ending 31 December 2014 (1H FY15) with highlight of returning to profit growth and a strategic shift in focus towards services.


Key Metrics (Source – Company Reports)

The company’s revenue was $406.4 million in said period, which was an increase of more than 1.8% as compared to the same period last year. Products still accounted for about 81% of the revenues, however the percentage share of services revenue increased as compared to percentage share of revenue in the same period last year (from 16.2% to 19%). The margin of services business is higher as compared to margin of product business, which is becoming increasingly commoditized. The increase in percentage share of services revenue is a sign that the strategy outlined in last year’s annual report, is on track in terms of implementation.

DTL did not witness much increase in the gross margins in view of only 1% rise, at margins of 15.4% in six month period ending 31 December 2014. Although expenses increased by 5.7%, the net profit after taxes also surged by 39.2% to $3.6 million. The company has been able to increase revenues and improve margins in a highly competitive market wherein sentiments to IT Investment have been flat last year. However it should be noted that this improvement comes after years of declining trend in profit after tax and a lot still needs to be done looking at the profit after tax for 2013, 2012 and 2011. Similarly earnings per share and dividend payout have shown an improvement on a year to year basis, the same are still significantly behind the EPS and dividend payout numbers witnessed from 2011 to 2013. Nonetheless, the strong balance sheet and the positive outlook enabled DTL to take many positive steps such as the raise in the interim fully franked dividend by 40% to 2.1 cents per share reflecting a 90.4% payout ratio.


Improved Performance in Profit and Earnings (Source – Company Reports)

The margin in services continues to be high at 42% while the margin in products is at 9.3%, which explains why company would want more of its revenues from the services segment. The selling costs are higher in product related businesses, which show up in the high cost of goods sold.  While total revenue of DTL increased from 399.1 to 406.4 million on an year to year basis, the product revenue declined from 332 to 229 million on an year to year basis. At this rate, the yearly product revenue of 2015, would be the lowest in 5 years. 


Strategic Shift in Business Mix (Source – Company Reports)

Among the different services offered (software solutions, managed solutions, infrastructure solutions, applications solutions and consulting), applications solutions registered a maximum revenue growth of 51.4%. In absolute terms, the maximum revenues were from software solutions, which accounted for $241 million of revenues. The percentage of services revenue was higher in infrastructure solutions as compared to software solutions, which indicate that company will be pushing for more of infrastructure solutions sales in the future.

Total expenses increased from $55 million to $58 million. Internal staff costs accounted for approximately 84% of the expenses, while operating expenses accounted for the remaining. Internal staff costs were up by 5.4% on a year to year basis (1H15 vs. 1H14) while operating expenses costs were up 7.1%. The increase in internal staff costs was due to the manpower support needed in the sales focused plan. The increase in operational expense was due to professional fees amortisation expense and other costs related to acquisition and investment activity.
 


Change in Gross Profit (Source – Company Reports)

DTL’s strategy rests on three pillars of outstanding solutions, customer success and exceptional performance. The company is working with the assumption that while technology investments will remain subdued, the same will increasingly shift to cloud and outsourcing and IT Spends outside IT budget will continue to grow. The company will continue to focus on selling services solutions, which have higher margins. Consulting business was started with a strategic intent to influence the decision making process of companies to buy more technology products and services, as is the case with consulting practices of large technology companies.


DTL Daily Chart (Source - Thomson Reuters)

For 12 months till April 2015, the stock has beaten about 86% of Australia-listed stocks in the same period. With the current price range around 0.88, the stock is trading at a price to earnings ratio of about 16 and a dividend yield of above 5%. At such a combination, DTL looks to be a good opportunity for investing.

Given the above and the positive turnaround trends, we put a BUY recommendation for this stock at the current price of $0.88.
 

Level 13  167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147


        
Note - You can also view this daily in the special reports section.

 
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