Data#3: Still in the right place at the right time after 40 years

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
10 November 2021, 8:00 AM
Sectors Covered:
Telecommunications, Technology

  • Data#3 (ASX:DTL) hosted an investor day which provided a deep dive into the business units, key personnel and the outlook.
  • An undersupply in the supply and demand equation, for people and products, remains the key challenge. These things will take time to normalise. However, DTL is better placed than most and growth in customer demand in CY22 is expected to hit highs arguably not seen since Y2K.
  • We retain our Add recommendation and increase our target price to (login to view) on minor tweaks.

Investor day highlights

Industry analysts at Gartner have upgraded their forecast for Australian ICT growth and now expect it to grow from 4% in CY21 to 6% in CY22. IT services is expected to grow at 8.6% in CY22 with the other key areas of growth being enterprise software, data centre systems and device and communication services. This record growth is driven by an increasing need for digital transformation, remote working and scalability, which COVID accelerated. 

Importantly, DTL is well placed in these higher growth areas – having one of the largest Australian owned and operated IT services businesses.

Pleasingly DTL provided a bit more granularity on the high, medium and low margin parts of the business. Managed services and consulting are in the high category and software, recruitment and infrastructure are in the low category.

DTL expect higher margin services growth to outstrip lower margin software growth over the next few years and the margin mix should mean that gross profit dollars and percentages grow. Management are more focused on growing gross profit dollars than margin expansion, however both are expected to grow in the coming years.

Access to skilled staff remains a challenge with DTL noting demand is for ~60k roles per annum in Australia vs supply at just 7k domestic students graduating.

The supply/demand imbalance will drive wages higher and cause challenges for customers and supplier alike. Again, DTL should be better placed than most given it has a dominant position in many of the high demand areas (where both customers and workers want to operate) and DTL has won the HRD “Employer of Choice” award for six years in a row (people like working there).

Staff and customers are happy, rating DTL 4.45/5 and 4.34/5, respectively in FY21. DTL noted customer spend has, on average grown by >13x in the first 5 years of gaining a customer and by >7x by year 10. Customer Life Time Value is >5x Customer Acquisition Cost.

In summary; supply and demand remain mismatched but DTL should be better placed than most ICT suppliers to meet high demand. This should lead to happier customers, staff and shareholders (due to growing profitability and dividends).

Forecast and valuation update

Immaterial short-term changes (EPS +1% in FY22/23), driving medium-term upgrades, which sees our target price increase to (login to view).

Investment view

We retain our Add recommendation.

Price catalysts

Trading updates (unaudited results) expected in January and July 2022.

Risks

Supply and demand equation. Declining supply and increasing demand means finding the right equilibrium is likely to remain challenging. DTL is better placed than most to work through these challenges but is not immune.

Earnings volatility remains a challenge for DTL. A substantial portion of earnings fall in the June and December periods. This is sometimes subject to supply/demand challenges which can positively or negatively impact EPS.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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