Data#3: Still in the right place at the right time after 40 years
About the author:
- 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).
We retain our Add recommendation.
Trading updates (unaudited results) expected in January and July 2022.
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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