Datatec hungry for growth

By Nicola Mawson, Contributing journalist

Johannesburg, 02 Nov 2006

Networking and IT services business Datatec is keeping an eye out for acquisitions that will add value to its bottom line.

The company, which yesterday reported its interim results to the end of August, recently made several acquisitions. It is seeing about 20% return on investment from these companies and CEO Jens Montanana says acquisitions are a "work in progress".

He says there are a few "things in the pipeline", but it will only complete acquisitions if they make sense for the company. Montanana adds Datatec must be able to add value to the acquisition.

Datatec, which recently listed on the London Stock Exchange's AIM board to complement its JSE listing, reported a 16% increase in revenue, to $1.7 billion. Operating profit moved up 44% to $43.3 million.

An analyst, speaking on condition of anonymity, says this is in line with the company's guidance, adding that earnings growth for the full-year should be at least 25%.

Headline earnings per share moved up 30%, to 15.65c. Montanana believes that, with the benefit of its London listing, the group is well placed to develop internationally through both organic and acquisitive growth.

The company improved operational efficiencies, which resulted in profit and margin growth. Its gross margin moved up to 11.4%, from 11.3% in the previous corresponding period. The analyst comments this could be because Europe is growing off a low base.

In addition, says Montanana, organic and acquisitive growth is generating momentum. North America accounts for half the company's business, South America accounts for 2%, Europe for 36%, Asia for 7%, and SA and the Middle East for 3% of revenue.

Consistent divisions

He attributes the growth in gross profit to the consistency of the company's underlying businesses. Westcon contributes 75% to revenue and 54% to gross profit. The Analysys Mason Group (AMG) contributes 3% to revenue, but 6% to profit, while Logicalis contributes 20% to revenue and 36% to gross profit. The Middle East and Africa region contributes 2% to revenue and 4% to gross profit.

Westcon, which recently acquired Ronco to strengthen its Nortel convergence offerings, derived most of its revenue growth from organic expansion. The division also improved the financial position of its European-based offices, which could grow margins further should this trend continue.

Montanana adds the division is looking into further takeovers and notes that "significant financing capabilities exist within the Westcon group".

The analyst comments that an indication of Westcon's future growth would be revealed in Cisco's quarterly results next week. "It could be possible that Westcon has changed its tack and is focused on margins," he says of the margin increase.

Logicalis, in its third year of turnaround, completed one acquisition during the half-year. The division reported organic and acquisitive growth and constant gross margins. The company will continue to leverage its operations in the US and UK, the analyst says, adding that the 20% gross margin should be sustainable.

Datatec's consulting arm, AMG, is "highly cash-generative and well poised for future expansion," he notes. Gross profits in this arm are growing faster than revenue. However, the analyst was disappointed by performance in this division as a large contract failed to add to the division's bottom line.

The company's cash on hand declined to $83 million, mostly as a result of acquisitions and the resultant increase in investment into working capital. However, Montanana says the company is still in a strong cash position.