Small Caps | 12:30 PM
Data#3's strong start to FY27 has twice triggered upgrades to forecasts, now questions are being asked about the premium valuation.
- Data#3 upgraded guidance in October -- twice
- Track record shows proven ability to grow revenue faster than costs
- Ongoing growth potential from AI spending and larger contracts
- Premium valuation does temper analysts' enthusiasm
By Mark Woodruff
If resilience had a corporate calling card, it might bear the name of Brisbane-headquartered Data#3, a software and hardware reseller and provider of value-added IT services.
When initiating coverage around 14 months ago, Macquarie highlighted the company’s proven ability to grow revenue faster than costs, steadily lifting profit margins.
With shares then trading at $7.52, Macquarie also pointed to management’s record of sustaining a 58% return on equity (ROE), delivering compound annual earnings growth of 19% over FY19-FY24 and distributing 91% of profit as fully franked dividends.
Shares are now trading around $15 after management upgraded profit before tax (PBT) guidance twice in October.
At the beginning of the month, management reported a strong start to FY27, guiding to gross profit for the first half more than 15% above the first half of FY26 and profit before tax (PBT) over 40% higher than the prior year.
Stronger profit growth reflected the timing of technology and reinvestment spending, Canaccord Genuity explained, alongside around $1.5m of additional interest income from favourable cash flow timing.
Morgan Stanley was not ruling out some additional “acceleration in organic activity” as well.
Canaccord anticipated higher prices for infrastructure products would lift gross sales and felt the early FY27 upgrade, combined with the potential for a Services rebound, left room for further near-term improvement.
Never a truer word was spoken. On October 28, management further upgraded 1H27 PBT guidance to $52m–$57m from $47m-plus, assisted by strong demand for Infrastructure Solutions and Software, including an estimated $8m gross profit contribution from a one-off transaction.
Higher gross profit and interest income underpin the upgrade, Morgans observes, with 1H27 gross profit now expected to rise around 20% year-on-year.
Management expects to deliver year-on-year profit growth for both the second half and across the full FY27.
Concerns over valuation
Valuation has become the main obstacle to a Buy rating for Data#3 among the brokers covered in this article, although potential AI-related growth may help justify the company’s valuation premium.
Indeed, Jarden is increasingly confident Data#3 can sustain its growth, supported by stronger IT and AI spending as well as the company’s own investment in AI and cyber security capabilities.
Morgans highlights strong customer demand, ongoing upgrades from distributor peers and solid execution by Data#3.
Part of the most recent upgrade reflects clearer delivery timing, with confirmed customer delivery dates providing greater confidence to management where earnings will land in the first half, this broker explains.
Morgans sees two increasingly likely, concurrent upgrade cycles: replacing ageing equipment purchased for remote working during covid and preparing businesses for AI.
AI adoption requires new hardware, including storage, firewalls and cybersecurity upgrades, alongside consulting and services to consolidate and integrate systems and unlock productivity gains.
Morgan Stanley suggests the second upgrade in a month reinforces the likelihood of a potential inflection in IT spending, with positive momentum extending into 2H27.
Reflecting broader market concerns, Morgan Stanley notes the stock trades on a peak multiple despite recent upgrades, suggesting further earnings upside is already priced in.
Jarden likewise cautions the expected first-half performance is driven by one large, one-off infrastructure and software deal, with no flow-on benefits in the second half.
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