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Data#3 Has Growth Locked In For FY23

Small Caps | Aug 23 2022

This story features DATA#3 LIMITED.. For more info SHARE ANALYSIS: DTL

Supply chain constraints have not hampered Data#3's ability to deliver another record year, with the company describing constraint-driven backlog as a timing issue that will benefit FY23.

-Data#3 delivered a record result in FY22, despite multiple challenges
-Supply chain issues drove record delivery delays, but left $6m backlog that should benefit FY23
-Sizeable backlog and revenue under contract provides investors with good near-term visibility

By Danielle Austin

Delivery of a record result by cloud computing and ICT solutions provider, Data#3 ((DTL)) has proven the company's ability to deliver growth despite supply chain constraints that drove record delivery delays in the year.

The company reported 12% year-on-year growth to both revenue and gross profits, 15% growth to earnings, and 19% growth to profit before tax, earnings per share and dividends per share. Full year cash flow was negative, impacted by supply chain constraints, but the company attributed this to a timing issue that will reverse in the first half of FY23.

Supply chain constraints caused a $6m backlog of work that will be carried over into the new year, with the company noting while this did impact on gross margins in FY22, it will see the company benefit in the coming year.

Data#3 will enter the new financial year not only with the $6m backlog to be realised, but also with 65% of its revenue targets already under contract for the year. This combination provides a strong financial starting position, and with a good level of visibility over the near-term outlook.

Broader industry commentary around demand resilience looks likely to support a continuation of large project pipelines across the sector.

Market positive on pipeline visibility and further growth in the coming year

Of FNArena's database brokers, Ord Minnett, Morgans and Morgan Stanley have all updated following the release of Data#3's results. Two of these brokers are Buy equivalent rated, and one Hold equivalent rated, and between them have an average target price of $6.94, ranging from $6.42 at the lower end to $7.50.

Noting Data#3's result was indicative of its ability to grow and win market share despite the supply constraints impacting the industry, Ord Minnett (Buy, with a target price of $7.50) retains a positive outlook on the company given robust growth and attractive business model.

The broker anticipates 12.8% revenue growth in the coming year, supported by a growing pipeline of digital transformation projects.

The Ord Minnett analysts did highlight the $6m backlog of work being carried into the new year drove a lower 9.5% gross margin in the second half, but the broker anticipates this will improve to 10.2% in the coming year as the company's sales mix improves. Only minor changes have been made to earnings forecasts.

Morgans (Hold, with a target price of $6.42) described Data#3's result as hard to fault. This broker expects supply chain constraints will persist until FY24 when new large scale chip manufacturing plants in Japan and the US reach first production.

Given this, the broker assumes another backlog in the second half of FY23, but also notes potential for a demand slowdown as economic conditions weaken.

The Morgans analysts noted the Hold rating is a result of the stock's recent share price strength rather than performance issues, with the broker preferring to buy at a lower level. Morgans' earnings and earnings per share forecasts increase 2% and 4% respectively for the coming year.

Already a key pick for Morgan Stanley coming into the reporting season, post-result the broker (Overweight, with a target price of $6.90) noted it likes the company's competitive position, industry tailwinds, near-term visibility and longer-term growth opportunities.

This broker particularly highlighted a strong performance from the Services segment, which delivered 39% growth on the previous comparable period and 18% on the previous half, and that the work backlog suggests better underlying earnings power.

Morgan Stanley lifts its earnings per share forecasts 2% for both FY23 and FY24, but remains conservative on including the company's $6m backlog into FY23 forecasts, preferring to see this as a source for upside.

On current consensus forecasts, derived from the three brokers mentioned, Data#3 is expected to grow earnings per share by 15% in FY23 and by 14.7% the following year. Dividends are projected to grow only a smidgen slower to 20.3c and 22.8c respectively, implying a yield of 3.3% and 3.7% at today's share price of $6.20.

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