Dicker Data: Synergies, Costs & Distribution

This story features DICKER DATA LIMITED. For more info SHARE ANALYSIS: DDR

Recent research on Dicker Data notes an improving distribution capability and potential synergies from recent acquisitions.

-Brokers are positive on the outlook for Dicker Data
-Upside includes an improved distribution capability
-Synergies expected from recent acquisitions
-A review of first quarter results and outlook

By Mark Woodruff

Following a pandemic low of $4.00 in March 2020, shares in Dicker Data ((DDR)) subsequently quadrupled in value to reach an all-time high of around $16 in August of 2021, before consistently trending lower to the current level around $8.40.

Petra Capital now believes shares of the largest value-added information technology (IT) distributor in Australia, and the second largest in New Zealand, offer "compelling value".

Management’s focus is on the corporate, commercial and enterprise sector via distribution of hardware, software, cloud and emerging technologies.

The Australian information and communications technology (ICT) market has demonstrated robust growth over the past five years, driven by digital transformation and businesses migrating to the cloud.

The company’s business model remains adept at identifying key pockets of growth to drive market share gains, observes Petra Capital.

It’s felt management will capitalise on current trends for IT innovations and market convergences, as well as the movement toward the latest product replacement cycles and IT consumption rates, driven by economic factors.

Recent efficiency initiatives are also ready to gain traction in the current quarter, according to the broker, enabling the company's track record of above-system sales and EPS growth to continue over the medium-term.

A marked increase in Dicker Data's distribution capacity is set to come fully online in the second half of this year, note the analysts.

Back in March, the company announced the opening of its new headquarters and distribution facility, located in Sydney’s south.

Stage two of the warehouse expansion works commenced in the fourth quarter of 2022 and is expected to be completed in the second half of 2023, representing a further 70% increase on Stage 1 in warehouse capacity.

Moreover, Petra Capital expects increased operating leverage from management’s renewed focus on extracting efficiency gains/synergies from recent acquisitions, particularly Exeed in New Zealand.

The broker is Buy-rated on Dicker Data and has a $10.38 target price.

First quarter earnings result and operational trading update

In early-May, Morgan Stanley noted several positives for the outlook, when management delivered first quarter results, though conceded some questions would be asked about the underlying growth trajectory, given implied underlying revenue was flat on the previous corresponding period.

This broker acknowledged PC headwinds for Dicker Data and downgrades by offshore peers, and suggested upcoming catalysts regarding clarity on the company’s organic growth and working capital stabilisation would probably have to wait for the second half of the year.

While there was no update on working capital, management pointed out supply constraints had eased, leaving the analysts expecting improvement into the third quarter.

Morgan Stanley also anticipated “operational refinements” in the first quarter would represent upside over 2023. This fine tuning included redundancies, which implied annual cost savings of -$2-3m.

Moreover, management expected the DAS business would turn profitable from the second quarter, following a focus on cost rationalisation. 

Dicker Data acquired the Security and Information Technology (SIT) distribution division of Hills Security in May of 2022; it was rebranded as Dicker Data Access and Surveillance.

This broker remained Overweight-rated on long-term potential and kept its $10 target price.

The Q1 trading update was consistent with expectations by Goldman Sachs (Neutral, target $9.50) for softening Hardware demand through 2023. Gross profit margins of 9.2% were considered solid, offset by higher interest costs.

Management announced a 10c dividend, in-line with the broker’s first half forecast of 20cps, with the company re-committing to paying out 100% of net profit after tax on a quarterly basis.

Outlook

Back in early-May Goldman Sachs anticipated SME Hardware demand would likely deteriorate in subsequent months as economic growth slowed.

This slowing of demand for Dicker Data was expected to partially offset profit margin improvements from acquisition synergies and interest costs, via improved working capital management through the remainder of 2023.

Petra Capital expects the second quarter for Dicker Data will provide an inflection point, reflecting the compounding benefits of recent efficiency measures.

The average target price of Petra Capital, Morgan Stanley and Goldman Sachs is $9.96, which suggests just over 18% upside to the latest share price.

On current forecasts, the shares offer forward-looking dividend yields of 5.3% (FY23) and 5.9% (FY24), respectively.

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