Dicker Data Still PC

Small Caps | Mar 07 2024

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

Dicker data shares fell -10% yesterday but it had nothing to do with the company’s AI-fuelled outlook.

-Dicker Data founder sells a stake, impacting on the share price
-2023 result a bit mixed, but brokers look ahead to improving demand
-AI set to drive a return to growth for PC sales

By Greg Peel

Dicker Data ((DDR)) engages in the wholesale distribution of computer hardware, software, cloud, access control, surveillance, and technologies in Australia and New Zealand.

The company’s product vendors include the likes of Microsoft, Samsung, LG and Hewlett Packard. “As the leading Australian distributor for many of these vendors,” boasts the company’s website, “Dicker Data is dedicated to helping our partners deliver industry-leading solutions built on the world’s best technologies”.

You may not have heard of the company, but it was founded nearly 50 years ago and listed in 2011. Shares in Dicker Data have quietly rallied around 50% since August, including a 9% pop on its result release late last month, but yesterday the shares fell -10%.

A bit of trouble at home, it seems. Yesterday founder, chairman and CEO David Dicker announced he had sold down some 8.3m shares representing around -10% of the company at a discount of a bit more than -9%. It was a single block-trade worth about $90.5m. He sold the shares due to a recent divorce settlement.

The fall in share price yesterday was thus a response to the discounted sale, rather than any issue with the company itself, and the free float has increased to 46% from 36%. Dicker has entered into a six-month escrow on his remaining stake, so for now he can’t sell any more shares.

For the company itself, the outlook is all about a return to growth in sales of personal computers.

The Return of the PC

Like many a company selling things electronic, particularly those suited to a home office, Dicker Data enjoyed solid sales during covid. The share price peaked at just under $15 in December 2021.

But by that time, we’d all bought everything we needed. There followed a slow decline in PC demand, and Dicker’s share price, to a low of $7.50 last July. Inflation and rising bond yields did their bit too. But from there, the outlook began to brighten.

The latest PCs will be needed to access this new fad called AI. Dicker data is a vendor of Microsoft’s Copilot, and of Nvidia chips.

Citi had initiated coverage of the stock earlier in February ahead of the result release, with a Buy rating, observing, at the time, PC sales appeared to be bottoming.

Dicker Data’s PC sales were down -24% in the first half of 2023 and management was expecting the decline to moderate to -15-17% in the second.

With the PC market close to its bottom, Citi expected PC revenue to grow at 7% compound annual rate between 2023-27, supported by a larger installed base from a shift to hybrid working post-covid, further acceleration in the shift to Notebooks which have shorter refresh cycles, Microsoft ending windows 10 support and the release of AI-capable PCs.

The company’s 2023 result showed an increase in gross sales year on year of 5%. That was a miss to analyst forecasts of -1-2%. The surprising slowdown in software sales and the (slight) miss to expectations were nevertheless offset by stronger gross margins.

Looking Ahead

UBS had initiated coverage last July with a Neutral rating, noting Dicker Data is exposed to secular tailwinds driving technology adoption by organisations. The company can continue to outperform, the broker suggested, given its consistent track record of share gains and the ability to create/scale new categories.

With regard the recent result release, UBS suspects the first half of 2024 will represent some revenue uncertainty and sales are likely to remain soft. But the outlook is more positive going into the second half with the potential upside from the PC refresh cycle and customer uptake of AI/Copilot.

It’s a common theme among analysts.

Jarden had initiated coverage back in December with an Overweight rating, suggesting Dicker Data should benefit through incremental software sales and more hardware (endpoint, network, data centre) sales.

While Microsoft Copilot is the most visible opportunity, Jarden expected it to have a modest impact medium term but expected Gen-AI to drive increased cloud, security and copilot-like software sales. While AI's impact on data centres is well understood, Jarden believed the market underappreciated AI's potential to drive higher endpoint and network sales.

In the wake of the result, Jarden considers the second half to be set up well. Dicker Data first navigated a declining gross profit margin post covid highs, then PC weakness, rising interest rates and deteriorating business confidence. Yet all the while the company has delivered earnings growth. Jarden considers this to be strong evidence of the quality of the company and the structural growth in IT spend.

Petra Capital (Hold) noted while Dicker Data delivered modest revenue growth, by its own standards, in 2023, it still managed to report net profit growth of 12% on the back of a good operating performance. This broker expects this trend to persist in the first half of 2024 ahead of a more pronounced recovery in PC sales, which represent some 20% of group sales) in the second half.

Morgan Stanley had listed Dicker Data as one of its key picks heading into result season, and has maintained an Overweight rating thereafter.

There are three brokers monitored daily by FNArena that cover the stock (Citi, UBS, Morgan Stanley) and together they have a consensus price target of $12.80, up from $12.10 pre-result.

Petra Capital set its target at $11.29, while Jarden has increased to $12.61 from $12.31.

One point of note about Dicker Data is that despite being arguably a growth company in the tech space, it has always paid a handsome dividend. The 45c paid in 2023 represented a near-100% payout of earnings and a yield of over 4%, fully franked.

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