In Brief: Dicker Data, Mineral Resources & Red 5

This story features DICKER DATA LIMITED, and other companies. For more info SHARE ANALYSIS: DDR

A key theme of the latest reporting season has been costs which continue to impact across a suite of companies.

-Dicker Data sets up for a better year end 
-Mineral Resources is feeling the pain
-Red 5 misses but resets expectations

By Danielle Ecuyer

The quote of the week comes from RBA Governor, Michele Bullock.

“”High and variable inflation is harmful because it raises uncertainty and makes it harder to plan for the future. It can distort economic activity, affecting decisions about investment and employment and ultimately hurting productivity and household incomes,”

Multiple factors drive earnings recovery for Dicker Data

Dicker Data ((DDR)) hasn’t caught the AI tailwinds yet, but are the breezes of change gathering for an improved second half 2024 performance?

You bet they are, say Jarden and Goldmans Sachs. The first half of 2024 brought forth some unwelcome higher-than-expected costs for the company which took more than the shine off the share price.

Bad debts rose $2m which the brokers view as a one-off, while a higher headcount pushed up employee costs, and higher inventory levels increased working capital. Margins were also under pressure from the shift to lower margin enterprise customers.

Nevertheless, there is a lot to like about the next 18-months.

The challenging market conditions for small, medium sized businesses experiencing longer than usual cycles should subside as macro conditions improve. PC sales are anticipated to improve with the refresh cycle.

Jarden is positive on this PC refresh cycle due to the aged installed base and Windows 10 support ending. AI will also be lending a hand through the new AI PC offerings coming to market. Similar observations have been made by JB HiFi ((JBH)) and Harvey Norman ((HVN)), as well as Wesfarmers’ Officeworks ((WES)).

Pressure on margins from higher costs should abate as IT spending picks up and Dicker Data’s Access and Surveillance business grows, with over 20% margins.

The loss of the Autodesk and Dahua contracts impacted on the first half. Recently secured Adobe is expected to contribute going forwards.

Goldman Sachs is Neutral rated with a $9.80 target price. Jarden sits at $10.60 with a Buy rating.

Daily monitored brokers at FNArena generate a consensus target price of $10.567 with two Buys (including an upgrade from Neutral to Buy by UBS) and an Equal-weight (Neutral) from Morgan Stanley.

Mineral Resources in the eye of the lithium storm

Lithium and iron prices have been in the firing line with Mineral Resources ((MIN)) in focus for Jarden incorporating one of the catchiest report titles..“oxygen masks will be deployed”.

Is it any wonder Chris Ellison was quoted at the end of August by the AFR as saying it’s the “s—tiest time” to run a business exposed to a prolonged downturn in lithium prices?

While the boss may have admitted challenges, Jarden’s synopsis of the state of Mineral Resources post the FY24 results and FY25 update is sprinkled with irony and concerns. The broker displayed frustration at the ability to gauge just where the company is at strategically when it comes to lithium.

Jarden points to concerns around FY25 production guidance across lithium assets, suggesting the cuts reflect cash constraints and supply side behaviour which is “at odds with well-funded peers lower on the cost-curve”.

Both Mt Marion and Wodgina production guidance was significantly reduced bringing into question whether the joint venture partners motivations are not in the best interest of Mineral Resources shareholders. 

In response Jarden removes Wodgina Train 4 from the valuation model, reducing the net present value by -$6.50/share.

Capex took a steep upwards step in FY25 guidance to almost -$2bn despite production misses. Onslow’s capex is cited as coming in higher than expected.

Post the disappointing guidance, Jarden believes the company’s balance sheet is in “a precarious position”. Too much debt and not enough cashflow as pricing weakness in iron ore and lithium engulfs Mineral Resources.

Goldman Sachs gives Mineral Resources more benefit of the doubt, although the notable company’s 20-year track record could be “tested” over the next few years, the analyst states.

Although the company is anticipated to be cashflow negative in FY25, Goldman Sachs believes a lot of bad news is already in the share price and thus has upgraded the stock to Neutral from Sell with a $43 target price.

Jarden is less than convinced, retaining a Sell rating while slicing the target price to $32 from $44.70.

Red 5 adjusts to a new norm

Red 5 ((RED)) caught a cold at the FY24 results, not because the company missed earnings expectations in the year that was, rather management turned out what was viewed by the market as less than impressive FY25 guidance. Shares declined -12% compared to peers retreating between -1% to -3%, according to Moelis’s observation.

Petra Capital notes the inclusion of Silver Lake for the last 12-days of the fiscal year, which inspired some market enthusiasm and a 50c rally in the share price in the run up, which Moelis highlights has been largely priced out.

The dispersion of sentiment is expected to settle now that management has provided commentary around the outlook.

Moelis expects more guidance from management around the two to three-year outlook but don’t hold your breath as the analyst assesses more internal number crunching needs to take place.

Both Petra and Moelis take the forecasting knife to earnings on the back of the guidance downgrade.

Red 5’s FY25 production guidance of 390-430koz and costs of $2350koz at the mid-point compare with Petra’s estimates of 419koz at $2022/oz. 

Tax charges are expected to be lower with disclosed tax losses in Australia (-$381m) and Canada (-CA$255m).

Although lower cashflow is expected in FY25, Moelis anticipates stronger results from King of the Hills, and “bolstered” production from Mount Monger with a move forward to restart at Sugar Zone.

Post FY24 year-end, the company repaid its debt. Cash on hand was boosted with the sale of RED 5 treasury shares for $136.8m.

Moelis is Buy rated with a 50c target price. Petra Capital sits at 44c, following a -14% revision in the target, with a Buy rating.

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