Dicker Data Preps For PC Refresh Cycle Upswing

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

Analysts see value in Dicker Data shares based on second quarter momentum and potential upside to PC sales.

-First half miss for Dicker Data, but gathering momentum
-Profit disappointment and elevated inventory explained
-Upside from PC refresh cycle and AI-related features

By Mark Woodruff

Post the August reporting season, analysts suggest investors overlook Dicker Data’s ((DDR)) slight first half profit ‘miss’ and instead focus on gathering sales momentum in the second quarter along with upcoming benefits from the PC refresh cycle with additional tailwinds from the new generation of PC’s designed to handle AI and machine learning tasks more efficiently.

The share price is currently range-trading around $9.00, not far above the 52-week low of $8.68 having peaked at $12.76 in February this year, and at $16.00 during the post-covid run-up.

Sales in the second quarter lifted by 9% on the prior quarter while gross margins remained strong. As this was noticeably better than UBS’s 2% growth forecast, this broker has upgrade its rating to Buy from Neutral.

First half pre-tax profit of $50.8m still marked a -7% year-on-year decline and missed the consensus forecast by -6% largely due to higher employee and interest costs.

Higher rates and higher debt saw interest costs rise by 28% to $12.1m.

More positively, with the gross margin percentage holding its ground in the second quarter, analysts believe management is not discounting product to generate sales.

Jarden sees upside risk to its own earnings forecasts given management’s ability to grow second quarter revenue by 8.6% year-on-year despite facing macroeconomic headwinds and tough comparisons after losing the Autodesk distribution agreement.

Goldman Sachs also highlights the loss of the Dahua distribution arrangement in the first half but expects additional incremental revenue leading into the end of 2024 due to the signing of new vendors such as Adobe in Software.

Existing key product vendors include the likes of Microsoft, Samsung, LG, and Hewlett Packard.

Dicker Data is a wholesale distributer of computer hardware, software, cloud, access control, surveillance, and technologies in Australia and New Zealand.

The New Zealand business more than offset macro weaknesses with market share gains and demand for cloud and cybersecurity, though small-to-medium business (SMB) demand remained subdued, Petra Capital highlights.

Apart from the potential upside from the refresh cycle and AI computers, the analysts note improving SMB engagement, receding macro headwinds benefiting the company’s broader hardware portfolio, as well as AI filtering through the rest of the ecosystem, with servers and software key beneficiaries.

Current valuation and management’s record suggest upside

Given long-term structural tailwinds, shares of Dicker Data represent good value, Jarden’s opines.

The current relative valuation has de-rated with the next-twelve-month P/E ratio now less than 21x times on the broker’s estimate, when the shares have traded at a significant premium over the last two years.

Petra Capital’s pre-tax profit margin estimate of 5.1% (of net sales) could prove conservative if revenue and associated operating leverage exceed the analyst’s current expectations, with PC sales considered the key catalyst.

This broker expects management’s track record of above-system sales and EPS growth will continue over the medium-term.

First half profits and inventory

UBS attributed the first half profit miss to a higher-than-expected increase in headcount to support major new vendor wins plus an around -$2m worse-than-expected bad debt provision expense.

After adjusting for this provision, profit was in line with the consensus forecast, highlights Jarden.

Second quarter revenue growth reflected increasing demand across several product categories and further market share gains, highlighted Petra Capital.

While working capital was slightly elevated as management invests in inventory ahead of expected revenue growth in the second half, Goldman Sachs pointed out this was a healthier dynamic than the supply chain driven build-up during covid.

Morgan Stanley suggested there may have been some sticker shock from higher-than-expected prices as management takes inventory ahead of the PC refresh cycle.

The inventory balance is expected to normalise towards year’s end as large deals convert and sales cycles reduce, explains Goldman.

Management has not provided explicit second half guidance but expects the business will return to growth in revenue and profit.

Goldman Sachs found gross margin commentary was constructive, with mix shifts towards larger, lower margin Enterprise deals placing downward pressure on the gross profit percentage during the first half.

The average target price of the three covering brokers in the FNArena database has risen to $10.57 from $10.45 following first half results. This level suggests around 18% upside to the latest share price.

UBS and Citi are Buy rated while Morgan Stanley remains on Hold.

Outside of daily coverage, Jarden and Petra Capital have Buy ratings while Goldman Sachs sticks with Neutral, with an average target price across these three brokers of $10.37.

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