Small Caps | Dec 03 2024
New research suggests Dicker Data is set to benefit by providing tools enabling business access into the rapidly expanding generative AI market.
-New research on Dicker Data highlights PC upside
-Demand to lift via PC refresh, AI-enabled devices, Windows 11 upgrades
-Macroeconomic backdrop to delay benefits, says Wilsons
-Recent upbeat technology vendor commentary
By Mark Woodruff
Recognising a significant opportunity in the growing generative AI market, management at IT distributor Dicker Data ((DDR)) regards the business as a picks and shovels' provider with the launch of AI-enabled PCs set to supersize the upcoming refresh cycle following heightened purchasing by customers during the pandemic.
After peaking at $16 in August 2021 during this period of amplified demand, the company's share price has steadily declined and is currently trading at around $8.40.
AI-enabled PCs have been introduced this year on the back of, for example, Intel's new 14th generation Core Ultra Processor. Also, the new iPad Pro now includes a new Apple chip, called M4, designed for AI computing.
In new research coverage this week by broker Wilsons, the analysts suggest the end of Windows 10 support in October 2025 should provide a further catalyst for the return of PC growth as old PCs ineligible for a Microsoft 11 upgrade will need to be replaced assuming users want to retain Windows support.
In Australia, Microsoft has estimated around 4.4m ineligible PCs, which compares to the 4.2m of PCs purchased in 2023, a fall of -10% from 2022 due to the normalisation of sales post covid.
For now, the macroeconomic backdrop is challenging, and will likely remain so for some time, notes Wilsons, anticipating the company's core customers of Corporates, Commercial and Enterprises will defer purchasing as they focus on returns.
These risk-averse customer segments may take time to evaluate GenAI, its potential value, and how the technology integrates with their existing IT systems, suggests the broker.
Dicker Data stands out with significant economies of scale compared to its peers, holding approximately 35% market share in the Australian corporate, commercial, and enterprise IT market, and 29% in New Zealand.
Operating across both regions, the company serves as a wholesale distributor of computer hardware, software, cloud solutions, access control, surveillance systems, and other technologies.
The Dicker Access and Surveillance (DAS) business (greater than 20% gross profit margin) is a significant segment of the company, observes Goldman Sachs, focusing on the distribution of access control and surveillance products.
Following first half results for Dicker Data in late-August showing pre-tax profit (PBT) margins of between 3-4%, this broker forecast likely 10% gross profit margins in coming years, based upon growth in the DAS business and a cyclical recovery in SME IT spending.
Noting higher profit and earnings margins in Australia, Wilsons anticipates an easy win should management leverage learnings derived from its Australian business and apply them in New Zealand.
Courtesy of more than 12,300 partners, the company distributes a wide range of products from the world's leading technology vendors including Microsoft, Dell, HP, Cisco, and Lenovo.
Recent commentary from management of these vendors (apart from Cisco) was upbeat during quarterly reporting, notes Wilsons.
This broker suggests rebounding demand for Dicker Data's products could be implied from such vendor observations as stronger device growth, the APAC region becoming the strongest geography, and rising growth for the Commercial segment.
According to Goldman Sachs, new vendors signed through the first half of FY24 (including Adobe in Software) should also add incremental revenue into the end of 2024.
Dicker Data's revenue growth in 2023 fell below the overall Information and Communications Technology (ICT) industry largely because of the company's greater weighting to PC sales, notes Wilsons, which were negatively impacted by the pull-forward of demand during the pandemic.
Wilsons forecasts the decline in PC shipments will ease within the next twelve months, enabling the company's revenue growth to accelerate above trend as the pull-forward headwind shifts to a tailwind with the onset of the PC refresh cycle.
First half results
Increased headcount investment to support major new vendor wins plus a circa -$2m higher-than-expected provision expense caused the first half profit to miss forecasts, explained UBS.
Excluding bad debt provisioning, earnings would have aligned with Morgan Stanley's expectations.
Despite overall results coming in slightly below consensus forecasts, the analysts at UBS gained more confidence in the top-line growth trajectory into both the second half and FY25.
Supporting management's expectation for second half profit growth, this broker noted falling headcount investment in the second half of 2024 should support operating expenses as a percentage of sales easing to 5.4% from 5.7% in the first half.
Petra Capital also pointed to a second quarter growth rate of 8.3% reflecting increasing demand across several product categories and further market share gains.
Certainly, management expects both revenue and profits will return to growth, driven by the much-anticipated PC refresh.
Positively, Citi noted management did not resort to discounting in an effort to generate sales, and, agreeing with Petra Capital, highlighted strong second quarter gross sales indicated demand was returning.
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