Refreshing Outlook For Dicker Data

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

The company is included in ASX300, ALL-ORDS and ALL-TECH

After a tough three years, the outlook is brightening for IT solutions provider Dicker Data as signs appear the long-awaited PC refresh cycle has begun.

-Dicker Data’s 2024 numbers fell in line with expectations
-Sales trajectory better in the fourth quarter and into 2025
-Long-awaited PC refresh cycle to provide tailwinds
-Dicker Data among analysts’ Best Ideas for the year ahead

By Greg Peel

Dicker Data ((DDR)) is Australia’s leading locally-owned and operated distributor of ICT (information and communications technology) hardware, software, cloud and IoT (internet of things) solutions for reseller partners.

Over the past 45 years, notes the company’s website, Dicker Data has been helping Australian partners of all shapes and sizes to design, configure and implement solutions for their customers and to successfully transition their businesses through technological change. The company also now operates in New Zealand.

Dicker Data has had to navigate three years of earnings headwinds, due to macroeconomic headwinds, interest rate hikes impacting the company’s bottom line and subdued spending among high-margin small and medium business (SMB) customers, and due to simple post-covid demand normalisation.

As a result, the stock has fallen to a four-year low historical valuation below a near-term PE multiple of 17x.

Improving Trajectory

Last month Dicker Data posted a second half profit result that was broadly in-line with consensus expectation after the company’s fourth quarter dividend was pre-reported. Compositionally, gross margins were softer, impacted by a lower SMB mix, but cost control was better, UBS noted.

The key focus for the market was nevertheless the improved top-line trajectory through the second half, consistent with analysts’ expectations. Sales accelerated from 2% year on year growth in the September quarter to 10% in the December quarter, with similar growth seen through January and February.

Crucially, the much awaited PC refresh cycle is finally coming through, UBS notes, with PC demand (28% of sales) picking up through the fourth quarter and first quarter 2025, including AI PCs, which are higher priced. Dicker Data is outperforming here.

The industry structure also appears to be improving, UBS points out, following the exit of competitor Arrow’s ECS business and Dicker Data recently converting a few existing vendors to exclusive distribution agreements.

Jarden considers now to be the right time to own the shares, given an improving business macroeconomic backdrop which is likely to drive increased SMB activity. The refresh cycle has begun, driven by a larger aged install PC base, Windows 10 support ending in October this year, laptops now being a bigger mix of PCs, AI PCs supporting application service providers, and PC component price inflation.

Jarden further cites ongoing software tailwinds, AI working its way through the rest of the tech ecosystem, ongoing New Zealand margin improvement, Access & Surveillance share gains, and upside offered by potential RBA rate cuts.

The industry outlook into 2025 remains positive, Goldman Sachs believes, with an acceleration in growth into the December quarter and continued momentum into January and February providing a leading indicator of the long-awaited PC refresh cycle.

Management also commented some Global IT distributors had exited the market as vendors were supporting less total distributors, improving the market dynamics and industry position for Dicker Data.

At a category level, management expects all categories to be in growth in 2025, with Software and Retail again to be dominant growth contributors.

Goldman notes softer gross margins in 2024 were impacted by the customer mix-shift to lower-margin Enterprise (20% sales) with an expected return to growth of SMB (80%) in 2025 to support gross margin expansion to 9.8-10%.

The company’s interest expense is based on variable rates with further reductions to interest rates to be a tailwind for earnings, after being a headwind in recent years.

Margins

Dicker Data’s second half gross margin of 9.5% was below the 9.9% achieved in the first half, impacted by subdued IT spending by the SMB sector (high margin customers) and competitiveness on larger enterprise deals (lower margin). However, into 2025 UBS forecasts gross margins improving to 9.7%.

SMB sector spending picked up in the December quarter, but is not yet back to normal, UBS notes, and the PC refresh cycle should continue to see spend improve given only some 10% of SMBs have upgraded their PCs (versus 20-25% of enterprises), New Zealand profit margins are expected to rise to 2-2.5% in 2025 from 1.4% in 2024, driven by increased gross margins (albeit remaining below Australia) and cost leverage.

Management noted at the 2024 result release new consumer retail vendors are being signed at “high double digit” margins. The key source of upside risk, suggests UBS, would be a stronger SMB sector recovery.

While soft sales in 2024 were driven by lower spend per SMB customer, importantly, noted Goldman Sachs, Dicker Data did not lose any SMB customers and increased market share across key vendors, positioning the business well for any industry recovery. Strong growth in Software (7.5%) continues to support recurring revenue as an increasing share of Group sales (now 27%).

The company’s operating expense was higher than expected in the second half, largely driven by an increase in bad debts to $4.3m from $0.7m, reflecting a tougher debtor collection environment. Management expects this to improve into 2025 which implies a cost tailwind, Goldman suggests.

Dividends

Noting that Dicker Data pays dividends quarterly, Morgan Stanley suggests the first quarter 2025 dividend is the key near-term catalyst but also key risk.

The broker sees 2025 consensus forecasts as achievable, but there is scope to be second half-weighted as IT spend improves over 2025 and hardware sees refresh catalysts.

The federal election is a risk, but Morgan Stanley emphasises January and February were strong.

As such, there is scope for the first quarter dividend (annualised) to disappoint, Morgan Stanley warns.

Key Pick

Morgan Stanley was cautious leading into the 2024 result prior to Dicker Data’s fourth quarter dividend, given broad IT spend headwinds had persisted into year-end, the company’s exposure to hardware sales, and SMB exposure would likely be incrementally more affected by cycle headwinds. But as 2024 delivered against that backdrop, the broker feels an earnings base has been found, supporting a recent upgrade to an Overweight rating.

In the wake of the February reporting season, Morgan Stanley has included Dicker Data amongst its key small/mid-cap ideas for which the broker has conviction on the earnings outlook. Morgan Stanley has set a $10.30 target.

Dicker Data is one of Jarden’s two high conviction technology Buy-rated stocks, the other being SiteMinder ((SDR)). Jarden’s base case 12-month total shareholder return forecast is 30%, based on a PE multiple re-rating to the mid-20s, low-teens earnings per share growth, and a 6% dividend yield.

Refresh cycles aside, Jarden believes offshore expansion could re-rate the stock to close to 30x PE. Dicker Data has done a good job taking New Zealand share, the broker notes, although this (deliberately) came at the expense of profit margin optimisation, which is now starting to improve.

Based on its track record in New Zealand, Jarden expects Dicker Data could create significant value by expanding into Asia (post the recent legal entity establishment), which could provide the base for more organic global expansion.

Jarden has a target of $10.88.

Wilsons is Overweight on Dicker Data with a $11.29 target. While it might still be a bit early in the cyclical upswing, Wilsons sees the laptop refresh cycle, the upgrading of hardware relating to cloud and AI-workloads and the Microsoft Windows 10 “end of life” as opportunities for sales growth.

UBS is also among the positive cohort, maintaining a Buy rating post-result with a $10.20 target.

Letting the side down is Goldman Sachs who, while cognisant of the improved outlook and supportive industry tailwinds, considers this largely factored into consensus expectations.

In aggregate, Goldman considers Dicker Data a well-run operation with a strong market position, which limits earnings upside outside of market growth, while noting movements in interest rates as potential near-term earnings catalysts.

Goldman Sachs maintains Neutral with a $9.80 target.

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