Data#3: A great start to CY22

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

18 January 2022, 12:00 PM

Sectors Covered:

Telecommunications, Technology

• Data#3 (ASX:DTL) have upgraded 1H22 PBT guidance from previously $15-18m to $18.1m. This shows an impressive 30% yoy organic growth from DTL.
• Using the mid-point of DTL’s prior guidance this equates to a 10% upgrade.
• We upgrade our full year forecasts by ~3%. These numbers should leave a margin for error/upside risk as if we were to apply a ~38% 1H PBT skew as per the previous two years, our upgrade should be bigger. Offsetting this argument is the fact that there remains chip and supply chain challenges which could impact 2H22.
• We retain our Add recommendation and upgrade our price target to (login to view).

1H22 guidance ~10% ahead

At their AGM in late October 2021 DTL guided to 1H22 PBT of $15-18m. This was inline with Morgans prior estimate of $16m. Today DTL have upgraded their guidance and now expect PBT to be “slightly ahead of the top end of the $15-18m guidance range”. This equates to an impressive ~30% year on year organic growth.

We upgrade our 1H22 PBT forecast to $18.1m.

Analysis

DTL had a strong start to FY22 due to some carry over from 2H21 as supply chain challenges prevented delivery. Consequently, 1H22 has benefited from a $3m PBT carryover from 2H21.

1H22 PBT will be up ~30% yoy organically including this benefit. If we take the $3m PBT carry over benefit out of DTL’s 1H22 PBT, then DTL would have reported $15m PBT, up ~8.5% yoy. However, we do not think this is a fair argument as supply chain challenges and chip shortages have not yet been resolved, so further delays could have negatively impacted 1H22 PBT.

In FY21 62% of DTL’s revenue was recurring and ~75% of that revenue is not linked direct to hardware challenges. A large portion of DTL’s revenue is linked to areas of ICT like software and Cloud which are arguably growing at a record pace.

Industry analysts at Gartner forecast Australian ICT growth of 6% in CY22. IT services is expected to grow at 8.6% in CY22 with the other key areas of growth being enterprise software, data centre systems and device and communication services. This record growth is driven by an increasing need for digital transformation, remote working and scalability.

DTL is very well positioned in these higher growth areas – having one of the largest Australian owned and operated IT services businesses. DTL are seeing the benefits of their competitive positioning in their results.

Forecast and valuation update

We upgrade our PBT forecasts by ~3% with potential for further upside. Our price target increases ~3% (login to view) and we retain our Add recommendation.

Investment view

We upgraded our DTL recommendation to an Add in October 2021 and remain comfortable with our Add recommendation.

We view DTL as a high-quality company which is one of the best positioned on the ASX to deliver on areas of ICT where there is elevated end customer demand.

Price catalysts

DTL will release their formal 1H22 result on 17th February 2022. Details from this result will be helpful for investors to understand what is happening under the hood.

However, we do not expect DTL to provide any specific FY22 guidance in the February result. We expect a FY22 trading update in July 2022.

Risks

Supply and demand equation. Declining supply and increasing demand means finding the right equilibrium is likely to remain challenging. DTL is better place than most to work through these challenges but is not immune.

Earnings volatility remains a challenge for DTL. A substantial portion of earnings fall in the June and December periods. This is sometimes subject to supply/demand challenges which can positively or negatively impact EPS.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.