Listed technology firm Datatec says it is likely to be worth more than it is, compared with its international peers, yet another sign that the local market has failed to take advantage of the global tech boom of the past five years.
Despite managing to orchestrate a turnaround of its operations over the past two years, Datatec group CEO Jens Montanana told Business Day that technology companies are generally underrated on the JSE. It seems to have affected them too.
“We don’t comment directly on the valuation or share price of the company but we’ve been saying for some time that there’s a huge difference between our value and similar companies internationally, Montanana said in an interview.
Having evolved over the past 35 years, Datatec, the operations of which span more than 50 countries, has two main divisions: Logicalis and Westcon International (WI), which distributes security and networking technology products.
The stock is 86% higher than it was a year go at just less than R42, but that is still a far cry from the R137 it commanded at the turn of the century and about half of its almost R77 in 2015.
Much of this negative perception has been attributed to the firm’s international operations — the bulk of its business — which had struggled over the past decade to be profitable, resulting in a series of corporate actions to slim down the group.
By comparison, Telkom — which houses IT business BCX — is valued at R26.2bn, having made about R43bn annual sales. Datatec is only valued at R8.4bn, though it is on track to make almost R70bn on an annualised basis, having made $2.26bn (R34.14bn) in the half-year to August, a 15% increase.
Datatec’s problem echoes the dilemma faced by Altron, whose strategic review a year or so ago found that the value of its UK division, Bytes, was not reflected in its share price. It solved that problem by spinning off and separately listing Bytes UK in London and Johannesburg, handing shareholders more than R9bn worth of shares.
Separately list
As a way to address its valuation gap, Montanana has assembled a team from Lazard, known as the world’s largest independent investment bank, to try finding ways to unlock value.
Datatec has a few options. The company could sell or separately list its main units. As a technology distributor, Westcon International’s peers such as Synnex, which bought up Westcon’s operations in South America in 2017, are trading at enterprise multiples of between five and eight times. Enterprise multiples are a popular tool used to value a business. At the low end of that range, Westcon International would be valued at about $350m (R5.4bn).
Logicalis, as a technology services operation, has a more profitable business model than Westcon. It has peers such as France’s Capgemini and Spain’s Indra Sistemas, which have multiples of six to nine times. Using a conservative 5x, Logicalis would be worth $600m, more than Datatec’s market cap.
Combined, the two businesses would be worth R15bn, if not more given their operation in high-growth markets such as Latin America, which may attract a premium.
Another option would be selling the whole company to a larger group, similar to Dimension Data’s buyout by Japan’s NTT or the current takeover of Adapt IT by Canada’s Volaris.
The company could also continue to improve its operating model and keep its listing on the JSE.
Rand hedge
Analysts say the company could be trading at about R65 a share, spurred by efforts to unlock value in the company.
Martin Lowenthal of The Bulfinch Group, a US-based financial services firm, said that Datatec is trading at just under its net asset value, “with growing revenues and profits”. He said the group’s international base makes it a good rand hedge and that it “could easily be taken private or bought out” at R70-R100 a share.
Peter Takaendesa, head of equities at Mergence Investment Managers, said delivering on the multiyear restructuring programme of Westcon International has gone far to improve sentiment about the group’s prospects.
“They have painted an optimistic outlook for the remainder of the year based on growing order books and the declaration of the 512c special dividend to be paid in November, which is also a sign of management’s confidence on midterm prospects.”
He noted that the market has reacted positively to this improved outlook and expects the company “to remain supported by the recent announcement that the board had hired bankers to advise on a value unlock strategy”.
Lowenthal said that Lazard would not have taken on the task “if they didn’t understand the business and the potential”.
Analysts agree that the Datatec management is highly incentivised to maximise value at exit or disposal of Westcon International, as executives participate in equity proceeds above $125m. The CEO has a further kicker if proceeds above $300m are achieved.
Local investors
Takaendesa said most of Datatec’s peers have been acquired by private equity firms or other peers for global expansion purposes. “If the value unlock will involve disposal at valuations in line with global peers and above the current net asset values of their divisions there could be upside to about R60 per share at the current rand exchange rate,” he says.
Montanana would not say in what direction they are leaning, but said they are happy to stay on the JSE, given their founding and base of local investors, despite tech companies not fetching the valuations seen elsewhere in the world.
“We obviously have operations in SA but 95% plus of our business is worldwide. And if you compare us, our performance has been pretty good in the last two years. So have our competitors, but they’ve really moved in terms of valuation and we haven’t.
“It could also be about the orientation of the JSE. If you look at the US, the UK, and other parts of the world, technology is becoming a bigger and bigger part of stock markets but in SA it’s basically been going backwards for almost 20 years.”
Montanana said “company after company” has been disappearing from the local stock exchange, noting the example of Dimension Data almost a decade ago and Altron’s demerger with Bytes Technology last year.
“It’s a tough question to answer about why technology is so underrated here,” he says.
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