DTL (ASX) - BUY ~ 1.73 - SOLD @ 1.80 (31/07)

Company Profile

  • Data#3 Limited (DTL) is an ASX listed company that provides market-leading business technology solutions in a Hybrid IT environment from on-premise to outsourced to cloud across a wide range of industries throughout Australia and Asia Pacific.

  • Data#3 Ltd offers information technology solutions such as software licensing & software asset management; design & operation of desktop, network & data center hardware & software infrastructure; & contract & permanent recruitment service.

  • Historically a re-seller of desktop software, Data#3 is transitioning to a cloud-based software business.

  • Data#3 is a small company with a market capitalisation of $192 million. A growing component of its business is providing cloud-based services. Jargon aside, this means helping customers move from using servers and storage that they manage internally to using servers and storage managed by Microsoft. Microsoft is one of the top three global providers of cloud services, and Data#3 is Australia’s leading Microsoft services provider. It has been in business since 1977.

  • Services: Azure, Backup & Recovery, Colocation, Connectivity, DevOps, IaaS, IT Consulting, IT Security, Managed IT, Office 365, Storage, Virtualization

  • Partners: Cisco, EMC², HP, Lenovo, Microsoft, Vmware

General Thoughts

  • It is in IT sector which has a lot of potential,

  • As the business relies more on human knowhow than on capital equipment, the amount of investment required is quite low. There is only $35 million in equity and no debt. This helps it achieve high rates of return on equity, currently about 37%. It is also spinning off a good amount of cash, with operating cash flow well in excess of net profits

  • With cloud-based software providing higher margins, the company’s change in strategic direction is starting to deliver significant revenue growth for the company.

  • Technically, IT sector is currently Uptrend

  • It is undervalued according to CF method by Simplywall ($1.7 vs. $3.2)

  • It paying high dividend @ 5.09%, higher than market top dividend payers @ 4.9%

  • It has very low level of Debt ~ 2%

  • ROE in 3 year is expected ~ 42%

  • Data#3 has considerable free cash flow which ensures the company is well-positioned from a capital management point of view and to make future acquisitions to supplement existing revenue streams.

  • A bit worry about Net Operating Cash Flow, which decreased significantly from 24,262 (2015) to 6,818 (2016)

  • Plan to accumulate this stock below $2 and hold for at least 6 months

The challenges

  • Thin margins. The net profit margin (net profit divided by total revenue) has been around 1.5% in recent years. This means there is little margin for error. It takes only a small decrease in revenue or increase in costs for there to be a material impact on the bottom line.

Entry Price: $1.73

Brokerage cost: $20

Position Size: 4,000

  • Risk = 1%

  • ATR Multiple = 2

  • Stock ATR Daily ~ 0.06

  • Recommended Quantity = 4,000 shares

  • Initial Buy = 1,000 shares @ 1.73

  • Pyramid #1 = 1,000 shares @ 1.81

Stop Loss: $1.57

Target Price: $3.50

Reasons to Buy


DTL has grown top and bottom lines the past 3 years and also improved revenue quality with virtually no increase to operating costs.Their DCF valuation is about 2x the share price. I took a small position on Friday and will probably add to it over the coming months. Expecting a big kick up when the full year numbers are released (BigLeon_HotCopper)

Fundamental Reasons

Trend Analysis

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