Datatec’s Commitment to Closing the Valuation Gap
Jens Montanana, the CEO of Datatec, South Africa’s largest listed IT company, expressed confidence in unlocking significant value for the group’s shareholders. Over the past three years, the company has returned billions of rand to investors through dividends, yet Montanana believes there is much more potential to be tapped.
Montanana highlighted the company’s perceived undervaluation over the past 15 years and emphasized management’s ongoing efforts to unlock this trapped value. To demonstrate his commitment, Montanana increased his personal stake in Datatec to approximately 17%, translating into a substantial paper wealth in the company’s shares.
Despite a slight decline in revenue during its latest six-month period, Datatec reported strong financial performance. Both its principal subsidiaries, IT/networking distributor Westcon and IT services company Logicalis, showed commendable profit growth and margin expansion. Headline earnings per share saw a significant rise of 66.7% in dollar terms.
Datatec declared an interim dividend of 75 cents per share, and its share price saw an increase of 3.5% in intraday trading. However, Montanana pointed out that the shares continue to trade at a considerable discount compared to international peers.
Strategic Moves and Future Opportunities
The sale of a controlling 70% stake in Analysys Mason in 2022 was a significant move aimed at unlocking shareholder value. The proceeds from this sale were distributed to Datatec’s shareholders as a special dividend. Montanana reflected on this sale, noting the considerable market cap represented relative to profit contribution.
Currently, Datatec’s focus is on its two main businesses: Westcon and Logicalis. Even though 98% of Datatec’s revenue and 99% of its profits come from outside South Africa, the company remains listed locally due to its predominantly South African shareholder base. Montanana remarked that, although a US listing could lead to improved share ratings, it would pose challenges of visibility and compliance costs.
To further enhance shareholder value, Montanana’s management team is considering several possibilities, though no active discussions are underway. Potential moves could include a merger with a large global player or a subsidiary sale akin to the Analysys Mason deal. However, a listing elsewhere appears unlikely given associated challenges.
Operational Insights and Challenges
Aside from corporate actions, Datatec’s underlying businesses are performing well. Westcon recently overcame SAP enterprise software implementation challenges and has seen a considerable increase in operational profitability. This success is attributed to a strategic pivot from hardware sales to an emphasis on software and services, with cybersecurity solutions notably driving up profit margins.
Nevertheless, Latin America remains a challenging region for Logicalis. This area has faced ongoing pressure, exacerbated by a decline in business from telecommunications operators since the onset of the Covid pandemic. Additionally, overreliance on a few large clients has affected operations adversely. A previous intention to list Logicalis in Latin America to unlock value has been postponed.
The South African Market Challenge
Montanana attributed some of Datatec’s share price challenges to the South African market. Global investors have been hesitant, impacting the share price. Additionally, tightly held shares among key long-term shareholders result in low liquidity, complicating trading dynamics. Montanana highlighted the need for share rotation between large and smaller shareholders to address this issue.
“Our focus remains closing the valuation gap and pursuing corporate actions, whether through dividends or disposals. We are constantly evaluating all options,” Montanana asserted, emphasizing the substantial valuation gap and his commitment by continuing to accumulate shares.
