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Jens Montanana, CEO of Datatec – South Africa’s largest listed IT company – said there are still opportunities to unlock significant value for the group’s shareholders, even after returning billions of rand to investors in the form of dividends over the past three years.
Speaking to TechCentral ahead of the publication of Datatec’s interim results for the six months ended 30 August 2024 on Thursday, Montanana said the group has been “wildly undervalued” for the past 15 years, and management remains focused on ways of unlocking the value it believes, for various reasons, has become trapped.
And Montanana, 63, is putting his money where his mouth is: he’s upped his personal stake in Datatec – which was listed on the JSE 30 years ago this week – to about 17% (from 13.5% three years ago), for a paper wealth of roughly R1.5-billion in the company’s shares.
Datatec on Thursday reported a strong financial performance in its latest six-month period, despite a small decline in revenue, with both of its principal subsidiaries, IT/networking distributor Westcon and IT services business Logicalis, turning in good profit growth and margin expansion, with headline earnings per share rising by 66.7% in dollar-reporting terms.
The group declared an interim dividend of 75c/share and the share price rose 3.5% in intraday trading on Thursday on the back of the numbers. However, the shares are still trading at a deep discount to the valuations attached to similar businesses internationally, Montanana said.
The biggest corporate action aimed at unlocking shareholder value in recent years came in 2022 when the group sold its controlling 70% stake in Analysys Mason for about £140-million in cash to private equity firm Bridgeton Development Capital. The proceeds of the sale were returned to Datatec shareholders in the form of a special dividend.
“We sold it for 33% of our market cap [at the time] – it was 7% of our profits for a third of our market cap,” Montanana said.
Westcon and Logicalis
What’s left are two big businesses: the Westcon IT/networking distribution entity and Logicalis, a global IT services firm. Although 98% of Datatec’s revenue and 99% of its profits are generated outside South Africa, it remains listed here for one important reason: most of its shareholders are South African, Montanana said. Though a listing in the US – perhaps on the tech-heavy Nasdaq – might lead to a better rating on the shares, Montanana said the company would struggle to get noticed in a market of that size. “We’d be invisible,” he said.
So, to unlock further value for shareholders, Montanana and his management team are considering other options, though nothing is being actively discussed. One option might be some sort of corporate action, including a merger with a large global player or the outright sale of another subsidiary, à la the Analysys Mason deal. A listing elsewhere is unlikely given the compliance requirements and costs.
Read: Datatec to sell Analysys Mason for as much as R4.1-billion
Even without corporate action, the underlying businesses are performing well, Montanana said. Westcon, which recently successfully implemented the SAP enterprise software system (after some major teething problems), has seen a big jump in operational profitability, lifted by a shift from hardware sales to software and services. Cybersecurity solutions have been a stellar performer for Westcon, and now makes up 45% of sales – above networking, which has slipped to 38%. This has provided a good uplift to profit margins.
One problem area has been Latin America, where Logicalis has come under severe pressure, in part because business from telecommunications operators – a key client segment – dried up when the Covid pandemic hit. It was also too reliant on a small number of large clients. A previous plan to list Logicalis in Latin America – again aimed at unlocking value for shareholders – has been scrapped, for now.
One reason for Datatec’s depressed share price, Montanana said, is a function of the South African market, which global investors have avoided like the plague. Also, Datatec shares are tightly held, with only a handful of large shareholders, including the Government Employees Pension Fund, M&G Group, Sanlam, Old Mutual and Ninety One.
“We have a handful of shareholders who are all close to me in their percentage holdings and have been there a long time. But ‘tightly held’ equals ‘low liquidity’. For buyers, you need sellers… You need rotation among big shareholders to smaller shareholders. This problem is not unique to us.
“Our focus remains closing the valuation gap and focusing on corporate actions – whether it’s dividends or disposals. We are alert to all [options],” he said.
Just how big is the valuation gap? “It significant, which is why I keep accumulating [shares],” Montanana said. – © 2024 NewsCentral Media
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