DataTec | Normalising central costs

Datatec trades at a c.42% discount to our c.ZAR40ps value for Logicalis alone, implying a negative c.ZAR17ps value for both Weston International and the consulting business. Datatec sold a 10% stake in Westcon International to Synnex in FY'18 for USD30m, implying a value of ZAR16ps for the remaining 90% of Westcon International that it owns. Our estimate of the SOTP value of ZAR36ps is masked due to high central operating costs in Westcon International (FY'18: USD61m pa), which lowers HEPS in the short-term. However, management is likely to reduce central cost by USD16m to USD45m in FY'19, with the cost saving falling to the bottom line. For FY'19, we estimate that the Group will generate underlying HEPS of USD8cps with a rolled forward PE of 14x.

The elevated central costs followed a poorly executed BPO/SAP implementation strategy. The remaining Westcon operations had to carry central cost for Westcon Americas for 12 months after the disposal. We expect central costs to normalise to USD33m in FY'20, a reduction of c.46% since FY'18. Combined with improving EBITDA margins in Westcon International, we forecast earnings to double over the next two years. In addition, we forecast the discount to the SOTP to unwind in line with accelerating financial performance.