Dicker Data (ASX:DDR) HY 2019 Half Year Results Analysis

2019-08-29T22:14:38+00:00

Dicker Data (ASX:DDR) HY 2019 Results Analysis

On Friday last week, IT distributor Dicker Data (ASX:DDR) reported its results for the first half of 2019, demonstrating that it remains a great source of funding for its co-founder’s private race track and superfast racing cars.

Plenty of credit must go to the operational team along with the employees more generally, who have shown in this half what they can achieve if the facility is running at close to capacity. Revenue was up about 19% of the prior corresponding period while earnings per share gained close to 50%, thanks to record-breaking margins.

I agree with my friend Tony Hansen that this is partly a demonstration how cramped they are in the current facility and suggests that expenditure on new staff isn't being made as they don't have the room. Therefore, it seems unlikely this NPAT margin will be maintained as the company gears up for another growth leap with its new facility. In any event, you can see how the profit spiked in the most recent half, in the graph below:

Operationally, it was good to see a good rebound in NZ revenue, which was a key target for COO Vladimir Mitnovetski to improve on after the company suffered a set-back there in losing one distribution agreement, a couple of years ago. In my observation this is a team that usually achieves its stated goals.

Free cash flow came in at $13.8 million, which is obviously below profit, due in large part to a massive build-up of receivables. Cynics among us might quite fairly object to this and in my view the worst decision the business has made in the last few years is to offer “by-the-month payment solutions that can be specifically tailored to suit our partners and their customers’ varying needs” which “will be underpinned by DDR’s own balance sheet”. Ironically, I actually do trust CFO Mary Stojcevski to run this program sensibly, but I nonetheless think it increases risk for the company and probably creates a negative narrative that is suboptimal.

Having said that, I would expect nothing less from the board of Dicker Data who seem to do exactly whatever they want and don’t worry too much about what analysts think. Usually, this would be entirely unacceptable but when you take no salary and pay out 100% of earnings as a dividend then you have proven alignment with shareholders so in my view you earn that right. The main ramification of all this is that if Mary or Vlad quits I think I will sell most or all of my shares in a hurry.

Speaking of dividends, the company maintained the 5 cents quarterly dividend, putting the company on a trailing yield of 3.2% at yesterday’s close of $6.66 (someone has a sense of humour with that pricing). I’m forecasting the dividend to increase, with a final dividend to increase for the fourth quarter, potentially by a meaningful amount.

At current prices, I think that Dicker Data is roughly fairly valued. I could see myself selling some shares at around $7, but I’m not in a massive hurry. I’m not sure if I would be a seller at current prices. It has re-rated by well over 100% since I called it my preferred dividend stock for November 2018. I was buying around that time, with my last purchase in January 2019, and I might be more motivated to sell once a tick past the one year holding period.

Potential Upside

This analysis has characterised the extremely strong improvement in margins as unsustainable. I think that is the case, but also note that the company said, it is “moving even more so to becoming a solution aggregator business focusing on strong value added services for our vendors and partners”. This approach should lead to higher margins, so it is possible that the company will actually be able to keep margins above historical levels. This hypothesis is consistent with the multiple on-market purchases of shares by COO Vlad and CFO Mary, over the last year. If it comes true, I will be pleased.

Potential Downside

Dicker Data is gearing up to move to a bigger facility. This is the correct move as it will allow the business to continue growing over time. However, this kind of transition always comes with risks and is likely to depress profit growth, if not profit itself, during the transition period. As you can see in the chart above, Dicker Data has previously depressed its profit when undergoing a transition period in 2014. Keep in mind that the company has net debt of over $100 million, and historically pays out 100% of earnings as a dividend, which necessitates borrowing. In a period of declining profits (but increasing revenue) the company might face some funding difficulties, although I think that reasonably unlikely. The announced sale of the Kurnell property for $36 million will help in this regard.

Conclusion

I continue to like Dicker Data as a business although I am not likely to be a buyer at current prices.

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Disclosure: Claude Walker owns shares as disclosed and will not trade any for at least 2 days after publication of this article.

This article does not take into account your individual circumstances and contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

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Dicker Data Ltd (ASX:DDR) FY 2018 Results: Record Revenue

2019-03-01T00:24:17+00:00

Dicker Data Ltd (ASX:DDR) FY 2018 Results: Record Revenue

IT distributor Dicker Data released a typically solid set of full-year results yesterday. Revenue rose 14.4% to $1.5 billion, net profit before tax was up 16% to $46.2 million and NPAT improved 20.5% to $32.5 million. A one-off tax credit assisted the NPAT result. You can see below how the improved profit was ultimately a product of record half-year revenue.

Net debt increased 21.3% to $103 million (1.9x EBITDA), operating cash flow dove 70.5% to $12 million and free cash flow tumbled 73.2% to $10 million. Cash flow is volatile in this business because of high working capital (inventory plus receivables less payables) requirements combined with skinny operating profit margins (3.1% in FY 2018).

This means a relatively small percentage move in working capital over a period can overshadow profit and play havoc with cash flow. Over time these moves balance out, assuming working capital remains under control. And this has been the case to date, as you can see below.

Even though working capital is well managed, additional working capital is still required to grow revenue. Therefore, cash flow will fall short of profit whilst Dicker Data grows which is what happened this year even though working capital/revenue fell.

Despite its inconsistent cash flow and respectable growth profile, the company pays substantially all of its profits out as dividends each year. It does this by using debt to finance its working capital position. Total dividends for FY 2018 rose 9.8% to 18 cents representing a dividend yield of 5.5% at current prices.

Although working capital requirements are high, fixed asset requirements are relatively low and so Dicker Data generates a high return on capital (27.6% in FY 2018) and a very high return on equity (41.9% in FY 2018). However, return on capital will moderate over the next couple of years as the company upgrades its warehousing facilities for a cost of around $55 million.

Dicker Data is run by founders David Dicker and Fiona Brown and has provided outstanding returns for shareholders since listing at 20 cents in 2011. The annualised return for those lucky enough to have held since then is approaching 50% including dividends. Including dividends, the stock has returned about 24% since we chose it as our Preferred Dividend Stock for November 2019 in our hidden report for subscribers.

This impressive result is partly due to the lean capital structure described above, skilled and shareholder aligned management and tailwinds in the IT industry. Another factor is a scalable business model which offers customers an ever growing range of IT vendors and products.

The stock trades on an EV/NPAT multiple of just shy of 20 or a P/E multiple of 16 which is reasonable given the quality of the company and secular IT growth trends.

Note from Claude: I have little to add to this other than to remind readers that the founders own most of the business and management incentives are well aligned with shareholders. I thought these results were good.

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Disclosure: Matt Brazier does not own shares in Dicker Data at the time of publication. Claude Walker does own shares in Dicker Data and will not trade them for at least two days after the publication of this article. This article does not take into account your individual circumstances and contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

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Dicker Data (ASX:DDR) HY 2019 Half Year Results Analysis

Dicker Data (ASX:DDR) HY 2019 Results Analysis

Dicker Data Ltd (ASX:DDR) FY 2018 Results: Record Revenue

Dicker Data Ltd (ASX:DDR) FY 2018 Results: Record Revenue