DWS Ltd (ASX:DWS) is an IT Consulting and Software Solutions business, forever Danny Wallis Services (in my head) though apparently it's pure coincidence. Founder Danny Wallis remains the major shareholder and controls the company, but has recently stepped down as CEO. The major way that this company creates value for clients is to allow them to perform their own processes more efficiently. My view is that a lot of the work that once would have been performed by Australian IT consultants will now shift elsewhere, because of the increasing use of cloud data storage and software.
Services historically offered by DWS include project management (bringing in new IT systems), business analysis and information management, data capture, content management systems, boutique software development and data aggregation. IT companies are pretty coy about the impact of the cloud on business, but I'd be surprised if it doesn't reduce demand for some services. Having said that, I also think it could create demand for new kinds of services. However, there's no guarantee that the same firms that dominated the IT consulting landscape in the past will emerge on top after this period of fundamental change.
The company has been shedding staff, and it recently lost a major contract with Telstra. At the AGM last year Mr Wallis said, “Over the past four years DWS has successfully diversified in client base and currently approximately 8% of our consultants are assigned to Telstra. Whilst our preference would have been to be successful with the Telstra RFP we will work hard to continue to diversify our client base and redeploy any affected consultants.” The impact of this loss is yet to be fully felt, and I expect that profit, the dividend and potentially the share price will continue to fall. My feeling is that even if the company does take a big hit, it will recover either by finding new business or letting people go (or both).
I'm not game to buy shares in DWS (yet), but I think if the price gets low enough, there could be an opportunity for contrarian investors. The market seems to be implying that the company will never really recover from the current downturn. If the share price gets much lower, then it will be implying that the company will be shrinking a lot. NPAT for the half to December 2013 was $6.7 million (cashflow was $12.5 million - go figure). Assuming the profit in the next half is around $5 million, the share price could drop even further. If the company drops to a market capitalisation of around $100 million, on a trailing P/E ratio of about 10, with stronger cashflow and plenty of cash, I think it's quite likely that it could be a bargain.
DWS is staying on my watchlist because if I'm going to make any contrarian play, it's going to be a company that has a very solid history of paying a generous dividend. If DWS can stabilise profits, it might become a buy.
The Author does not own shares in DWS. Nothing on this website is advice, ever. The purpose of this blog is to keep track of my decisions and invite feedback
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Hi Damien,
Yep it is definitely shrinking. How are we to know when it will stop?
Hope you're well
DWS certainly looks like keeping an eye on.
LinkHigh earnings multiples, little debt, healthy ROE. But it is shrinking, so the time will come when the shareprice is stable.
"However, there’s no guarantee that the same firms that dominated the IT consulting landscape in the past will emerge on top after this period of fundamental change".
LinkThanks for the post and well summed up Claude.
In my humble opinion, SMX, DWS, DTL and ASZ have all been asleep at the wheel as a transformation occurs in the way IT companies are employed. There has been a fundamental change as you state, and those who adapt quickly will prosper. SMX has made acquisitions (Birchman and Indicium) in the new growth areas of IT services and DWS is pushing into the areas of managed application services / digital automation / business analytics. It would appear that the old IT work (ie. solutions development and integration), is so competitive that margins have shrunk to the point where using offshore labour is the most viable option to supply this service (Philippines and Vietnam that I am aware of).
I continue to hold DWS, but am watching closely to see that they can adapt to this new landscape.
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Hey Claude,
LinkSounds interesting, thanks for the article. I remembered going to a Clime investment seminar last year and they mentioned they have a position in SMS Management, because they reckon IT spending would ramp up soon enough. As for contrarian plays, what do you think of Reckon?
Hi Paul,
LinkI think Reckon is a better contrarian play than DWS, SMX, etc. because it is in software, not in IT consulting. Having said that, the prospect of being caught between a rock and a hard place (Xero, MYOB and Intuit) is quite worrying. If those players all ramp up marketing spend and drop prices in pursuit of volume, Reckon could struggle rolling out Reckon One.
Hi Paul, thanks for your thoughts.
LinkI agree they have been a bit slow to adapt. I also think one possible outcome is that their businesses will permanently be smaller, but does that mean they won't be worth something? With all the big IT consultants increasing offshore workers and letting Australian workers go, it is surely a matter of time before salaries start dropping. That would work to their advantage.