IT distribution company that is scaling its business to new highs, 5G additional kicker

The world has seen many virus outbreaks and health disasters in the past with the Ebola virus, H1N1, Spanish flu, to name a few. Technology may not stop further outbreaks in the future, but it can play a significant role to keep the world moving. The Coronavirus has made the world realise the importance of technology to keep things going. This pandemic has exposed traditional businesses’ weaknesses and made them more vulnerable than the online or digital businesses. As a result, many businesses are ramping up their technological infrastructure to keep them afloat and sail through these rough times. As PM Scott Morrison stated in his latest address in Australian e-Commerce Virtual Summit, almost 40% of the businesses in Australia have bought software for remote working during the pandemic. The IT industry has been the driving force behind this radical transformation. Some companies like Dicker Data Limited (ASX: DDR) are well capitalizing on this opportunity by providing the required infrastructure for seamless integration of businesses processes. By converting this pandemic into an opportunity, Dicker Data has scaled up its business to new highs. DDR vs AXJO vs AXIJ (Source: Refinitiv Eikon Thomson Reuters) The stock price has zoomed up by 153% from its March 2020 lows. Equally the fundamental news flow from the company has validated the investor sentiments. In the past 5 years the company has handsomely beaten both the sector benchmark index and ASX200. Dicker Data Dicker Data is 42 years old, Australia based technology hardware, software and cloud distributor. The company is specialized in providing tailor-made technology solutions to businesses of any scale. The “Customer First” approach has led the company to garner a massive base of over 5500 partner resellers. The company has consistently increased its revenue in the past 5 years, accompanied by an uptick in gross profit. Data Source: Refinitiv Eikon Thomson Reuters The company’s stronghold in the industry can be estimated with the list of its technology vendors which includes Cisco, Microsoft, HP, Dell Technologies. Strong revenue growth In HY20, the company posted a healthy increase of 18.1% in the revenue, from $852.0 million to $1,006.1million. The recurring revenue from the software grew to $224 million, a good 53.1% growth. At the country level, Australia and New Zealand contributed 17.2% and 31.9% to the revenues, respectively. Image Source: Dicker Data’s ASX Update Incremental revenue of $26.3 million in HY20 was added due to the addition of new vendors in FY19 and HY20. The total YTD revenue as of September 2020 stood at $1,481.5 million, up by 14.9%. Green numbers are shining across the board. The Gross profit increased by 24.8%, from $77.3 million to $96.5 million, driven by growth in the revenue and improved margins. The Gross margin notched up by 0.5%, from 9.1% to 9.6%. The company has been able to bring down the operating cost as a proportion of revenue due to increased sales and improved operational efficiency. Image Source: Dicker Data’s ASX Update Profit before tax increased from $32.2 million to $42.0 million, a healthy increase of 30.2% and YTD profit before tax grew to $60.8 million. The net profit increased by 23.6% to $29.4 million in HY20. Image Source: Dicker Data’s ASX Update The balance sheet also stood strong and total assets increased from $507.5 million to $577.6 million, majorly contributed by an increase in PP&E, net and accounts receivable. Total liabilities increased marginally from $412.5 million to $419 million. The total equity at the end of HY20 stood at $158.6 million, an increase of $63.5 million from PcP. The company has maintained strict working capital discipline during this growth phase, from $165.4 million to $162.1 million. Capital structure The company’s strategic thinking has resulted in a Judicious blend of debt and equity, which has been the foundation of robust financial planning. In May 2020 the company completed its $50 million share placement which was followed by another share purchase plan (SPP) of $15 million in June 2020. The net proceeds have been strategically invested in the growth of Dicker Data Financial Services. The construction of a new facility and payment of the short-term debt has also been taken care of by this fundraising. New Facility update In August 2019, the company announced its plans to sell its existing distribution facility for $36 million to make its way to build a much larger facility. The construction has been near its completion stage with 90% of work being completed. The remaining 10% of the work is expected to be completed by the end of the year. Image Source: Dicker Data’s ASX Update The facility is expanding the warehouse space from the current 13,000 sqm to 23,500 sqm in the first stage. Another 20,000 sqm of warehouse space is to be built as part of a second stage for the future expansion, after approval by development authorities. The total cost of the project is estimated at approximately $55 million, including the fit-out cost. Dicker Data’s market share and leading strategy The company has a niche in mid-market and SMB communities with an added focus on value-added services, pre-sales capabilities, and emerging hybrid end to end technology solutions. It has also increased its focus on distribution agreements in software and high-end enterprise products for cloud computing. Image Source: Dicker Data’s ASX Update The company has a 20% market share in the Australian IT distribution market, making it the third-largest player after Ingram Micro and Synnex. However, if only large clients are considered which includes corporate, commercial and enterprise, then the company leads at the no.1 spot with 27% market share. Prestigious base of Vendors marks the company's’ presence. Dicker Data’s vendor list is what increases the credibility and makes it a dominant name in the industry. These vendors have helped the company to achieve consistent growth in the revenues. Some of the names include Sony, LG, Lenovo, Cisco, and Microsoft. Some of the new vendors that have been added in 2020 are Synology, StarWind, Sinefa, and Barco. A consistent increase in the vendor list reduced the revenue concentration. Due to the consistent increase in the vendor list from across the board, the company has been significantly able to reduce the concentration of revenue from a few vendors. This has reduced the reliance on a few vendors for revenue and made the revenue steam more consistent and less prone to drawdowns. Image Source: Dicker Data’s ASX Update To put it in perspective, in FY12, a massive 90% of the revenue was coming from the top 5 vendors, which in FY19 has reduced to 57%. The key objective in the FY20 is to continue the growth in vendor list to diversify the concertation of revenue. Outlook The last quarter of FY20 is going good with increased demand on account of business growth strategies being adopted by businesses post COVID-19. In the next quarter, the company would be focusing on supporting businesses with their “return to work” strategies. In the coming 1 to 2 years, the company expects a revolutionary effect on the industry amid the rollout of 5G connectivity which would explode the data consumption. It is well prepared to take advantage of this transformation with its hardware and software vendors. The development of a new distribution facility would be another catalyst, increasing the capacity by almost 80% in the first stage. This expansion will pave the way for significant inventory growth and technology portfolio diversification to cater to the emerging needs. Stock Performance Being the 3rd largest player by market share in Australia, a consistent increase in the vendor list, revenue crossing $1 billion mark, all is being reflected in its share price as well. The stock has already delivered a good return of 63% in the last six months, and the YTD return is 46%.

IT distribution company that is scaling its business to new highs, 5G additional kicker

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