Thursday 31 August 2017 by FIIG Research ripples_on_water Company updates

Dicker Data – on track to meet full year guidance

Dicker Data (Dicker) reported its half year results to 30 June 2017. The group recorded solid growth and reconfirmed its full year guidance regardless of the loss of its Cisco relationship in New Zealand

Main points: 

  • Sales revenue for 1H17 rose 7.2% to $631.7m (1H16: $589.0m), driven by nine new vendors that were on boarded and contributed $17.2m to revenue, while revenue for existing vendors grew 9.4%
  • Total gross profit (excluding other revenue) rose 6.7% to $57.1m (1H16: $53.5m)
  • The gross profit margin fell slightly to 9.0% (FY16: 9.1%) due to market competition
  • Operating costs to income remained stable at 5.4%
  • Free cashflow reduced gross debt by $20m year on year to $100m and net debt to $72.6m (1H16: $98.7m)
  • We also note that cashflow was impacted as the change in financial year delayed an ATO assessment meaning the majority of the FY16 tax was actually being paid in H117 (an additional circa $10m)
  • Dicker confirmed its previous guidance of $40.0m in pre-tax operating profit for FY17

Loss of Cisco distribution in New Zealand

On 15 August 2017, Dicker Data announced the termination its distribution agreement with Cisco in New Zealand. The actual amount is not public however the total NZ business represents about 10% of EBITDA (FY17) and Cisco NZ represents a portion of that. Dicker stated its distribution agreement with Cisco in Australia remains in place and is not impacted by this announcement. Cisco represents a significant (approximately 30%) of Dicker’s total business. 

Dicker intends to restructure the business in New Zealand so that the cost structure is appropriate to the adjusted level of expected revenue from the remaining vendors, whilst also focusing on potential new vendor targets.

The New Zealand market is unique in that it is significantly smaller than Australia and business is transacted through a few major accounts. As such, Cisco initiated a Request for Proposal (RFP) process 12 months ago to reassess its ‘go to market’ strategy in New Zealand. No such similar process has been initiated in Australia nor does Dicker believe that it will be.

In New Zealand, vendors have been reducing distribution agreements with multiple parties in preference to dealing with one industry player. During the past 24 months there has been a lot of change in the market. Industry Magazine Reseller News describes the situation as a “case of swings and roundabouts” for all distributers including Dicker. While losing Cisco, Dicker was recently appointed by Schneider Electric to replace Ingram Micro, and agreed a partnership with TeamViewer in April and announced a pre-Christmas deal with Lenovo.

Source: FIIG Securities, Company accounts

Relative value

Source: FIIG Securities, Bloomberg. Pricing at 31 August 2017. Indicative only 

Dicker has a stable business profile which is a function of its large, entrenched market position, relatively predictable volumes, as well the stability of its margins. However Dicker’s 2020 bond is trading tight compared to its peers and we suggest investors consider switching to a higher yielding option as highlighted above. We also note that leverage levels are likely to increase over the medium term, as the company develops its new warehouse facility – pending the sale of its current headquarters. 

Source: FIIG Securities, Bloomberg. Pricing at 31 August 2017. Indicative only