Here’s why Dicker Data Limited soared today

Dicker Data Limited (ASX: DDR) is one of the top three IT distributors in Australia, but has a surprisingly small market cap of around $186 million.

Shares in the company climbed 11% to $1.61 in mid-afternoon trading, after the company released a positive trading update. Earlier this year, Dicker Data acquired Express Data Holdings, a company that distributes software and hardware products, with very little overlap with Dicker Data’s existing vendors.

Express Data cost Dicker Data $65.5 million, which the company funded through debt. The company says that the acquisition is performing as expected, and is forecast to deliver earnings before interest and tax (EBIT) of around $13 million. That equates to a purchase price of around 5 times earnings – a cheap price it seems for almost doubling Dicker Data’s EBIT. Dicker Data is expected to report EBIT of $15.6 million for this financial year, with underlying pre-tax profit coming in at $14 million.

But the big gains look likely to be made next financial year, when Dicker Data says it expects to generate a pre-tax profit of $30 million, excluding one-off costs. $2.5 million in integration costs are expected, but are forecast to generate savings of around $13 million each year.

In March this year, Dicker Data announced that it was reinstating its dividend reinvestment plan (DRP) to allow shareholders to take dividends as shares, with all directors participating in the DRP.

And while Dicker Data maintains a generous dividend payout policy, with 100% of profits usually paid out to shareholders, the company says it will use 95% of its 2015 profits to pay down debt. So shareholders may miss the generous fully franked dividends next year, but it’s likely to be reinstated in 2016. Paying down debt is a very sensible strategy, and management are to be applauded for it.

So far, Dicker Data has had a strong year, with the share rising 89% compared to the S&P/All Ordinaries Index (Index: ^AORD) (ASX: XAO) 14.7% – not including dividends. And more gains could be ahead, with the company having a bright future.

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Motley Fool writer/analyst Mike King doesn't own shares in Dicker Data, but wish he did. You can follow Mike on Twitter @TMFKinga

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