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Why the DWS Ltd share price is down today

The share price of information technology services company DWS Ltd (ASX: DWS) is down 5.3% to $1.525 in morning trade after the company delivered an uninspiring half yearly result for the period ending 31 December 2017.

Key highlights from today’s release include:

  • First half revenue was down 16% on the prior corresponding period (pcp) to $61.67 million (down 3% on H2 FY17).
  • First half adjusted earnings before interest, tax, depreciation and amortisation was down 13% on the pcp to $11.85 million.
  • First half net profit after tax rose 12% to $10.13 million
  • Earnings per share increased by 12% to 7.69 cents.
  • A fully franked interim dividend of 5.0 cents per share is payable on April 4.

What happened?

Management attributed the lack of top line growth to a tight labour market for digital specialists and a renegotiation of panel agreements with key clients that led to DWS being reappointed but with lower rate cards.

The bottom line result was mitigated by a writeback of the Symplicit Earn Out provision as the Earn Out target is unlikely to be achieved. The company managed to exercise strong cost control with adjusted EBITDA margins rising from 18.5% to 19.2%.

DWS also paid down a significant amount of debt with net debt declining to $2.75 million at balance sheet date. This led to net interest expense declining from $368,000 to $112,000. The company continues to pay out most of its earnings as dividends with the interim dividend of 5.0 cents representing an 80.5% payout to adjusted net profit after tax. At current prices, the company trades at a lofty dividend yield of 6.56% which is attached with full tax credits.

Should you invest? 

The stock remains a yield play given the lack of growth in the underlying business. The second half  of FY18 will reflect the impact of lower rates due to the renegotiation of panel agreements, strong cost control, and further repayments of debt in lieu of suitable acquisition targets. The fall in the company’s share price this morning is unsurprising given the outlook. Investors searching for capital growth might want to look elsewhere for companies with more compelling growth prospects.

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