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Why the Data#3 share price is climbing higher

The Data#3 Limited (ASX: DTL) share price has risen 3.1% to $1.65 following the release of its interim result for the period ended 31 December 2018 on Wednesday.

Below is a summary of the results with comparisons to the prior corresponding period.

  • Total revenue rose 17.7% to $644.4 million
  • Public cloud revenues increased 65.7% to $142.7 million
  • Gross margin fell 30 basis points to 12.9%
  • Net profit before tax jumped 123.3% to $9.0 million
  • Net profit after tax rose 126.7% to $6.1 million
  • Earnings per share climbed 126.7% to 3.99 cents
  • The interim dividend increased 125.0% to 3.60 cents (fully franked).

This was a solid result for the information technology services and solutions provider. The top-line growth was driven by digital transformation projects that resulted in product revenue rising 19.2% to $532.2 million and services revenue increasing 11.3% to $111.4 million. The fall in gross margin occurred because of a change in mix from decommissioning the Data#3 Cloud which saw services gross profit narrowly decline by 2.2% to $39.1 million.

Overall, the interim result was in line with January’s trading update when the company announced that it expected net profit before tax to be within the range of $8.5 million to $9.0 million.

Whilst the headline growth numbers on the top and bottom lines are impressive, investors should note that the prior corresponding period was unusually weak for Data#3. The company was impacted by a number of one-off events and some operational issues from its acquisitions of Business Aspect and Discovery Technology. For comparative purposes, Data#3 reported net profit before tax of $8.1 million for the first half of FY17. Thus, the result for the first half of FY19 is a resumption in the company’s long-term growth after a subdued FY18.

Foolish takeaway

Looking forward, Data#3 has a solid pipeline of large integration projects in the second half. The company expects its FY19 result to be less skewed to the second half than in FY18. Moreover, an improvement in Discovery Technology’s profit contribution is expected after it posted a loss in the first half.

Data#3 has reported a solid set of numbers in an increasingly difficult operating environment. The stock has also outperformed other small-cap information technology companies such as DWS Ltd (ASX: DWS) and RXP Services Ltd (ASX: RXP) over the last 12 months.

At around 15 times forward earnings with a dividend yield of around 6%, Data#3 is a reasonably solid investment for income-oriented investors that are comfortable with the risks involved with investing at the smaller end of the market.

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia has recommended Data#3 Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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