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Why the Data#3 share price is printing record highs

The Data#3 Limited (ASX: DTL) share price is up 4.4% to a record high of $2.12 in Thursday’s trading session. Shares in the information technology services and solutions provider have been on a strong run recently despite no material announcements being released to the market since the company’s half-year result in February. 

DTL’s share price has notably broken out following the result of last month’s Federal Election. Data #3’s share price has climbed 19.8% compared to the broader market’s 2.9% rise since the close of trade on May 17.

The result of the Federal Election means there will be no changes to taxation legislation regarding the refund of excess franking credits to eligible taxpayers. As a result, income stocks such as Data#3 that pay out the majority of their earnings as fully franked dividends would become more appealing investments to certain types of investors. Self-managed superannuation funds in pension phase would be particularly attracted to stocks that pay fully franked dividends. 

Outlook

2019 has been a strong year for Data#3 with its share price up 41.3%. It has comfortably outperformed peers such as DWS Ltd (ASX: DWS) and RXP Services Ltd (ASX: RXP) in the small-cap information technology space. 

The company reported a solid set of numbers at its half-yearly in February. Total revenue was up 17.7% to $644.4 million with net profit after tax climbing 126.7% to $6.1 million. Earnings per share rose 126.7% to 3.99 cents and Data#3’s interim dividend increased 125.0% to 3.60 cents (fully franked). Whilst the headline numbers look spectacular, investors should note that the prior corresponding period was unusually soft for the company as it was impacted by a number of one-off events and some operational issues. 

Data#3 is a reasonably solid investment for income investors that are comfortable with the risks involved with investing in small caps. However, the strong rise in the share price has propelled the company’s valuation to around 19 times consensus FY19 earnings of 11.10 cents per share. This is a higher multiple than what the company has historically traded on which also means the dividend yield has fallen. Thus, investors may want to wait for a more attractive entry point from a valuation perspective before buying DTL stocks.

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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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