Fool's Eye View

[ October 4, 2000 ]

Dabbling with Dimension Data

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- Dimension Data (LSE: DDT) is one of a handful of low profile members of the FTSE 100. Many investors probably don't know too much about the company. It is best known for soaring 50% last month on the eve of the day it was due to be included in the FTSE 100 index, due to some unscrupulous souls in the City trying to take advantage of the way index funds work. The price of the shares promptly gave back all of these gains when the shares began trading again on the next day.

A little background

Dimension Data, or Didata to its friends and lazy writers like myself, was set up in South Africa in 1983. It is an IT services company primarily concerned with network services and e-commerce consulting services and solutions. So Didata will come in and help companies set up their corporate networks, intranets and labyrinthine e-mail systems. It will also advise companies how to put their business online. This means the company competes with the likes of IBM (NYSE: IBM), Cap Gemini and, to a lesser extent UK firms such as Logica (LSE: LOG). It floated on the Johannesburg Stock Exchange in 1987. In 1996 it announced its intention to 'go global'. A number of acquisitions followed in the next couple of years in Australia, Asia and the UK.

In July of this year Didata followed the lead of other South African companies such as Anglo American (LSE: AAL), Billiton (LSE: BLT) and Old Mutual (LSE: OML) and listed its shares here in the UK. Didata said this move was aimed at raising the international profile of the group and providing an international market for its employee share schemes. But the group is likely to continue making acquisitions and will find it easier to raise the necessary funds here rather than in the South Africa. It is currently the 45th largest company within the FTSE 100.

Global reach

So what makes Didata different? It says it is one of the largest independent network services firm in the world and one of a handful of players with true global coverage. Its latest results showed 25% of turnover coming from each of Europe, Asia and Africa and some 20% from Australia. So whilst it's true to say their coverage is global some investors might feel a little nervous about half of the group's sales coming from the developing economies of Asia and Africa. There's still potential for great growth of course but the road could be a little bumpy along the way. Other investors may be a bit uneasy that the group's US presence is quite weak, only accounting for 4% of sales.

But unlike many IT companies on the market Didata is already generating substantial revenues and profits. It also has net cash having raised some £800m when it transferred to the London market. Its result statements also show the company's strong cash flows and it is encouraging to see that the company is quick to highlight this is a core strength.

The financial information on its website is complicated by the fact that it is in Rands. But it is quite easy to convert as the exchange rate has hovered around 10 Rands to the pound for the last two years or so. Using this approximate rate, turnover last year came in at £670m and pre tax profits were a touch over £90m. So the company is roughly the same size as the three other IT service companies that are in the FTSE 100 at the moment.

Major IT Service Companies

              Mkt Value       Forward
                     £b     p/e ratio
Logica              9.0            95
CMG                 8.7           103
Didata              7.6            62
Sema                7.2            67

Didata's profit margins look good compared to this peer group. At 13.5% they are about the same as CMG (LSE: CMG), a bit higher than Logica's and roughly double that of Sema's (LSE: SEM). Both Logica and CMG appear to enjoy higher p/e ratios because of their current emphasis on software for mobile companies.

But all these companies are growing swiftly and look set to continue doing so for a number of years to come. The trouble for investors is deciding how much to pay for this rate of growth. Didata's profits are forecast to grow to £150m for the year ended this September and some £230m for the year after that. Turnover is likely to top the £1b mark for the year just ended.

If anything Didata appears to the fastest growing of these four, but on the lowest p/e ratio. Its reliance on revenues from Asia and Africa may be one reason for this. With limited financial information available it is hard to tell how much of this growth relies on acquisition and how much is real, organic growth. But if you are considering an investment in this market Didata looks like it should be on your shortlist.

Where Next?
• Didata discussion board | website
• Software/Computer Services discussion board