Datatec issues severe profit warning for 2017 – announces potential Westcon sale

Special Report by Indraneel Arampatta, Analyst at Megabuyte: Johannesburg and AIM-listed distribution and infrastructure services player Datatec has updated the market on the cautionary warning released in January, announcing that it is in a sale process for its value-added distribution arm Westcon-Comstor, valuing the business unit at 'more than $800m', which would equate to 9.1x 2016 EBITDA.

Datatec has also issued a severe profit warning for the year ended February 2017, with both headline and underlying EPS expected to more than halve in the year to less than $0.10 and $0.16 respectively, a significant miss from expectations for a slight improvement. The miss comes from another poor performance by Westcon, especially in EMEA where there was disruption to a major SAP implementation, but Logicalis is trading in line.

Firstly, the sale. Datatec is a holding company for three autonomous divisions: Westcon-Comstor, a value-added distributor of IT and networking products and a key Cisco partner; Logicalis, which provides IT solutions and managed services globally; and Analysys Mason, Datatec's small consulting division which provides market research and services to companies in the TMT sector.

The subject of the cautionary warning in January has now been revealed as the Westcon-Comstor business unit, which Datatec is looking to sell (to an as yet unknown buyer) at a valuation of more than $800m or 9.1x 2016 EBITDA. Even prior to today's Westcon-driven warning, the business has been struggling as of late, with revenues for the latest reported year (to February 2016) remaining flat at $4.9bn, alongside a significant drop in EBITDA from $125m to $88m.

This was further compounded in the first half of fiscal 2017, during which revenues fell 8.0% to $2.3bn (-8.4% in constant currencies) and EBITDA fell 19% to $42.9m.

It seems that further disruption at Westcon has hammered group performance in 2017 overall. Alongside the sale notice, Datatec also issued a profit warning for the full year, noting that headline and underlying EPS will be more than 50% down year-on-year, or less than $0.10 and $0.16 respectively.

The warning blamed worse-than-expected results by Westcon, which faced disruption as it reached the final stages of a SAP ERP implementation, which brokers noted was similar to previous issues seen in the North American unit. In contrast, Logicalis is said to be performing in line with management expectations.

Megabuyte view
Whilst we had anticipated that the cautionary announcement related to the sale of a unit, today's more interesting news is the continued problems at Westcon and its clear impact on overall group performance for fiscal 2017. It remains to be seen whether the Westcon deal will go through, particularly given today's profit warning that may make the bidder(s) think twice, and/or revise down their offer. However, subject to final valuation, a sale of Westcon has strategic merit, enabling Datatec to focus on Logicalis and its services offering, which we see as a key driver of growth in the infrastructure services market globally.

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