Recognition From Microsoft And Cisco Will Highlight Competitive Edge For The Future

Key Takeaways

• Focus on managed services, software solutions, and high-growth areas like AI aims to drive revenue and improve gross margins.
  
• Strong customer base and efficient cash management support financial stability, with vendor recognition aiding competitive positioning and partner-driven growth.
  
• Delayed decision-making and increased competition threaten revenue growth and margins, while a high payout ratio could limit reinvestment and long-term growth.

Catalysts

Engages in the provision of information technology (IT) solutions and services in Australia, Fiji, and the Pacific Islands.

• Data#3's strategic focus on growing its managed services and software solutions business, demonstrated by an increase in recurring business to 67% and growth rates of 12% and 11%, respectively, is expected to drive revenue growth by providing stable, long-term income streams.
  
• The company has successfully mitigated the impact of economic downturns by maintaining a strong customer base among government and large corporate clients, suggesting potential improvement in net margins as economic conditions stabilize.
  
• New customer acquisitions and record-high interest income from efficient working capital management indicate potential growth in earnings, showcasing the company's strong cash position and financial discipline.
  
• Awards and recognition from major vendors like Microsoft and Cisco, alongside industry accolades for workplace culture, highlight Data#3's competitive positioning, which is likely to support continued partner-driven revenue growth and margin stability.
  
• The strategic push in high-growth areas such as AI integration and cybersecurity services anticipates an increase in demand, which could lead to improved gross margins and overall net profitability as these offerings carry higher margins.

Data#3 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Data#3's revenue will grow by 64.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.4% today to 1.6% in 3 years time.
• Analysts expect earnings to reach A$57.6 million (and earnings per share of A$0.37) by about February 2028, up from A$43.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, up from 26.3x today. This future PE is lower than the current PE for the AU IT industry at 80.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Data#3 Future Earnings Per Share Growth

Risks

• Delayed decision-making by customers could potentially impact revenue growth, especially for infrastructure solutions, as clients assess economic conditions and adjust their technology investments.
  
• Increased competition leading to reduced pricing to win business may impact gross margins, creating further pressure on profitability.
  
• Impacts from government budget cuts aimed at reducing external consultancy could affect consulting services revenue streams if significant public sector contracts are reduced.
  
• Ongoing challenges in the infrastructure segment, particularly in networking, may continue if decision-making delays persist, affecting revenue and gross profit from this area.
  
• The high dividend payout ratio of over 91% might restrict the ability to reinvest earnings into the business, potentially impacting long-term earnings growth and financial flexibility.

Valuation

• The analysts have a consensus price target of A$8.054 for Data#3 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.91, and the most bearish reporting a price target of just A$6.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.6 billion, earnings will come to A$57.6 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$7.34, the analyst price target of A$8.05 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.