Data#3 Limited (ASX:DTL)

Data3 logoData#3 Limited (ASX:DTL) is an ASX listed company that provides market-leading business technology solutions.  The company operates in what is now a hybrid IT environment where some of their clients prefer solutions maintained on their business premise and other clients have solutions outsourced to the cloud.  Data#3 provides IT Solutions across a wide range of industries throughout Australia and Asia Pacific.

Headquartered in Brisbane, Data#3 have offices in all Australian capital cities with data centres, and warehousing facilities in Sydney, Melbourne and Brisbane.

Data#3’s customers cover a wide range of industries including banking and finance, mining, tourism and leisure, legal, healthcare, manufacturing, distribution, government and utilities that are located throughout Australia and Asia Pacific.

Does this business have a sustainable competitive advantage?

Data#3’s competitive advantage comes about due to having strong relationships with leading global vendors of IT software.  This enables Data#3 to act as a consultant and implement the right IT solutions from the vendor with the best technology to meet their client’s needs.

Data#3 have adapted to the changing environment in the last few years it appears better than most.  The company offers business technology solutions including offering Software, operating Infrastructure, Managing the solutions and now offering Applications (Apps).

While the IT solutions have become pretty much a commodity, the way in which their clients are using technology has evolved due to cloud computing and the integration of tablets, smart phones and apps being used in the workplace.  This evolution has created the next opportunity for Data#3 as their clients ‘upgrade’ to the new way of doing business.

Data#3 have adapted, bolstered their business and diversified revenue streams in the past year by:

  • Partnering with The Alpha School System (TASS) to provide ‘best-in-breed’ IT solutions to the Australian education sector.
  • Acquiring a Wi-Fi Data Analytics company named ‘Discovery Technology’ to enhance the company’s offering of cloud based solutions.
  • Acquiring a company called ‘Business Aspect Group’ that specializes in helping businesses transition from traditional technology to new ways of doing business in an ‘app centric environment’.  This acquisition is immediately earnings accretive.

What are the risks facing this business?
One risk that caused the ‘sell-off’ in 2013 in a number of IT business is the ever changing technology sector creates permanent structural challenges for those that do not adapt. I think Data#3 have used their relationships with global vendors to stay at the forefront of this structural change for the time being.  This has enabled the company to adapt their business and act on the need to acquire a couple of businesses that specialize in offering services that meet this new way of doing business.

Is it run by able and trustworthy management?

The business has been run for many years with a strong balance sheet showing plenty of cash on hand.  The company operates with an interesting cash flow seasonality where cash flow runs low in the first half of the financial year to December before jumping significantly in the second half of the financial year by June.

Is it trading at a bargain price?
The company was a clear bargain a few months ago and is still good value in my opinion.

Company Code Rank 2014 Actual Valuation Today’s Share Price Margin of Safety 2015 Forecast Valuation 2016 Forecast Valuation
Data #3 Limited DTL Gold 1 $0.78 $0.82 18% $1.00 $1.10

*Forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

The Situation
The company had rightfully been sold down on a weaker outlook for the year to April 2014.  I had been patiently lining up a buy in Data#3 for many months since the company announced at their Annual General Meeting on 7 November 2013 that a turnaround was not expected until the second half of 2014.  I was pleased with my execution in buying this stock at the time.  Price is now is at a bit of an inflexion point where it could fall or just continue on the upward trajectory.

The Conversation
I tweeted my buying of this company in a twitter conversation that originated out of an article I wrote back in May about another IT company DWS.  A couple of the tweets in the conversation are here:

The Chart

DATA#3 LIMITED (click to enlarge)

In summary, Data#3 has been an excellent business with a solid reputation for many years.  The company has adapted to the challenges it faced over the past couple of years and appears to be flourishing again as a result.  It met these challenges while still maintaining a strong balance sheet and a very strong position in the IT space.  The company was very cheap and is still good value if you believe the opportunities created by adaption are sustainable.  And, how can you go past a company with a number in its name?

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Data#3 Limited.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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