My DDR Thesis is as follows.
Very keen to hear from anyone with a different view / other insights!
It's a bit wordy / long winded as these are effectively notes to myself and it's a live document, so may be a little rough, hopefully it makes sense to others who know the business.
Summary
I see Dicker Data (DDR) as a high quality business with Short Term issues and limited downside.
For this reason I see significant potential upside from the current share price of ~$8.50 (Mkt Cap of $1.5bn).
I expect returns to come from improving fundamentals driving NPAT (and DPS) growth leading to an improvement in sentiment (multiple expansion) over the medium term (1-2 years).
Quality
The quality aspects include the longevity of a business that has been built over 4 decades by a founder CEO & Chair (intelligent fanatic) and run by empowered, aligned deputies – mainly Vlad, COO (14 years) and Mary (CFO).
Other indicators are niche market leadership in AUS, and gaining on this in NZ.
Sources of moat mainly scale, some network effects (more vendors are better for customers and vice versa) and probably cultural moat. All evidenced by sustained high ROE & ROIC (> WACC). The IP of LT vendor relationships, customer contacts, deep industry experience, etc also hard to replicate by others.
Niche market should keep bigger well resourced operators out (eg. Amazon is unlikely to enter).
Low NPAT Margins on the surface suggest low quality but they’re much higher than competitors (DDR 3%+ vs Competitors ~1%) and a significant barrier to entry so I see their margins as indicative of quality.
Market share growth - Vlad has mentioned that they take more market share in tougher economic conditions. I see this as a great indicator of business quality and long term, opportunistic thinking by management (as long as they are not overly sacrificing margins to do it).
Short Term Issues
PC refresh cycle low, business cyclical low w bad debt provision hitting NPAT and slower collections hitting Op CF, loss of vendors (mainly Autodesk), founder (forced) selling stock at higher prices hitting sentiment, weaker financials with flat FY revenue, first fall in FY DPS in 7 years and 21% fall in 1H NPAT (the worst HoH in >4 years).
Vendor loss. Losing Autodesk was significant – but that has now happened and they can’t lose them again (could lose others though). It was not a loss to a competitor, as Autodesk now going direct. Would be concerning if this becomes a trend – especially with big vendors. This concern partly offset with the addition of Adobe and being the only full suite reseller of Nvidia.
Mgmt - Concerns from David selling down shares to settle (another!) divorce, only zooming into the AGM (due to death threats!) and not showing up to the 1H 24 Call.
Potential reversal of fortunes?
Business cycle at a low? Interest rates stabilised from the fastest rise in history. Potential for cuts – other economies already cutting w RBA to follow in FY25 all else being equal.
For DDR internally this means financing costs should have stabilised and may even fall if they manage debt down over time, but I expect them to maintain some debt (for funding inventory).
Natural PC refresh cycle to be aided by Windows 10 support expiry, and AI optimised PC’s hitting the market. This should turn a recent headwind into a decent tailwind as 30% of sales are PC related.
I’m not expecting boom times, but also not expecting a deep or protracted recession (noting the per capita recession we’ve been in).
NZ market share and margins growing – to become a more meaningful contributor to NPAT growth – especially at the margin.
Investing for growth largely done via additional headcount and warehouse expansion with optionality for more space if required.
Growing contribution from higher margin software sales (although a concern that distributors could be cut out in time – see Autodesk).
NPAT and Dividends
The policy to pay out 100% of NPAT as dividends provides dividend yield support.
This provides a strong incentive to mgmt. to grow NPAT through direct incentives (STI) and their personal holdings – especially Exec Chair and CEO, David Dicker who remains a significant shareholder and does not draw a material salary so is reliant on dividends to fund his expensive lifestyle.
I asked about the dividend policy at the FY23 AGM and came away with the impression that this is rusted on – as long as David remains Chair / CEO / on the board.
So I expect that dividends are likely to grow over time in line with Mgmt being strongly incentivised to grow NPAT and pay out 100% of NPAT as Dividends.
Except for last year (-13%), DPS has compounded between 13-21% p.a. for the last 7 years.
Limited Downside
At $8.50 share price, the expected dividend of ~ $0.45 ($0.52 in FY22 and $0.45 in FY23) equates to a prospective Fully Franked Dividend Yield of 5.3%. Grossed up this 7.6% return is about 50% more than you can get in a Term Deposit.
The most recent Quarterly Dividend was $0.11 per share ($0.44 annualised).
I expect TD rates to fall and dividends to rise over time, so this gap should widen providing additional share price support.
Some Mgmt buying after recent price weakness from a result showing ST results were average but LT expected to improve. Management are eating their own cooking and running the business like the long term owner operators that they are.
Management
Trust is management is key for my thesis – partly because they are saying things about the future (bright) that are different from the past (dim).
David stepping down / sideways would likely cause investor concern but I expect this will happen sooner rather than later and I would be more worried about losing Vlad, or if David stepped back and Vlad was not promoted to CEO.
Other potential catalysts
ASX200 inclusion would attract passive flows but I don’t expect this any time soon. Sitting at the ~260th largest stock by market cap makes this seem possible with a 30% rise in the share price to $11 (all else remaining equal) but I expect liquidity / free float issues from NED Fiona Brown and others may stymie this.
The ASX 200 is “The 200 largest and most liquid stocks listed on the ASX by float-adjusted market capitalization“. Note that: “Stocks require a minimum Relative Liquidity of 50% for inclusion in the S&P/ASX 200” whereas this is only 30% for ASX300 inclusion which DDR is currently in. Source: https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-asx-australian-indices.pdf
If the emerging AI opportunity sees DDR operate as a key ‘picks and shovels’ seller where AI is becoming table stakes for SME’s & SMB’s, there may be a material uptick in sales (may not be sustained though?). This may significantly boost sentiment / multiples. There’s been some buzz about the opportunity for JBH & Officeworks from selling AI capable hardware, so DDR will likely catch some of this at some point, especially as the pipeline comes into clearer view.
More broadly on AI – as this functionality gets embedded in most / all vendor offerings there may be a rush to buy / or shortened refresh cycle for the enhanced products (be they hardware, software or hardware capable of optimising AI enabled software).
NZ growth as a leading indicator for AUS cyclical recovery? It was noted by Vlad at the FY23 AGM that NZ’s downturn was more severe than AUS and NZ underperformed in 2023 as a result. This makes sense given NZ followed a steeper rate tightening cycle to AUS (as did most developed economies). If NZ’s current recovery (in 1H 24) is leading AUS as would make sense, a cyclical trough may be in or close by with a stabilisation / upswing over the next 12-24 months.
M&A into other verticals / geographies – NZ is working out nicely after M&A there. I see a risk that if DDR continue to approach ANZ market saturation this may be a handbrake on organic growth, so they may need to look elsewhere. It might then make sense to utilise their capabilities and relationships to extend their offering into new markets (generally lower risk) or new products / verticals (generally higher risk) via M&A. Not expecting this any time soon though.
Continued growth in NZ market share and margins sees more benefits of scale as DDR are able to negotiate ANZ wide deals with vendors (not just AUS & NZ siloed deals). This improved scale may also benefit inventory management across the region.
Risks
Increased willingness for vendors to go direct (like Autodesk). This may make sense if the vendor is big enough to deploy their own sales capability and if they want to get closer to their end customers. This is probably more likely at the competitive, lower margin enterprise end of the market.
Threats from AI – could an AI app or capability provide a procurement department in an app? Could this circumvent distributors via a seamless discovery / procurement consultant capability? Anything seems possible with AI these days but if this threat or similar did emerge, DDR is well placed to see it early.
Competition
DDR’s Competition mainly comes from 3 global players headquartered in the US.
Ingram Micro (CA), TD Synnex (CA) and Westcon (NY) have weighted average shares of the ANZ market of 21%, 14% & 7% respectively (42% total) versus DDR’s share of 34%.
These are much bigger players with lower margins: Ingram EV = US$2.7bn, NPAT 0.7% and TD Synnex EV = US$13.9bn, NPAT 1.1% versus DDR EV = US $1.2bn, NPAT 3.3% (Westcon is private).
So DDR is the only significant sized locally based supplier. DDR are the biggest in AUS (35% vs Ingram’s 17%) and 2nd biggest in NZ with 29% vs Ingram’s 36%.
DDR is improving margins and Market share in NZ following some acquisitions there and expect to become the biggest in NZ organically from here.
Vlad (COO) claims to grow market share faster in down markets so this may have helped NZ grow share recently.
Smaller players in each market may provide additional scale if M&A looks attractive – but unlikely worth doing for global players.
ACCC unlikely an issue as it’s a B2B market and still fragmented.
Sentiment
Dec strong, June weakness – The last 3 June HY’s have seen Revenue and NPAT falling from the prior 6 months, so the Dec half is seasonally stronger than June halves. This June’s seasonal dip may have contributed to recent poor sentiment - following cyclically lower revenue after interest rate (and rent) rises have squeezed DDR’s end customers. Also, higher interest costs, costs from reinvesting in capacity growth, the founder selling shares at higher prices – a lot of things may have contributed to the current trailing 19x (forecast 19x) PE Multiple being in the bottom 25% of the last 5 year range.
There were a lot of brokers on the 1H 24 call and all had predictably short term focused questions. I’m surprised how many brokers cover DDR but this may be a function of their ASX300 inclusion and potential for a cap raise for M&A or to fund WC expansion? Or sniffing a chance to skim a block trade from David’s next forced sale event?
I expect that the analyst community and market more generally are waiting to see the numbers actually improve (or at least firm guidance is given when pipeline is clearer), by which time the opportunity will have at least partly receded. It will have also been partly de-risked.
A more prudent approach may be to wait for the first (clear) sign that the numbers are sustainably improving and confirmation of why – expected PC sales uptick, business cycle pressures easing, etc. Then to buy into an improved fundamental situation in line with expectations in anticipation of improving sentiment.
Next 6-12 months - Actuals and Outlook
Next indication of this is likely to come close to 31st Oct when DDR typically release a Q3 update to market.
However Q3 is the weakest seasonally, so the outlook statement is likely most interesting, especially if they provide firm / narrow FY Guidance.
Q4 24 should be an absolute belter (H2 is the strongest half and Q3 is the weakest quarter, so Q4 must be the strongest quarter seasonally) – and it would be a big concern if it was not.
Next stop is FY24 reporting at end Feb, then AGM Preso in May-25. If these show significant growth in NPAT actuals and outlook, the share price could be materially higher in 6-12 short months.
If not, it may take longer or there could be some other hiccup / hit to sentiment. This is where the quality of the business and dividend support (being paid to wait) should minimise downside.
Valuation
From current price of $8.50, a 10% RRR could be earned if in 5 years NPAT Margin is 3.3% (3.3% in FY22, 3.6% in FY23), 5yr PE is 21x (80% of 5 year historical average), 5yr Revenue CAGR is 9.5% (last 5 year average).
I think the 5 year NPAT Margin and Multiple are likely conservative but Revenue CAGR may be harder to hit.
On balance I would expect a TSR CAGR > 10% from here, and significantly better than that if the above catalysts materialise over the next 1-2 years.
A note on Market Psychology
I feel like there are a number of features of this business that could be used to explain historical performance and outlook in either a positive or negative way depending on how you look at them / what type of investor you are.
These include the eccentric / unorthodox founder CEO, dominates a mature market niche (Saturation vs mkt leadership), low NPAT margins (competitive industry vs barrier to entry), distributor / picks and shovels (limited upside and downside), 100% payout ratio (capital discipline vs lack of reinvestment opportunities), exposed to the business cycle (volatility vs opportunity).
When DDR seems to be performing well these things can be viewed as contributing to past success and indicative of continued success.
But when performance has underwhelmed, these things can be seen as negatives and reasons to doubt future success.
If this is correct, DDR could make for a good long term investment at currently lower multiples as price volatility could be exaggerated by good or bad performance that are actually due to seasonal (H1 vs H2), cyclical (business cycle, PC refresh) and structural (AI, shift to software) factors – all of which look more positively than negatively positioned to me and explain why tepid recent performance is likely to give way to a better 12-24 months.
This is in line with management commentary which seems to be candid and transparent which I would expect based on their alignment and experience (LT owner operators).
Disc: Held
