Update Aug 2025

A solid second half of the year with revenue up 9% and EPS up 11%. Was expecting a reasonable half, so the real watch comes in FY26 as the changes to Microsofts pricing model for them fully kick in. That said, they appear confident they can still deliver solid growth. Interest income continues to be a significant part of the total profit / EPS, so will probe into that at the AGM around impacts in a falling interest rate environment.

Valuation in Aug 2025 based on 31c EPS and 9% growth rate for next 5 years with PE of 25. (PE of 25 is in bottom quartile of its trailing 5 year history.)

Update Feb 2025

After doing some more digging following @Trancer excellent insights on what the Microsoft pricing changes announced in December mean, I am lowering my valuation to $6.00 and exiting my position for now.

My thesis required EPS growth of more than 10% p.a. for the next 5 years and it seems likely to me that DTL are in for at least a couple of tough years moving forward as they adapt to the Microsoft fee change. This half might be ok. But the next few at least look a lot tougher for profit growth. Which means we may get flat or small declines in EPS and then probably some multiple compression. The recent PE range is double what it used to be 5 years ago.

In addition, a negative change to their deal with Microsoft was one of my key risks to watch for. I do now wonder if the long serving CEO and Chair, who both exited voluntarily last year, were worried the coming years were going to be a lot tougher…

Valuation in 2023 based on 28c EPS and 12% growth rate for next 5 years with PE of 25. (PE of 25 is in bottom quartile of its trailing 5 year history.)

Why do I own it?

# Mid cap and market leader which provides IT hardware and software from mostly Microsoft to predominantly commercial and government customers across Australia and NZ. Also provide support services.

# Has 10 years of 20% p.a. earnings growth

# Founders have all exited the business now as it was created 45 years ago. But still has a strong founder like mentality with insiders holding 15% of the company and the "new" CEO having worked at the company for 28 years before his appointment this year!

# Strong staff engagement across their 1400 employees, with average tenure of over 5 years and consistently awarded as an employer of choice.

# Consistently high ROE / ROC of over 50 / 40% as it's a capital light operation.

# Acceptable MOS at current price of $7.85 in Feb 2024 at almost half the previous growth rate.

# They can deliver double digit revenue and earnings growth for 5 + years so the return should exceed my 15% p.a. + target

# They were recently added to the ASX200 providing indexing tailwinds to the historical multiple.

# Probably has structural tailwinds as Australia keeps growing and spending more on IT / AI and in particular cyber and security products that have been a source of good growth in recent years.

What to watch

# Low net profit margin of 1.5%. This is probably a moat though as given their large volume it will be tough for competitors to undercut them. They have been able to maintain this for many years now.

# Any significant change or approach from the new CEO and new Chair, that may add risk or distractions to what is a well proven business model.

# Loss of supply/service contract with major suppliers, especially Microsoft.