JP Morgan Research note from February 2024

Been a volatile period for holders and the below explains the factors quite well.

Tempting to add at the lows but I always get distracted by some other shiny new thing now and then.

[held]

52 Week high today

Checking the investor day presentation , apart from having the MD for Microsoft Australia as guest speaker, the word "AI" was mentioned several times on the 15 November call from the new CEO

The CFO Cherie O'Riordan also mentioned focusing less on margins and more on improving profitability. They believe by not growing gross margins, Data#3 will be more competitive in winning new business and hence increase profitability.

Data#3 also mentions they are able to still pass price and wage inflation into their customer contracts. Several measures mentioned include:

• Reseller agreements that allow the company to pass price increases to the customer
• Professional services contracts being more time and materials based while managing fixed price contracts
• Periodic price reviews of managed services contracts

Finally for Working capital, they have no issues with drawing down this component as it is mostly current and there is a low default rate from customers

Lots to unpack from the call transcript so above is just a summary of the main points..

There was also a special call today which I do not have access to the transcript so not sure who was invited here.

Note: I've been cashing on the dividend reinvestments in SRL only. If only I bought more during that mini crash months back.

[held]

Data3 down 17%

Looks like they missed in something on their results

They did lift the dividend

[Held]

Unfortunately DTL did not make it to the ASX200

This is the current state of the bottom part of the ASX200 vs DTL (with SBM leaving). Courtesy of Factset.

Starting to think the Goldman Sachs pump was a deliberate attempt to push DTL into the 200 for their benefit.

Just have to remember Capricorn Metals (CMM) spent 6 months as a $1.5B+ stock before being admitted into the ASX200

[held]

Goldman Sachs initiated coverage - Buy - $8.95

Although I think that price target is a bit over the top.

[held]

ASX200?

With current marketcap (if it continues to hold), Data#3 is now firmly in the bottom of ASX200 if there was a rebalance.

It may explain the frenzied buying last few days. Possibly a index fund doing a bit of frontrunning the rebalance?

Unfortunately didn't follow through my Strawman trade in real life but am still considering right now.

Still a bit of risk and I'm a bit bearish in the tech sector not like others here. But considering that dividends have an increasing trend and there is clear guidance, maybe less risky than some other tech companies on ASX.

[held]

Shorts increasing but not reaching the peak in July 2021 when Mitsubishi Financial Group went substantial so they can lend out a whole heap of shares for shorting.

Although I added in strawman, I did not add any in my real life portfolio as I was a bit late putting in the order before it went parabolic today.

[held]

Thoughts on financials

Margins:

Low margins on maintenance, software and infrastructure. Reflects current labour skills shortage and wage pressures in tech sector. There's no exact numbers regarding margin. I'm surprised managed services margin is high.

Overall gross margin remains the same from last year:

Product delivery:

Delivery and deployment delays from supply chain constraints resulting in a significant backorder of about $6m. Personally I don't think it's just supply chain constraints. Root cause is labour shortage.

Personal thoughts:

Working in the tech sector is tough. Too much emphasis on certification, patching, long hours, things going wrong during/after patching and not enough utility. And if you aren't certified, you don't get the job. In addition, cloud certifications expire and need to be retaken. IT certifications offer no utility after retirement so a big moneymaker for companies such as Pearsonvue and the tech companies. Going forward, I think the younger generation is seeing this and don't want to "touch" a system that needs to be patched quarterly in a "black box" fashion when patches take long to apply (and run into issues)?So they opt to avoid the IT technical side and go for the non tech /Business analyst jobs? This picture seems to be reflected in the results. IT industry needs to "grow up" a bit on the certification side as well and provide more incentives to solve the labour shortage. My comments probably exacerbated the IT labour shortage even more so apologies for that!

Valuation:

I've only slightly increased my valuation to $5.88 using forward PE 30x and EPS may increase slightly but pressured by margins.

Seems there are still some short on DTL.

But I haven't seen any substantial holding announcements from MUFG (Mitsubishi Financial Group) who are facilitators of borrowed DTL stock.

[held]

Key points from update

DTL expects to report another record full year result

Good update from the announcement and just a couple of percent below the DCF valuation.

Main concern is the Covid-19 impact in delivering work due to dalays in getting hardware from the chip shortages and revenue for that work needs to pushed out.

This sent the share price falling to where it is now. Glad I did not top up after doing the DCF.

However I think I would be interested anywhere below 4.50. I may need to do another DCF to confirm.

On another note, ETHI Global Sustaniability leaders fund holds Taiwan Semiconductor and might be a good pair trade for this.

Held still

DCF Valuation.

Completed the model estimate and updated my valuation. Really interesting one to analyze. Margin growth and cost control would be the main items for Data#3 or the share price will just stay where it is.

Shorts increasing

I've noticed shorts have increased during the last week on Data#3 if you check Shortman. This is despite the share price remaining stable during the week.

Due to this development I'll be doing a DCF analysis similar to what I did for Elders and see if the increase in short positions is justified. Will try to release it on Tuesday with an updated valuation.

held

Overreaction

It seems that some people weren't happy with aspects company update even though guidance was reaffirmed for FY21 at the AGM.

This prompted a selldown which was probably cascaded further from the ruthless shorting by MUFG.

I still think this is a solid business which is managing to adapt itself during this difficult period.

Just remember the director bought at 5.85 back in September.

Recent announcement that MUFG (Mitsubishi financial group) is substantial holder.

Actually they've changed from being substantial, non substantial and back.

These guys have a notorious reputation of buying up shares for short selling which explains the sudden swings from green to red in the share price after the results were announced. I think we'll get more rises and falls until MUFG is eliminated from the register.

Frankly I think the business is still good, and they are there just to cap the share price. And now I know this, I will simply take advantage of this when I have the funds available.

FYI: I added to my holdings when it got below $6.

FY20 – key metrics

•Revenue up 14.9% to $1.6 billion

•NPBT up 28.2% to $34.1 million

•NPAT (excluding minority interests) up 30.5% to $23.6 million

•EPS up 30.5% to 15.35 cents per share

•Total fully franked dividend up 29.9% to 13.9 cents per share

•Strong balance sheet with minimal debt

Forgot to add this in my scorecard. I bought at 2.88 during the market turmoil. So it's been a good run but wish I bought more. The impressive part is the cloud revenue growth.

Will try and add more once the price retraces, but think that will be difficult with the uptrend still in play