Dicker Data Ltd (ASX: DDR) today announced that it would raise capital by selling $55 million worth of shares at $6.70. $50m will go to institutions, while just $5m is reserved for ordinary retail shareholders to split among themselves. You can see the proposed use of the capital below:
Dicker Data Ltd is an interesting stock to follow in these times because it is seeing a strong, short term demand tailwind related to Covid-19. The company said “it has seen strong Q120 performance with record monthly revenue achieved in March 2020.” It reported Q1 net profit before tax of $18.4m. If we apply a standard 30% tax rate, and assume that performance is replicated for the rest of the year, that would give an FY 2020 profit of $51.5m. I feel confident the company can hit that target, given demand tailwinds, even if they are temporary in nature.
Based on the current share price, but after including the 8.2 million shares the company will issue, it would then trade on a FY 2020 multiple of between 23 and 24 times earnings. That’s not too bad when you consider it recorded “total monthly revenue for April 2020 of $163.7m, up 37.7% on the comparative period last year. The surge in demand has been driven by significant mobilisation to remote working solutions, reinforcing IT distribution’s role as an essential component for business continuity.”
Looking out longer term, the company will be financing some of its own customers through Dicker Data Financial Solutions (DDFS), which is risky, and moving to a bigger distribution centre, which will reduce its strong operating leverage over its current physical assets, at least temporarily. On top of that, I think IT spend will reduce overall as Australia copes with recession. So over the next 2-3 years, I’m not overly bullish the business.
But in the short term it is a beneficiary of the pandemic, with good management and a long term history of solid growth. It is also exposed primarily to Australia and NZ, both of which countries are seeming to do a good job avoiding a covid-19 massacre.
Dicker Data has over 6,000 shareholders so I don’t have much hope of getting more than around $1,000 in the Share Purchase Plan. And in any event the discount to the current price is not so great that I am overly motivated to buy shares. Indeed, the offer price is above my target buy price as listed on the updated fluffy dogs watchlist.
Therefore, if the shares trade at a premium to the $6.70 offer price, I may end up selling a small portion of my current holding and applying for shares at a slight discount, while acknowledging that I may not get all the shares I apply for .
I have held my Dicker Data shares throughout the turmoil this year, neither selling nor buying. The reason for this is I really like the company and how it is run, but I am worried about how it copes in a recessionary environment.
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