Software upgrade takes toll on Datatec’s net profit
Datatec has warned it may incur small losses at Westcon-Comstor subsidiary as it completes the transition to new technology software systems in some of its markets.
Datatec’s earnings for the year to February plummeted as a result of the implementation of SAP software and business process outsourcing (BPO) systems across Westcon-Comstor’s operations in Europe, the Middle East and Africa.
The project, which is expected to be completed in the first half of the 2018 financial year, disrupted Westcon’s operations.
However, Datatec is confident that performance will improve in the new financial year once the systems are fully operational.
The SAP platform is aimed at helping the group manage the entire portfolio of products and services and improve its inventory management system, which allows it to monitor the flow of products from its warehouses.
The project implementation materially affected Datatec in the past quarter across its Westcon-Comstor’s subsidiary, resulting in a $338m decline in revenue to $6.08bn. Headline earnings per share dropped to $0.02, from $0.194 for the previous period.
Datatec has already implemented similar software systems in Australia and North America and also faced challenges there.
CEO Jens Montanana said the group had not learnt fully from previous similar projects because if it had, "we wouldn’t have had these bumps".
He said some of the challenges were "adapting and adjusting processes and people to a new way of doing things, the rigidity required and adherence to the system".
Montanana said it would take a while before the group enjoyed the economic benefits of moving to BPO.
Datatec is in talks to sell the majority of its stake in Westcon-Comstor for $800m.
Mvunonala Asset Managers equity analyst Matthew Zunckel said if the Westcon deals fell through, the share price could be hit hard because the operational performance in these results was poor.
Mergence Investment Managers portfolio manager Peter Takaendesa said the offer for Westcon was almost equivalent to the entire market capitalisation of Datatec.
However, he said, the target asset, Westcon, contributed only 40% to Datatec’s operating profit in the results.
"The market is now sceptical of the operational guidance from management as they have failed to deliver the recovery promised last year, so we believe success on concluding the Westcon transaction will drive the share price over the short-to mid-term," he said.
Takaendesa said the 66% decline in underlying earnings per share was depressed further by restructuring costs of $17m as well as an abnormally high effective tax rate of 74%.
Datatec’s other subsidiary, Logicalis, which accounted for 25% of the revenue, reported a satisfactory performance.
Datatec shares fell 1.19% on Monday to close at R55.83.