Dicker Data Ltd (ASX: DDR) is in a sexy industry – well, it would be if it were 1996. The company is a computer hardware distributor, and moves around the devices of famous brands such as Netgear, HP, Toshiba and Lenovo. As a distributor of key brands, Dicker Data supplies retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN), though I can't confirm if those two are current clients. In April this year, the company completed its acquisition of another distributor, Express Data Holdings, for $65 million, funded by debt.
My preferred source of information on Dicker Data is boutique fund manager Tony Hansen. Back in February, he commented that, "Dicker is already a business with good operating leverage, provided there are no substantial integration problems [with the Express Data acquisition], and the additional cashflows are used to eliminate the debt quickly, the deal will probably work out well." While I'm generally not comfortable with debt, I agree with Tony in this instance.
In many ways, an investment in Dicker Data is an investment in David Dicker and Fiona Brown, who are the founders and who between them own over 90% of the company. They have stated that they intend to raise capital in late 2015 to pay down debt, and they are targeting a price of at least $2 per share. That's approximately a 25% premium to the current price of $1.62.
In May and June this year, Fiona Brown bought shares on market at around current prices, and the company recently released guidance of pre-tax profit of $7.5m. That would make it look expensive, because it's current market cap is around $200 million. However, that figure includes many of the costs, but few of the synergy benefits of the recent acquisition. By FY 2015, the company expects to generate a pre-tax profit of $30.0 million, including a partial period of contribution from synergies and excluding one-off integration costs (which are likely to be at least $2.5 million). If you assume the company pays about 30% tax, then this founder-led and growing company is trading for a FY 2015 PE of just a bit over 10.
There are risks with this kind of business – for example, the cost of hardware can decrease over time, reducing revenues. However, the ongoing success of JB Hi-Fi suggests to me that (at times wasteful) consumerism is going strong when it comes to electronic goods. Since Dicker Data thrives on volumes, I'd say that the company will be a solid investment, even if it does not continue to surprise the market. I'd find it hard to resist buying a few shares if I wasn't fully invested.
