Poor Westcon-Comstor performance drags down Datatec earnings

Poor Westcon-Comstor performance drags down Datatec earnings

Datatec warns investors to be cautious as negotiations to sell stake in Westcon-Comstor continue

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Disruption caused by an SAP implementation in some regions, along with rising finance charges and tax rates have hit Westcon-Comstor’s results for the financial year ending February.

The poor performance of the distributor has impacted the earnings per share of parent company, Datatec, which warned shareholders on 11 May to expect lower than anticipated returns.

Datatec, which is publicly listed in its home country, South Africa, and the United Kingdom, told investors that their earnings per share is expected to be 1.4 US cents for FY17, 93 per cent lower than in FY16.

The update comes as the company reports consolidated revenue US$6.08 billion for the 2017 financial year, down from the previous year’s result of US$6.45 billion.

According to Datatec, the year-on-year decline in earnings is a result of worse than expected performance in the company’s Westcon-Comstor business, particularly in the fourth quarter.

Westcon-Comstor experienced disruption to the business as a result of its final SAP implementation in Europe Middle East and Africa (EMEA), the company said.

Earnings were further impacted by higher finance charges, depreciation, amortisation expense and effective tax rate than in the financial year ending 2016.

Westcon-Comstor revenues declined by seven per cent compared to the year prior, according to Datatec, with the subsidiary’s revenues in North America and EMEA dropping by more than US$100 million year-on-year for the period in each region.

The company’s European operation went live on SAP during November 2016, resulting in transitional challenges and delayed financial reporting, exacerbated by the business process outsourcing in the region.

The company’s Asia Pacific revenue, however, saw US$12 million growth, compared to the same period the year prior, while its Latin America revenue rose by US$24 million during the period.

Additionally, Asia Pacific was the only region to deliver the company growth in gross profit for the period, with Westcon-Comstor seeing a $2 million rise in gross profit compared to the previous year, to US$57 million.

This was mainly attributable to a strong performance in the Asia security business, Datatec said.

At the same time, pre-tax earnings in the region (EBITDA) were lower than the prior year, due to higher operating costs, which included additional one-time employee related costs, sales tax reserves and increased investment costs in China.

Datatec also updated shareholders on the potential sale of a major share of Westcon-Comstor’s operations, about which it released a cautionary statement in January. This time it warned investors to be patient and cautious.

“There can be no certainty that the transaction will be completed, nor as to the precise terms on which the transaction might be completed. Shareholders are therefore advised to continue to exercise caution when dealing in the Company’s securities,” Datatec said.

The company is continuing to advise shareholders that negotiations are in progress in relation to a possible sale, which, if successfully concluded, may have a material effect on the price of their shares.

After issuing its cautionary statement in January advising shareholders of a potential acquisition deal in the works, rumours began circulating that Datatec was preparing to sell its distribution division.

“Shareholders are advised that Datatec has entered into negotiations in relation to a transaction by the Company, which, if successfully concluded, may have a material effect on the price of the Company's shares,” the company said at the time.

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