Belinda Anderson
Coronation fund manager Walter Aylett was one of the lucky or wise investors to reduce his holding of Dimension Data (DiData) shares in the first few months of this year.
As Liberty Asset Management’s Imtiaz Ahmed said on Tuesday: “Anybody that’s got one share in DiData has got one share too many.”
And both Ahmed and Aylett are investors licking their wounds because they still hold some DiData shares. DiData constitutes 6% of the Coronation New Era Growth Fund, down from about 10% in December.
Aylett on Wednesday said: “It is the job of a fund manager not to fall in love with a stock.”
He emphasises that “no one could have predicted this” the warning to the market that margins were being squeezed in some regions where the businesses were still product-centric.
Aylett says what is perhaps more disappointing than the fact that DiData has put out a profit warning is that management stayed confident right to the end. It kept on indicating to the market that the slow-down was not going to affect DiData to the extent that the rest have been suffering.
Cap Gemini is the most recent example of a global networking company warning that it would not make targets. Aylett says the timing of the DiData warning has done some damage to the credibility of management.
Sage’s Iain Anderson says management “could have been more clear about it” (referring of course to the presentation of the announcement as merely a trading update).
Jarrod Cahn from the Credo Group in London said players in London were asking why the warning had not come out sooner and were fast losing faith in the group’s management as a result.
DiData executive director Patrick Quarmby this week would not reveal the effect the margin squeeze would have on revenues. He said it would have been nice to have some more time to implement the services model in recent acquisitions that still relied heavily on product sales.
Quarmby said: “What we are doing is going at a much faster rate to implement our services model. That in itself will cause some of the margin to come down, because we are going to have added costs in implementing that.”
Quarmby expressed surprise on Tuesday that the share had fallen so far down 23% to R22,80. But it fell further on Wednesday, losing another 16% to R19,20 as 20-million shares traded. “Every single IT company is coming out with some sort of announcement and it is an uncertain market out there,” he said.
But one of the reasons that DiData managed to trade up to such high multiples was that the market never considered it as just another IT company it was believed to have had a sufficient services focus to cushion it from the global slow-down in IT spend.
Aylett said the multiples that DiData was trading on were out of kilter, clearly illustrated by some of the tracker funds paying up to R100 for the stock just after listing.
Global market conditions were a clear warning of the environment that DiData operates in.
Aylett credits UBS Warburg for expressing concerns when the share was at about R48, advice which he took in reducing some of his holding.
He cites the Warren Buffet adage: “It takes 20 years to build up a reputation and one second to lose it.”
If other London-listed IT stocks, similarly hammered, fall out of the FTSE 100 index, let’s hope DiData at least manages to stay in. If not, the attempt to regain that reputation may be even more of a challenge.