Datagroup Stock Analysis & Deep Dive

IT as a service at a charming valuation

Oct 14, 2023

Invest at your own risk; this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.

Update October 2024:

I sold my very small position late in 2023 because I did not see any of the points improving that I mentioned below. There are so many better companies out there. For transparency reasons, I will keep this post in its original form online.

Intro

Germany notoriously lags behind in all kinds of digitization matters. Especially the government and public institutions are a far cry from those in the Nordic countries. At the same time, the requirements to keep up with digitization are continuously rising. This poses a challenge, especially for small and medium-sized companies which cannot afford a huge IT department. Enter players like Datagroup, Bechtle and Cancom. These companies help the private and public sector to get their systems and software to the status quo. Today I will focus on Datagroup as one of the smaller players in this field.

The Company

Datagroup is based in Pliezhausen, Baden-Württemberg in the south of Germany, and was founded in 1983 by Max H.-H. Schaber and Herbert Schwarzkopf. In 2006 Datagroup entered the stock market. The company has a broad footprint across Germany.

The company has 3500 employees, of which the majority is based in Germany, and focuses on companies with €100 to €5000m in annual revenue, as well as the public sector.

With a market cap of €419m it is a relatively small company.

The Business

Datagroup has two big server hubs: One in Düsseldorf and the other in Frankfurt in very close proximity to DECIX and ECIX which are two of the largest internet exchange points in the world. Due to its location, Datagroup is very well connected to public cloud services such as AWS, Azure, and SAP. Datagroup is ISO certified for IT Service, IT Security, and Quality management.

80% of Datagroup’s revenue comes from the service business, with the other 20% contributed by the trading business.

The heart of Datagroup is the “Corbox” (Corporate IT out of the box) which it also labels as IT as a service. The Corbox can be anything from a full-fetched outsourcing of the IT infrastructure for the customer to only individual modules such as SAP hosting or public cloud services.

Datagroup has a rich history of small takeovers. Since the IPO in 2006, Datagroup has acquired 30 companies and plans to acquire 2-3 companies per year in the future. Once a company has been acquired, Datagroup checks existing contracts and terminates those, that provide low margins and at the same time moves business to its multi-year length Corbox product. Due to this, the revenues provided by the new company tend to decrease in the first years, while the margins of the new business are higher than the terminated old contracts.

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The Management

Founder Max Schaber stepped down as CEO in 2022 and switched to the board of management. He was succeeded by Andreas Baresel, who joined Datagroup in 2012

The founder Max Schaber owns still 54.9% of all outstanding shares, while the rest of the management owns another 1.9%. This means, that only 43.2% of all shares are owned by people outside of the company.

The management has shown great confidence in their company and started buying shares in late 2022.

Some words on capital allocation:

At the current high levels of long-term debt (108m), I would prefer to see more efforts invested in reducing the high amount of debt. Paying a dividend is nice but is it really necessary to pay 9.2m in cash to your investors when it would make sense to either pay down the debt or start share buybacks if you believe in the undervaluation which is currently present?

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Risks

Datagroup relies on corporate takeovers. This has been the main source of growth and Datagroup relies on finding more niche players at attractive prices. Another question is, how much impact does the slowdown of the economy and the wind-down of the COVID-19 vaccination centers (which Datagroup supplied with IT services) have on the top and bottom line of Datagroup?

The Fundamentals

Datagroup’s margins have been rising steadily from 3.1% in 2014 to 8.7% in 2022. This is mostly attributed to the rollout of Corbox. The average Corbox contract length is 4.5 years and customers purchase additional services over the years. These fixed contracts provide a stable, recurring revenue for Datagroup and bind the customers to the company. 71.5% of all revenues are recurring revenues, with the majority coming directly from cloud services.

COVID-19 provided a boom in digitization efforts, including one-time business with COVID-19 vaccination centers, and due to this effect, the revenue of Datagroup grew a lot faster from 2020 to 2022 compared to the previous growth rate. In the current fiscal year, Datagroup saw a reversion to the mean with lower growth rates.

Datagroup has shown a strong record of hitting or exceeding its forecast for both revenue and EBITDA:

Datagroup managed to achieve all the growth without major share dilution. The number of outstanding shares rose from 7.6m in 2013 to 8.3m in 2018 and has been flat since.

Revenue went from 157m in 2013 to 500m in 2022, net income from 1.9m to 21.9m, and FCF from 8.6m to 64m. Looking at the historical cash flow figures of Datagroup I am not too happy with the relative stagnation for many years with a sudden growth spurt from 2020 onward. I want to see if these levels are sustainable in the upcoming years, or if the 2021 and 2022 numbers were inflated with one-time effects.

Valuation

Datagroup has a cheap valuation. With an EV/Earnings of 22.6 or an EV/FCF of 14.5 Datagroup is very attractively priced.

Summary

Datagroup has shown tremendous growth over the last few years. Looking at the aggregate numbers of the last 10 years, we can see that Datagroup generated €237m in operating cash flow, which it turned into €163m of FCF.

These €163m were used to buy companies for a total of €84.7m and pay dividends of €31.5m. Without these acquisitions, the overall growth in revenue would have been a lot smaller.

I want to see a continuous path toward steady operating and (free) cash flows before initiating a larger position in the company.