Datatec Targets Acquisitions in U.S. as Weak Rand Boosts Profit

Datatec Ltd., a South African computer-networking company whose stock is rising as the rand falls versus the dollar, is considering acquisitions in the U.S. on signs the world’s biggest economy improved.

“This year we do sense a recovery in the U.S.,” Chief Executive Officer Jens Montanana said by phone from London. “For the first time in five to six years we are starting to have the conviction that that market is getting stronger. We may start to look at the U.S. for acquisitions.”

Datatec, which installs Cisco Systems Inc.’s products, is benefiting from a decline in South Africa’s rand to a four-year low against the dollar, with more than 98 percent of its earnings coming from outside its home market. The company, which trades its stock in Johannesburg and London, will also target growth through potential purchases in South America, Africa, the Middle East and Asia, Montanana said on May 23.

“U.S. margins are quite low for Datatec, however when the market picks up, those businesses benefit from significant operating leverage,” Dirk Noeth, a Cape Town-based analyst at Avior research (Pty) Ltd., said in an e-mailed reply to questions yesterday. “Datatec is unlikely to look at large, listed players. Smaller bolt-on distributors with exposure to networking and related software and services are likely to fit their target profile.”

Datatec “rarely” makes acquisitions totaling more than 10 percent of its annual sales, Montanana said. In the past five to 10 years, the Johannesburg-based company on average did between $100 million and $150 million in buyouts per year, he said.

Rand Hedge

The stock has gained almost in lock-step with the rand’s weakening against the dollar since May 16, a day after Datatec reported fiscal full-year underlying profit per share climbed 16 percent. The correlation between daily moves in the shares and the rand against the dollar was more than 0.85 through yesterday’s closing price, close to the 1 reading that would mean they move in tandem.

“For South African investors we’re a pure rand hedge,” Montanana said.

The currency of Africa’s largest economy has dropped 13 percent this year, the worst performer among 16 major currencies monitored by Bloomberg after the yen. Datatec has gained more than 16 percent this year. The stock, the sixth-best performer on the 61-member FTSE/JSE Africa Midcap Index in May, reached 57.60 rand on May 21, its highest since September 2000, while the rand weakened almost 2 percent.

“It still seems an attractive play to me, with recent movements driven by currency moves, rather than growth in underlying earnings,” said Noeth, who has an outperform recommendation on the stock, the equivalent of a buy.

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