The Information Technology (IT) sector is the home of some very large investment themes – prime among them being the move to cloud computing, big data and the “Internet of Things.”
Cloud computing is the practice of using a network of remote servers hosted on the Internet – that is, in a virtual “cloud” – to store, manage, and process data, rather than a local server or a personal computer. Cloud computing allows companies to cut their hardware and software spending, and just use software-as-a-service (SaaS) from cloud-based providers.
Big data refers to the massive stores of data generated by companies from their operations, and the difficulty of organising it and “mining” it for insights. Big data is well beyond the capabilities of standard database software to handle, so specialised services to capture, sift and analyse it, using smart algorithms and high-speed technology, are coming to the market.
The Internet of Things is connected machines, monitoring each other, swapping and processing information in real time – and generating ‘big data’ for humans to analyse.
IT themes
Australia is not regarded as having many investment-scale IT businesses – certainly not on the scale of the global household names of IT – but the Australian Securities Exchange does have some companies that offer exposure to these growing themes.
Nick Harris, technology analyst at broking firm Morgans, says the easiest way for an Australian investor to play in the IT sector is to “ride on the coat-tails of the cloud-computing giants.” While it is only early days in terms of cloud computing’s market share versus that of traditional upfront procurement, he says, cloud spending is growing very fast – “it would be growing at 40% a year versus low single digits for the traditional procurement market,” says Harris.
Harris says a good way to participate is through data centre operator Next DC (NXT, share price $2.28, market capitalisation $442 million), which operates five purpose-built data centres – in Melbourne, Brisbane, Sydney, Perth and Canberra – that offer secure co-location services to corporate, government and IT services companies. NEXT DC hosts critical IT infrastructure – such as servers – for its customers, providing the data centre as a service. Whereas previously a company may have stored information on its own servers, the growing amount of data – combined with cheaper telecommunications – means it has become much more economical to store such data in the “cloud.”
Next DC
[1]Cloud infrastructure in Australia grew 150% in the past three years compared to 106% globally, according to DatacenterDynamics. Over the next five years, it is estimated that data centre traffic will nearly triple, of which the cloud will account for nearly 75%.
Next DC has invested $250 million in its data centre network, but has not made a profit yet. It is expected to break through for maiden profit this year (FY16).
“The company made about $8 million in EBITDA (earnings before interest, tax, depreciation and amortisation) last year and it is guiding for $26 million–$28 million this year, so that’s a pretty strong growth story,” says Harris.
NEXT DC has sold its Sydney, Melbourne and Perth data centres into a real estate investment trust (REIT) called APDC Group (AJD, $1.26, $145 million), and leases them from APDC on long-term leases. APDC Group is the only Australian listed REIT that owns data centre assets (NEXT DC does not own any of APDC Group’s equity.) According to FN Arena, analysts expect AJD to pay a 7.5% unfranked yield in FY16, and 7.8% in FY17. “If you want a capital growth story, you can invest in Next DC, and if you want an income story, you can invest in AJD,” says Harris.
APDC Group
[2]The IT consultants
Other ways to tap into the growth of the cloud computing and big data themes are some of the IT consultants. Harris says “corporate Australia is starting to spend money again” on IT, after several down years. He says consultants such as Data#3 Limited (DTL, $1.185, $182 million) and SMS Management & Technology (SMX, $4.88, $336 million) have small but growing cloud businesses, as cloud gains in market share against traditional equipment procurement.
Data#3 lifted earnings per share (EPS) by 40.9% in FY15, and boosted its dividend by 40%. According to FN Arena, analysts’ consensus forecasts expect DTL to boost EPS by 13% in FY16, and raise its dividend by 15.9%. At $1.185, the expected FY16 dividend of 7.3 cents a share prices DTL on a fully franked yield of 6.2%. The analysts’ consensus target price of $1.11, however, implies that DTL is fully priced for the present.
Data#3
[3]SMS Management & Technology reported 35.4% EPS growth in FY15 and a 36% rise in the dividend. This year, analysts are looking for 28% EPS growth and a further 15% improvement in the dividend. At $4.88, that places SMX on a 4% fully franked yield. However, analysts don’t see much room for appreciation from here: the consensus price target is $4.99.
SMS Management & Technology
[4]Other stocks offering cloud exposure are Rhipe Limited (RHP, $1.37, $182 million), which provides the software behind cloud computing; IT services provider Empired Limited (EPD, 85 cents, $98 million); and hardware wholesaler Dicker Data Limited (DDR, $1.78, $283 million), the dominant player in the enterprise networking market in Australia and New Zealand. If DDR – the only dividend-payer among this trio – pays the same dividend as in FY15 in FY16, it would pay a 6% fully franked yield.
Data analytics
Analyst Marc Kennis, from Foster Stockbroking, says data analytics is an increasingly important theme: the exponential growth in data worldwide presents both opportunities and challenges on how to organise, analyse, and monetise data. “We believe that Invigor’s (IVO, 8 cents, $26 million) data analytics products, which focus on retail, provide a compelling real-time solution for brands and retailers to enhance profitability, and for consumers to extract value and savings,” he says. Invigor is not currently profitable, but is expected to report a maiden profit this year (IVO uses the calendar year as its financial year.)
Invigor
[5]Australia’s stand-out exposure to the Internet of Things is NetComm Wireless (NTC, $1.69, $218 million), which makes devices used to connect things like smart meters, medical equipment, vending machines, security cameras, elevators and environmental monitoring systems. The company’s machine-to-machine (M2M) devices mean that machines can be monitored and controlled wherever they are working, from any location in the world, over wireless or broadband, with all operating information captured. The Internet of Things allows companies to improve efficiency, increase revenue and reduce operational costs.
NetCommWireless is profitable, but does not pay a dividend. According to Thomson Reuters, analysts that follow NTC expect it to triple EPS in the current financial year to 6 cents a share, and boost that further by 43% in FY17, to 8.6 cents a share.
NetComm Wireless
[6]All charts sourced from Yahoo!7 Finance, 19 October 2015
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