Ann: H1 FY2024 Results Presentation, page-14

"I trust you still hold DDR @madamswer?
Would love to get your quick take on the results and outlook, for when you have a chance. Thank you as always!"

@thunderhead1,

Apologies, I've been away form computer for most of last week, so missed your message.

Yes, I do still hold DDR.

I though the result was actually quite robust under the circumstances of strong economic headwinds. Stripping out the second-half result (we already knew what the first-half looked like), while NPAT and Pre-Tax Profit we re down 4% and 5%, respectively, second-half EBIT was flat on pcp... which I think is not bad given the pain in the SME space, as well as sluggish discretionary retail spending.

And that this has occurred despite a further 6% increase in employee expenses (on top of the 17% increase of the pcp), tells me that the FY2024 result has been held back by a non-trivial extent due to DDR's usual investment in capability ahead of the demand curve it perceives (a similar thing can be detected in the FY2017 and F2018 results, which were followed by ~30% EBIT growth in the following 18 months).

Also, in terms of the balance sheet clues, the company exited FY2024 with $44m more stock than 12 months previous.

So DDR management is clearly gearing up for a strong FY2025 driven, evidently, by a cyclical recovery in IT consumption, supplemented with AI computing and all the hardware and software that is required to support it. DH2024 will look reasonable, I anticipate, but it is JH2025 which can be expected to be particularly strong.

Valuation-wise, it must remembered that it is a catch-and-pass business (albeit a very good one), but like all distribution businesses, there are plenty of short-term factors outside of the control of their management, so this has to inform the appropriate valuation multiple for such a business.

And that, unfortunately, is a matter of subjectivity and fluctuating market sentiment, meaning everyone can write his or her own adventure when it comes to DDR.

My take on it is predicated on asking myself what the market should be happy to pay for the following picture (assuming it continues for the foreseeable future and a bit beyond it):



I don't see that as a 15x P/E graph. Not even in the high-teens.
Probably not 30x, though, nor above 25x, given the nature of the business model and its limitations.

So I end up around in a valuation multiple range of 20x (when market sentiment is despondent) and 25x (when the market has become ebullient).

That's about as scientific as I am able to get, and - based on my FY2025 EPS forecasts of 48cps, it suggests a valuation range of $9.40 to $11.75.

That's a large splay, I know, but unfortunately that's the nature of things here.

.