someday all companies will be made this way

Having trawled through, and reconciled about 90 financial results so far, the Data#3 result is so far coming 2nd in the accolade for Best Quality Result of FY2010 Reporting Period. There was a lot to like about this result, for example, the recovery in margins, and the concomitant confirmation that the dampened margins in recent periods (DJH08 and DH09) was due to a self-imposed one-off costs for systems integration.

However, the most noteworthy aspect of the result, and something that I don't believe I can recall witnessing before to this extent, is the operating cash flow performance: for context, while DTL's market cap is $136m, OCF for the JH2010 was $66.8m ($22.4m in the prior corresponding period). So, DTL has, in just 6 months, generated half of the market value of the company in cash flow. And, importantly, because of its catch-and-pass business model, capital retention needs are negligible (<$1.0m pa), meaning virtually all of DTL's OCF drops through to the free cash flow line.

[Of course, these comments need to be qualified by the seasonal aspects of DTL's cash flows: December halves tend to be modestly negative (low-single $m's, although DH09 was minus $22m), but that this latest result represents extraordinary management of cash flow is beyond question.]

Importantly, it?s not just the past six months that reflects excellent trade capital management. This has been a structural trend for some time. Note the Working Capital-to-Sales ratio of the past few June halves:
JH07: 1.01%
JH08: 0.88%
JH09: -1.09%
JH10: -2.5%

What makes this even more impressive is the fact the inventories rose by almost 50%, to $9m from $6.1m, pcp. (Incidentally, DTL does not procure stock for resale, but only to service orders that have been received, so I?ll take the liberty of interpreting the inventory rise as an indicator of a good start to the current financial year!)

All-in-all, an exemplary performance, the upshot being that the company at the 31 June balance date held over $64m in net cash, implying an Enterprise Value at just over $70m. That provides a lot valuation headroom given DTL generates EBITDA of some $17m pa. (Note that I model net cash at 31 Dec 2010 will be closer to $40m, so investors really need to look at AVERAGE Enterprise Value when valuing DTL given the seasonality of OCF. Either way, the stock looks very attractively valued, with EV/EBITDA based on June capital structure = 4.2x, and EV/EBITDA using Dec balance cash = 5.6x, for an average multiple of 4.9x.)

Prudent Investing

Cameron

PS. For the record, my award for the Best Quality Result so far goes to ARB Corp (stock code: ARP.AX), manufacturer and distributor of accessories for 4WD vehicles. Third place is currently with Embleton (EMB.AX, very illiquid stock; trades almost by appointment only), a small ($10m market cap) Melbourne-based distributer and manufacturer of flooring products, and STW Communications (SGN.AX) is running 4th.

I declare that I am an owner of all of the businesses mentioned in this post.