DATALEX - BOUNCING BACK?
4th April 2022
Share price: €0.84
Click here for chart of Datalex
It all went pear shaped for Datalex in January 2019, when the company announced a profits warning. A profits warning, informing investors that the forthcoming results will be well below consensus forecasts, is always bad news - but this one was a hell of a shocker!
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EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) for 2018 will be nowhere near the $14 million being forecast by analysts, said Datalex. Instead, it indicated an EBITDA loss of somewhere between $870,000 and $3.5 million (it reports in US dollars) would arise for 2018. That represented a difference of as much as $17.5 million - a huge sum for such a small company, which currently has a market capitalisation of only €112 million!
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The normally sure footed Dermot Desmond, was caught out big time by this shocking news, as he was (and still is) the largest shareholder in Datalex, holding over 20% of the shares. Also caught out, holding a 7% stake was US asset management giant, Capital Group, another savvy investor - well, up to that point anyway! Both investors then had to make the difficult decision of whether they should 'pull the plug' on Datalex. Walk away and allow the company to collapse, and lose their entire investment, or inject rescue funding. Dermot Desmond opted for the latter course - fortunately, from the point of view of the smaller shareholders who would not have the deep pockets necessary for that exercise. He injected new funds, jointly with Nick Furlong of Pageant Holdings, with the latter acquiring Capital Group's stake.
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How did Datalex get itself into such a mess? And could it happen again? The first question requires an understanding of its business, and accounting policies. And the second question requires a serious stress test on the new Balance Sheet, following the bail out by Desmond and Furlong.
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Datalex is a software developer headquartered in Dublin that assists airlines in developing on-line travel facilities, such as booking websites.
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The accounting for the revenue and costs associated with these contracts with the airlines, is somewhat complex, but perhaps no more complex than for say, long term contruction projects.
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On reviewing Datalex's recent accounts, you will find that the company receives a certain amount of cash upfront from the airlines on the commencement of a project. This cash received upfront, is not accounted for as revenue in the year it is received. Instead, it is shown as a liability on the Balance Sheet under the heading 'Contract Liabilities'. This is duly described in the explanatory notes as 'amounts received from customers in advance of contractual performance obligations being satisfied'. This deferred revenue is gradually written down on the Balance Sheet, and shown as revenue earned in the Profit & Loss Account, over the duration of the contract.
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However, Datalex does not receive all its revenues upfront from the airlines. A further portion of monies due to it, is not paid until the entire contract is completed to the airline's satisfaction. Therefore, you will find quite a high amount for 'Receivables' as an asset on the Balance Sheet. Deducted from this is a provision for the non-receipt of some of these receivables, usually resulting in the net receivables being written down by almost 50%. That's a very heft provision for bad debts.
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All of the above indicates that there is a considerable amount of negotiation between Datalex and its customers about whether or not it has completed in full the specifications of the contract. Also, it is likely that these contracts change and evolve, while the work is on-going, thereby adding to the complexity of the agreement.
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A dispute between Datalex and one of its biggest customers, thought to be Lufthansa, was responsible for the gargantuan profits warning of January 2019.
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Could the same thing happen again - a huge dispute with a major customer, and lost revenue as a result?
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This looks much less likely to happen in the future, as Datalex is moving away from its reliance on contractors to deliver the necessary new software to the airlines. Like everyone else these days, Datalex is moving to 'the cloud'.
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What does that mean? It means that Datalex's customers will all log in to a cloud based system, and use (and pay) for software that it downloads or borrows from the cloud. This should theoretically be more efficient for all concerned. Datalex need only write one software program for doing a particular job, put it up on 'the cloud' and let each airline log in and use it whenever it needs it.
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The new cloud based system should prevent all these disputes about contracts being fulfilled or not, from recurring in the future. Of course, there is an attendant new risk that Datalex may not transition successfully to this new way of doing business.
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The new capital injected by Dermot Desmond and Nick Furlong in July 2021, together with the associated capital raising through a share placing with institutions at 50 cent per share, and a smaller offer to other shareholders, has transformed the Balance Sheet. The 'Proforma' Balance Sheet as at 30th June 2021, per the interim accounts, which includes this capital raised in Juy 2021, holds up well to the most dramatic of stress tests.
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There is an amount of $11.4 million in cash and cash equivalents. Deduct from that the total borrowings of $2.6 million (if called in immediately), and also deduct contract liabilities of $5.5 million (if all of this money received in advance had to be repaid), and there is still a surplus of $3.3 million. Therefore the financial position of Datalex now looks to be well secured.
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Elsewhere in the accounts of Datalex, there could be a suspicion of aggressive accounting in the way that a portion of 'employee benefit costs' (ie salaries) and a portion of contracting costs are capitalised. However, the resulting intangible asset is being written down ('amortised') every year, showing a portion of this cost in the Profit & Loss Account, so the timing difference in recognising these costs should not cause any major issues.
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Finally, are the shares cheap at the current level of around €0.85 cent?
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The interim results for the 6 months ended 30th June 2021 showed an Operating Profit of $495,000. Not a bad result, considering the continuing Covid lockdown disrupting many travel plans in 2021. However, this was wiped out by huge financing costs of $2.7 million. That was caused by the penal 10% interest rate being charged by Dermot Desmond for his emergency funding, but that has now been repaid by the company with a portion of the proceeds from the share placing at 50 cent each, in July 2021.
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Datalex reported a loss before tax of $6.5 million for 2020, the first covid affected year. Add back the imparement charge of $11.6 million (arising from the Lufthansa dispute) and the non-recurring finance costs of $2.9 million, results in an adjusted profit of $8 million.
The chart is bullish, showing a clear break out of the downward trend. The first indication that there was something wrong at Datalex before the profits warning, came from the chart, when it lost its upward trend in 2018. Now the chart is indicating that a new upward trend has begun. The straight line on the chart represents the period shortly after the profits warning in 2019, when the shares were suspended, due to the delay in producing accounts for the company.
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Two directors bought in near the low at prices of 34 cent and 38 cent in 2020 (new CEO Sean Corkery invested €496,208 in July 2020 and new Chairman David Hargarden invested €55,980 also in July 2020 at these prices).
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In contrast, the previous Charirman Paschal Taggart sold over €200,000 worth of shares in November 2018 at €2.48 each. Director David Kennedy also bailed out in two seperate sales, dumping over €570,000 worth of shares at €3.28 each in May 2018, and a further €829,000 worth at €2.55 each in November 2018.
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The directors' dealings are well worth watching, based on the above transactions, and the recent activity has seen buying in 2020, followed by a further top up with additional purchases in the open offer at 50 cent in July 2021.
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As Datalex is a small company, there is not much liquidity in the stock. On some days, there is no trading in the stock, and when it does trade, the total volume on the market is often in the region of only around 30,000 shares. Therefore you will need to be patient when investing, setting out a top limit of say 90 cent and allowing your broker at least a week or so to complete your order. The lack of liquidity makes it virtually impossible to buy this stock on-line.
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The full year results for 2021 should be announced in mid-May, and this will refocus investor interest in this stock. The outlook for 2022, per the Chairman's statement, will be more relevant than the covid lockdown ravaged results for 2021.