Datalex (DLE.I) – Clicking All The Boxes

(This is the third installment in my series of case studies on the shares that make up my portfolio. To see the other two articles, on Trinity Mirror and Datong, click on the company names)

 

Datalex is one of a lamentably small number of technology companies listed on Dublin’s ISEQ index. It provides technology solutions for the travel industry such as booking engines and CRM systems. In simple terms, Datalex’s offering helps travel companies directly sell seats and other ‘products’ to passengers. Its client list reads like a ‘Who’s Who’ of the airline sector, including United Airlines, Aer Lingus, South African Airways and Air China. Having floated during the dot.com era, Datalex has repositioned its business model in recent years under the leadership of CEO Cormac Whelan (in situ since 2005) to a transaction-based one, under which it receives a fee for every booking made using its system. Given the maturity of its offering (i.e. capex needs going forward are nowhere near as high as they were historically), there is scope for considerable operating leverage as more airlines choose Datalex. In recent times the company has announced a number of new contract wins, including from Delta Airlines.

 

In terms of tackling the valuation, the firm’s net cash position is a useful starting point. Due mainly to considerable investment in product development, Datalex’s cash pile had been considerably eroded over the years following its IPO. For example, in 2005 the company had net cash of $33.2m (Datalex reports in US$), but this had dropped to just $10.5m by the end of 2009. However, the successful transition to a transaction-based model and increasing customer adoption meant that last year saw cash balances starting to climb again, with $11.1m of cash and cash equivalents posted on the balance sheet at the end of 2010. In its most recent update management reiterated that the firm was “on course to deliver growth in EBITDA, cash and Enterprise Value in 2011”. In my model I estimate that Datalex will exit 2011 with just under $13m in cash (US18c/EUR14c – that’s nearly 40% of the current share price). Net cash should continue to climb over the coming years. I estimate the DLE will generate free cashflow of $3.5m in 2012 and $4.0m in 2013 (I define free cashflow as operating cashflow + interest + maintenance capex).

 

My DCF valuation, in which I use a 10% discount rate and a 3% terminal growth rate, produces a valuation of €0.64, which implies 83% upside from current levels (€0.35). While this is encouraging, it’s worth noting that Datalex is not without its risks, which include: (i) The potential that it will lose a contract to a competitor – against this I note that DLE has been winning more business of late; (ii) its status as a microcap stock (market capitalisation is only €25m) which puts it outside of many fund managers’ reach; (iii) The dislocation in the global economy could depress travel volumes and/or put a customer out of business; and (iv) the threat of a new entrant to the market with a competing product.

 

Four obvious things mitigate against the above. Firstly, Datalex’s growing cash balances offer comfort in terms of the valuation, as they provide a cushion for investors. Secondly, the company has over the years invested a sum in excess of its market cap in a software product whose credentials are obvious given the first-rate customer base. Thirdly, given difficult macro conditions, airlines are looking for new ways to generate ancillary revenue, and Datalex’s systems help facilitate this (there’s a decent chance that you’ve seen this first-hand if you were offered insurance, a hotel reservation and/or car hire along with your plane ticket the last time you booked a flight). Fourthly, many of its customers are tied in on long-term agreements (United Airlines has committed to Datalex until at least 2017, for example).

 

Overall, my sense is that, barring a major economic shock, the outlook for Datalex’s share price is positive. The quality of its technology offering is not in doubt, as evidenced by the stream of blue-chip customer wins over the past 18 months. I also welcome the recent resolution of its dispute with Flight Centre, which removes an unwelcome overhang from the stock. Cash balances continue to rise and provide a decent – and growing – support for the share price. Excluding cash, the firm is valued at a discount to the investment it has put into a product that on my numbers will produce EBITDA of US$5.5m next year – not bad for a firm with an enterprise value of circa €15m! Using traditional valuation metrics, on my estimates Datalex trades on 6.2x 2012 EPS, 3.3x 2012 EV/EBITDA and 0.9x 2012 P/B.

 

Datalex is cheap, and if it continues to successfully roll out its product to the world’s leading travel companies, I think more people will notice this too (I note that over the past 12 months we’ve seen significant share purchases in Datalex by Dermot Desmond, Pageant and Farringdon). I’m a happy holder.