Executive directors' report

The Group delivered a strong operational performance during FY23 benefiting from continuing trends in networking and cyber security.

Westcon International delivered another excellent financial performance. The significant performance improvements in recent years have driven an increased valuation of the division resulting in a high once-off accounting charge for FY23 relating to its share-based remuneration plan which materially impacted all of the earnings metrics.

Logicalis International's results were solid and Logicalis Latin America had a much improved second half, with improvement of its supply chain.

During the year, we successfully concluded the disposal of Analysys Mason and unlocked significant value for shareholders in line with the ongoing Strategic Review process. A special dividend of ZAR2.7 billion was distributed in addition to which we are now declaring a final ordinary dividend of ZAR439 million for FY23.

We continue to see consistent demand for our technology solutions and services across the world. With supply chain issues abating and backlogs reducing, our operations remain well-positioned in their markets.

Jens Montanana
CEO

Strategic overview

Datatec's goal is to improve shareholder returns over the medium term through a combination of corporate and business development actions aimed at enhancing the competitiveness and profitability of its subsidiaries and operating divisions.

The Group's Strategic Review continues to address the persistent gap between Datatec's valuation and the inherent value of its underlying assets while also ensuring that the Group is positioned to take full advantage of the positive market dynamics for its technology solutions and services.

In September 2022, Datatec sold its Analysys Mason ("AM") division, which entailed the disposal of its 71.2% shareholding in AM in accordance with the terms announced on 30 June 2022, representing another significant liquidity event for shareholders. The proceeds were distributed to shareholders by means of a special dividend (see below).

Datatec has split its investment in Logicalis Group into two divisions: Logicalis International (all markets outside Latin America) and Logicalis Latin America. This new organisational structure is reflected in the FY23 results with Logicalis International and Logicalis Latin America reported as separate segments.

During FY23, Datatec engaged a leading corporate advisory firm to develop new executive long-term incentive schemes for its subsidiaries to better align divisional executive management remuneration with Datatec shareholders. The developed management incentive plans focused on maximising shareholder value, designed to achieve strong equity value creation alignment and engage key management in the businesses as shareholders with their own money invested alongside Datatec. Divisional leadership teams will be able to invest in their businesses at fair value in the form of "sweet equity". An intermediate holding company is required in which Datatec will hold both a fixed return instrument (loan note) and ordinary equity and management will hold a minority equity participation.

The new management incentive plan for Logicalis International was implemented on 3 March 2023 and Westcon International's management incentive plan is expected to be implemented during the second quarter of FY24. The divisional management teams will only realise their investment at the same time as Datatec does through future value realisation events.

The executive directors of Datatec will not participate in these new divisional management incentive plans.

From an operational perspective, the Group delivered a strong performance during FY23 despite continuing to experience global supply chain headwinds which affected Datatec's businesses to varying degrees. Operations in Latin America were impacted the most, but the business experienced a notable recovery in the second half of FY23. Logicalis International achieved strong results while Westcon International delivered another excellent performance.

Demand for networking, cyber security products and solutions using cloud infrastructure remained strong while software and services contributions continued to grow as part of the overall mix.

Material disposal

Effective 27 September 2022, Datatec sold its 71.2% shareholding in AM which had been held by its 100%-owned subsidiary Datatec PLC. Datatec PLC received its portion of the consideration on completion, comprising approximately GBP128 million in cash. A further amount of GBP7.1 million comprising deferred loan notes will be receivable three years after the completion of the transaction. There was provision for an earn-out payment of up to GBP7.1 million (Datatec's portion), with reference to an EBITDA target of the Analysys Mason Group for the financial year ending 28 February 2023 that has not been achieved.

Dividends

The initial consideration Datatec PLC received on completion of the sale of AM was approximately GBP128 million in cash and GBP7.1 million in deferred loan notes (payable three years after completion). On 11 October 2022, the Board declared a GBP135.1 million special dividend to shareholders by way of a cash dividend with scrip alternative of 1 250 SA cents per Datatec ordinary share. All transaction-related costs were absorbed by the Company in order to maximise this distribution to shareholders.

On 23 May 2023, the Board declared a final dividend for FY23 of 195 SA cents per share, equivalent to 10 US cents per share, in total ZAR439 million, with the customary form of a cash dividend with a scrip distribution alternative. This dividend was calculated by normalising FY23 underlying earnings per share by excluding all share-based payment charges and applying the Group's dividend cover policy of three times to underlying earnings.

Group results

To be more in line with international peers, the Group is now presenting the adjusted figure for EBITDA excluding share-based payments, restructuring costs, one-off tax items impacting EBITDA, and acquisition, integration and corporate actions costs.

Alignment of underlying earnings per share with peer reporting

The definition of underlying earnings per share has been changed prospectively from FY23 to better align with international peer reporting. The calculation now excludes normalisation adjustments relating to one-off tax items impacting EBITDA, and costs relating to acquisitions, integration and corporate actions.

Liquidity and borrowing facilities

The Group continues to closely monitor the outlook for liquidity in its divisions to ensure that sufficient cash is generated to settle liabilities as they fall due.

Westcon International has an invoice assignment facility of EUR390.6 million for its European subsidiaries, as well as an extended payables facility of US$105.0 million. Westcon International has a securitisation facility of US$120.0 million for its Asia-Pacific facilities. In addition, Westcon International utilises accounts receivable facilities in the Middle East (US$15.0 million) and Indonesia (US$11.0 million) as well as overdraft facilities in Europe (EUR4.0 million) and Africa (US$1.0 million) and a securitisation facility in South Africa (ZAR250.0 million).

Logicalis International is supported by a corporate facility of US$135 million, covering all its operations, comprising a rolling credit facility to fund working capital requirements and an acquisition facility.

Logicalis Latin America is supported separately via a number of uncommitted overdraft facilities and short-term lending arrangements and is predominantly sourced via Tier 1 banks in Brazil as it is the largest territory in the region.

The Group continues to monitor the funding needs of its individual operations and works closely with various financial institutions to ensure adequate liquidity.

The Group has performed covenant projections for the next 12 months to confirm that banking covenants are expected to be met.

Acquisitions

Logicalis International

Effective 1 March 2022, Logicalis International Limited, a wholly owned subsidiary of Logicalis Group Limited, increased its shareholding in Logicalis Portugal S.A. by 30%, resulting in Logicalis Portugal S.A. being a wholly owned subsidiary. The acquisition was for a deferred consideration payment of US$4.4 million based on the EBITDA for the two financial years ended 28 February 2022. The purchase price was paid on 1 September 2022.

On 4 August 2022, Logicalis UK Limited acquired Q Associates Ltd, a leading provider of IT consultancy and advisory services around data management, data protection, compliance and information security for US$6.7 million.

On 27 October 2022, the Datatec Group increased its stake in Cirrus Participações S.A. ("Kumulus") from 32.57% effective shareholding to 48.87% for BRL17 million (approximately US$3.4 million). One of the minority shareholders sold his 2.44% shareholding in Kumulus in December 2022 resulting in the Datatec Group's effective shareholding after these transactions reaching 51.31%.

Analysys Mason (subsequently disposed of)

On 30 April 2022, Access Markets International (AMI) Partners, Inc. a 100%-owned subsidiary of Analysys Mason Limited, acquired 100% of the membership interests in Northern Sky Research, LLC ("NSR"). NSR is based in the US and specialises in research and consulting services to the space and satellite sector.

Divisional reviews

Segment changes

Logicalis is now presented as two segments, namely Logicalis International and Logicalis Latin America (of which the Group owns 65%).

Westcon International

Westcon International's unique international market access delivered strong growth and financial performance in all strategic regions, representing a resilient footprint against several macroeconomic risks that persist.

Westcon International's hardware and software backlog remained elevated because of the semiconductor shortage and supply chain constraints. Backlog at the end of FY23 was approximately US$768 million (FY22: US$818 million).

Westcon International will continue to prioritise financial and operating performance while investing in advanced systems and business automation which are accelerating its transformation into the world's leading data driven technology provider and specialist distributor of cyber security and networking solutions.

Refer to Westcon International performance in the Measuring value section for an overview of Westcon International's financial performance.

Logicalis International

Logicalis International had a strong order intake during FY23. Shipment delays as a result of the global supply chain issues resulted in backlog remaining high throughout the year. Logicalis International's product backlog at the end of FY23 was approximately US$271.0 million (FY22: US$261.0 million).

Logicalis International continues to develop its capabilities within cloud, IoT, software, security, data management and intelligent networks in support of its strategy to provide full lifecycle solutions around IT infrastructure to its customers.

The future will likely involve hybrid workplaces for part-time office and remote workers. Preparing and planning for this environment will be essential in providing a better digital experience for customers, partners and employees.

Logicalis International remains confident about the long-term prospects for the industry and its positioning within it. Over the short term, macroeconomic conditions are expected to remain uncertain.

Refer to Logicalis International performance in the Measuring value section for an overview of Logicalis International's financial performance.

Logicalis Latin America

Logicalis Latin America had a lower order intake during FY23. As expected, the business was most impacted by supply chain delays as referred to in Datatec's FY22 results. The business recovered well in the second half of FY23 with some easing in supply constraints. Logicalis Latin America's product backlog at the end of FY23 was approximately US$140.0 million (FY22: US$139.0 million).

The market drivers and outlook for Logicalis Latin America are consistent with those provided for Logicalis International above. In addition, Logicalis Latin America is continuing to improve its customer diversification.

Refer to Logicalis Latin America performance in the Measuring value section for an overview of Logicalis Latin America's financial performance.

Corporate and Management Consulting

The disposal of Analysys Mason was concluded on 27 September 2022. The FY23 results of Analysys Mason are disclosed as discontinued operations and US$7.1 million is included in profit from discontinued operations in accordance with IFRS 5.

The Corporate segment includes the net operating costs of the Datatec head office entities which were US$30.4 million (FY22: US$18.1 million). Corporate costs include the remuneration of the Board and head office staff, including share-based payments, as well as consulting fees and audit fees. The increase in corporate costs is mainly as a result of increased share-based payment charges of US$15.4 million in FY23 (FY22: US$4.7 million). In FY23, foreign exchange gains were US$8.6 million (FY22: foreign exchange gains of US$1.0 million).

As at 28 February 2023, Datatec head office entities held cash of US$78.0 million (FY22: US$103.1 million) of which US$16.4 million (FY22: US$30.8 million) is held in South Africa and subject to the South African Reserve Bank regulations. These cash balances decreased by US$15.1 million from 28 February 2022 mainly as a result of settlement of share-based payment schemes (shares purchased in the market), the cash portion of the FY22 final dividend paid to shareholders of Datatec and the Analysys Mason transaction-related costs that were absorbed by the Company.

Subsequent events

Increased shareholding in subsidiaries

Effective 3 March 2023, Logicalis Spain, S.L., a wholly owned subsidiary of Logicalis International Limited, increased its shareholding in Audea Seguridad de la Informacion, S.L. by 2.3% to 72.3%.

Effective 21 April 2023, Logicalis Spain, S.L. increased its shareholding in Audea Seguridad de la Informacion, S.L. by 13.85% to 86.15%.

Dividend declared

On 23 May 2023, the Board declared a final dividend for FY23 of 195 SA cents per share, equivalent to 10 US cents per share or in total US$22.5 million with the customary form of a cash dividend with a scrip distribution alternative.

Management incentive plan – Logicalis International

Logicalis International implemented the Logicalis International Long-Term Incentive Plan ("LILTIP") in March 2023 following a corporate restructuring. A fixed return instrument was issued to Datatec PLC in addition to its ordinary equity. The Logicalis International executive leadership team, being 18 individuals, invested 5.4% of the ordinary equity of the new structure with the same rights as Datatec's ordinary shares in Logicalis International. A further 0.9% of the ordinary equity is available for purchase by management to allow for changes to the management team up to a total limit of 6.3%.

There were no other material subsequent events.

Current trading and outlook

We continue to see good momentum in demand for our technology solutions and services across the world. With the semiconductor shortage now easing, our operations remain well-positioned to service customers in their respective markets as we continue to actively manage supply chain headwinds.

The Group has been able to mitigate rising interest rates through strong working capital management and by reducing debt levels.

All divisions are expected to deliver improved performance in FY24 and the Board remains focused on driving shareholder value in the context of its Strategic Review.

23 May 2023