DiData share plunge slows amid FTSE 100 concerns

By Iain Scott for Dimension Data South Africa
Johannesburg, 16 Jul 2001

The Dimension Data share lost only 0.57% last week as bargain hunters sought, despite concerns about the stock`s FTSE 100 status, to buy the share at its lowest levels since October 1997.

The DiData share ended the week at R17.30, 10c or 0.57% down on the previous Friday`s close. The share has lost almost 44% in the past two weeks. DiData announced on 3 July that its operating margin for the full year would be one to two percentage points lower than at the interim stage.

The JSE`s IT index, which ended June at 513 points, was at 339 points at Friday`s close. This was eight points or 2.31% down on the previous Friday`s close. Heavily influenced by Dimension Data, it has lost 33.9% in the past two weeks.

While the DiData share`s plunge has slowed, which analysts say is largely because investors are taking advantage of the lowest prices since October 1997 (it closed at R17.40 on 28 October 1997), concerns are still being expressed about the group`s FTSE 100 status.

Many investors have also adopted a wait-and-see attitude in anticipation of the recalculation of the elite FTSE 100.

The next recalculation of the FTSE 100 index is scheduled for September. According to FTSE rules, stocks in the FTSE 250 that are ranked 90 or above automatically go into the top 100, which FTSE 100 stocks at 111 or below are relegated automatically.

Inclusion in the FTSE 100 results in increased status and market attention. In addition, the stocks attract a share of the institutional money targeted at FTSE 100 tracker funds. Relegation usually means the share is dropped by tracker funds.

There is concern that the DiData share will be dropped from the index, although there is no consensus around the issue. Analysts say the calculation process is a complex one.

However, some of the analysts say that indications are that the share would be relegated if the index were recalculated now. However, they are also quick to caution that this is by no means a given and they would not make investment decisions based on that.

"It is still reasonably within the realms of speculation," one analyst said. "There is a fair number of other IT and telecoms stocks in the index, and they have been pretty hard hit by poor sentiment themselves, so DiData could well stay there."

He adds that the group does have its work cut out in regaining investor confidence.

One analyst says the extent of the Dimension Data share plunge should also be looked at in terms of the global IT slowdown.

"The whole situation in terms of the IT slowdown was underestimated," he says. "Everyone was waiting for a turnaround, but no one knew the real effect of the slowdown. The fact that someone like Cisco has been cutting out its middlemen is an indication that times are pretty tough."

He cautions that while DiData is transforming its business model to a services-oriented one, it still has a large hardware component.

Another analyst says that, with hindsight, no one should have expected DiData to maintain its growth in the face of the global slowdown and amid a spate of profit warnings from the US.

However, analysts say losing faith in the group would be premature. DiData has a good management track record, and it is sitting on a large cash pile. "We haven`t seen the end of DiData, but they have to find a way to deal with the market as it is now," one analyst says.

The DiData share was trading 0.87% or 15c up at R17.45 on the JSE late this morning after only 951 187 shares changed hands. It touched a low of R17.20 and a high of R17.70 during the morning.