Institutional Holdings
39.7% |
Industry
Office Equipment |
P/E to Industry
131.6% |
Price/Book to Industry
105.8% |
Profit Margin to Industry
61.5% |
| London headquartered, $3 billion in
revenues, Danka Business Systems is one of the world's largest suppliers of automated
office equipment. The company derives 28% of its revenues from the sale of
photocopiers, facsimiles, and other office equipment . 65% of the company's revenues come
from its retail service, supplies, and rental business which provides outsourced technical
support, training, maintenance and supply contracts to its base of copier customers. The
company's wholesale division markets its products to independent dealers and accounts for
7% of revenues. In September, Danka announced a distribution pact with Canon
that allows Danka to offer a complete line of color copiers to its customers. This
former highflier's troubles began with the December 1996 acquisition of the sales,
marketing, and equipment service divisions of Kodak's copier business. Danka also
acquired Kodak's outsourcing business. Danka struggled from the beginning to integrate the
businesses, and in December 1997 it announced the first of a string of earnings warnings
that cut its stock price in half.
In late June 1998 Danka announced that revenues for the first quarter of fiscal year
1999 would be 10% below expectations due to lower equipment sales in the U.S., and as a
result earnings for the quarter and fiscal year would be hurt. According to Danka,
"the revenue shortfall was primarily related to internal issues, including the
integration of the sales force, changes in the compensation plan introduced on 4/1, and
sales order entry issues related to the integration of the product portfolios.
Additionally the company is experiencing a recent increase in competition among equipment
sales and this is impacting margins."
On October 5th Danka issued yet another earnings warning, and announced that the
company would report a loss for the quarter. Gross profit margins fell in the second
quarter due to lower retail margins in the equipment and service divisions, and
intensified competition from Japanese manufacturers. Margins also came under
pressure as the company continued to take steps to reduce inventory levels.
The company's second quarter fiscal 1999 revenues fell 10% due to lower equipment sales
and lower retail service, supplies, and rentals revenues. Equipment sales were hurt by an
accelerated shift to digital products, Asian economic problems, and competition from
Japanese manufacturers selling directly to consumers.
There were a few bright spots in the second quarter report. Prices remained stable in
the retail supplies and services division. Equipment sales on a sequential basis
rose 5% from the first quarter. Color copier and digital products sales rose 8% and 34%
respectively. Danka is taking steps to improve the availability of digital products to
meet increasing customer demand. The increased focus on higher margin digital
products will help profit margins in coming quarters. Danka will also benefit from an
easing of competition from Japanese manufacturers due to the rise in the Yen. The gradual
improvement we foresee in Asian markets over the next year will help the company regain
revenue growth. Danka is expected to report a profit next year. We believe that the
company is taking the necessary steps to survive its current financial crisis.
In early December DANKY reached an accord with its lenders to restructure its lending
agreements. On December 12th Danka announced that an agreement had been reached to
end its research and development contract with Kodak The company also announced that it
had terminated the onerous supply agreements with Kodak that required it to make minimum
purchases of equipment from Kodak. The ending of these agreements will greatly help Danka
in its efforts to reduce the inventory buildup which had impacted profit margins.
Under the terms of the terminated agreements Danka had been required to make purchases
from Kodak which exceeded the company's inventory needs. The inventory buildup caused by
these supply contracts had put a severe strain on Danka's finances. Danka's
payments to Kodak will be reduced by $150 million over the next 3 years.
Danka still needs to come to agreement with Kodak on long term supply relationships,
and the company will need to continue to adjust its product mix in the coming quarters
if it is to regain financial stability. We believe that the company has taken the
necessary first steps on the road to a return to profits. The past year's string of bad
news has left the shares severely undervalued. DANKY now trades at just 1.5 times cash
flow, with a price/sales ratio of 0.08. The current book value is $8.32 a share. We look
for the shares to trade up to the $8-10 range on any positive developments. Our
12-18 month target for DANKY is $10-15 a share.
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