Dimension Data (DDT)

Shares in Dimension Data have kept their sector-premium rating while those in similar companies have seen their prices collapse. True, the networking equipment reseller and integrator has proven remarkably defensive thanks to rapid growth in its IT niche and its exposure to emerging markets. But power-supply problems in South Africa, deepening crisis in financial services and gloomy industry predictions from its partners prompt us to revert to a sell recommendation.

DiData's chief executive, Brett Dawson, told Investors Chronicle last November that his company’s “superb geographical footprint should shield us somewhat” and February’s trading statement reassured shareholders that DiData has experienced “good demand” and improved revenues and profitability “in all regions and across all lines of business” since October 2007. But some analysts note that DiData's bosses won't confirm that the company will meet City forecasts for 2007-08.

It’s true that the kit DiData resells is some of the fastest growing in the IT sector. Companies are rebuilding their networks on internet standards (“IP”) in what DiData hopes will be a long process of technology upgrades. One example cited by DiData in this next phase is “unified communications” - a broad term for technology that enables, for example, a single phone number for fixed, mobile and internet calls. But analysts say customers aren’t biting yet.

“Despite all the hype and glitz from the vendors, customers are apparently still sceptical,” says Jan Dawson of IT consultancy Ovum. Many corporate buyers “have pressed the 'pause' button on their rollouts while they wait for evidence that the solutions in the market today are ready for a large-scale deployment”, he adds. Niche integrators, such as DiData, will also face increasing competition from big players such as IBM, Accenture and BT.

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US networking giant Cisco is a leader in this emerging field, and DiData is one of its top resellers and integrators. But Cisco’s second-quarter results saw the company lower near-term growth forecasts to 10 per cent, below its long-term target of 12-17 per cent. Cisco's chief executive, John Chambers, has said US and European customers are “cautious”, and could remain so for over a year. DiData derives around a fifth of its sales from the financial services sector, where IT budgets face a freeze.

But DiData's home territory of South Africa is causing most concern among investors. “The key problem is the sudden South Africa electricity crisis and the dampening effect on growth this could create,” says Roger Phillips, an analyst at stockbroker Evolution. “While DiData is not particularly exposed to the mining sector, it is the largest systems integrator in the region and so would get hurt.” Mr Phillips reckons that Africa will contribute about 42 per cent of DiData's profits in 2007-08, with most of that coming from the south.

Given the high profile of South Africa's power supply problems, it’s not surprising that DiData’s shares have fallen from their peak at the start of the year, at around 66p. But they still trade on a PE ratio substantially above shares in similar companies. The rating of over 17 times this year’s forecast earnings compares with the average of 12 times for similar London-listed companies and only one - Detica - has higher-rated shares. DiData's rating reflects its fast earnings growth, but nonetheless seems excessive when compared with the dynamic Indian IT services sector’s average rating of 16 times or the international mean of 14 times.