Formed through the merger of CSC and HPE Enterprise Services in March 2017, DXC Technology aims to be the world’s leading independent, end-to-end IT services company by partnering with companies to develop world-class digital offerings that enable technology driven business transformation.
The new company has a highly diversified customer base across public and private sectors as outlined in the table below.
|Sector||% of Revenue|
|US Public Sector||12%|
|Global Public Sector||11%|
|Travel & Transportation||6%|
The recent merger of these two companies will unlock a wide range of synergies laying the foundation for slow but stable revenue growth of 1%-4% per annum alongside improving operating margins by 7%-8%.
If achieved, these synergies will generate significant shareholder value over the next 2-3 years. This article provides further detail of the company’s plan to achieve these synergies along with outlining an attractive buy price of $88.55 per share.
1. Stable Revenue Growth of 1%-4% per Annum by 2020.
While revenues at DXC Technology’s traditional IT services business are forecasted to decline annually in the low single digits, the company plans to shift its business mix to higher growth offerings by redeploying capital and resources to developing IP for key industry sectors, providing business process solutions and scaling it’s digital transformation proposition. This will enable clients to re-invest productivity gains to accelerate their digital transformation.
DXC Technology forecasts that developing it’s Industry IP and Business Process Solutions segments will grow revenues at 7%-10% per annum while scaling it’s Digital offering alongside making selected strategic acquisitions will result in digital revenues increasing annually at 25%-30%.
2. Operating Margin Expansion of 7%-8%
In addition to a steady increase in revenues, DXC Technology has identified a number of sizeable opportunities to reduce costs and improve operating profits including:
- Harmonising Policies and Benefits
- Optimising Workforce and Delivery
- Leveraging Scale in Supply Chain
- Rationalising Facilities and Data Centres
DXC Technology believes that these opportunities will increase operating profit margins by 7%-8% by 2020. A breakdown of targeted savings is provided below.
|Business Area||By 2017||By 2020|
|Supply Chain Efficiency||$225m/1.1%||$650m/2.2%|
Stable revenue growth combined with a significant increase in margins should unlock a meaningful improvement in financial performance. In addition, DXC Technology is planning to return c. 30% of cash flow to shareholders on an annual basis through share repurchases and dividends.
DXC Technology is aiming to increase EPS from an estimated $3.85 in 2017 to between $9.25-$10.00 in 2020. A breakdown of the improved performance is provided below.
|Estimated 2017 EPS||$3.85|
|1%-4% Revenue Growth||+$0.40|
|Supply Chain Efficiency||+$1.50|
|Estimated 2020 EPS||$9.25-$10.00|
DXC Technology will achieve a CAGR of 36.31% if it grows its EPS from $3.85 to $9.75 between 2017-2020.
Assuming a more conservative growth rate of 20% per annum we believe that a conservative PE multiple would be 23x forecasted 2017 EPS of $3.85 providing a Buy Price of $88.55 or lower per share.
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