Datalex’s upcoming share sale a delicate balancing act

Datalex, the Irish airline software company, has endured its share of turbulence in recent years, with an accounting scandal in 2019, the grounding of aircraft due to the Covid-19 pandemic globally the following year, and, more recently, its 2022 results coming in below hopes as China remained largely under lockdown.

But there has been much for investors to cheer about so far this year. Demand has rebounded strongly in China after President Xi Jinping abandoned its zero-covid policy. And Datalex has renewed contracts with key existing customers like JetBlue, Air China and Air Transat and signed a deal with LatAm Airlines.

Chief executive Sean Corkery told analysts this month that a huge growth opportunity from airlines focusing more on ancillary revenues — and a change in its focus from building bespoke systems for airlines to off-the-shelf products where fees are fuelled by transactions — should mean its turnover doubling to almost $47 million (€43.9 million) by 2026.

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However, Datalex’s shares have only edged 5.5 per cent higher this year to 58 cent as investors brace themselves for another large share sale — only two years after it raised €25 million of equity in a deal that was meant to get its finances back on track.

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Two-thirds of what was raised in 2021 repaid emergency loans from major shareholder Dermot Desmond, with €7.7 million of net proceeds left over providing working capital.

By the end of last year, the loss-making company had burned through those funds. It has now drawn down at least a further €9 million from another €10 million Desmond facility. The pressure is on to repay it quickly, as the annual rate on the loans rose in April from 10 per cent to 15.5 per cent — and is set to hit 18 per cent in October.

Expected return

If Datalex seeks to raise too little in a share sale, it risks going back to shareholders again with a cap in hand in no time. If it goes for too much, it would send a negative signal about an expected return to profitability. Analysts at its broker, Goodbody Stockbrokers, see it posting pretax profit of $4.7 million next year.

Cantor Fitzgerald analysts have put out a hypothetical figure that Datalex could look to raise €5 million of working capital in addition to paying back the Desmond loans. A total of about €15 million equates to about 19 per cent of the company’s current market value. That may seem manageable. But investors are likely to remain wary until there’s clarity.