Adapt IT, pressured by a collapsing share price and a sub-optimal balance sheet, is reviewing its capital structure with a view to reducing its gearing — or the proportion of its debt to equity.
The historically acquisitive JSE-listed software and services group has admitted it’s difficult to make fresh acquisitions given its depressed share price and its relatively high gearing.
CEO Sbu Shabalala said in an interview with TechCentral on Monday that the group’s net gearing at the end of December 2019 was 66%, higher than its preferred target of 50%, owing to a planned capital raising that did not proceed due to the decline in the share price.
Though the debt remains serviceable thanks to strong cash generation, Adapt IT has hired independent advisers to help it with a review of its capital structure. The advisers, who Shabalala declined to name, citing confidentiality, will present their report to the board soon.
A rights offer is one among of many options that may be considered, Shabalala said, but he emphasised no decisions have been made yet and won’t be until the report has been presented to the board.
Adapt IT’s share price has fallen precipitously in the past three years — down by more than 85% in that period. It was trading on Monday afternoon at R1.90, down 2.6% on the session, following the publication of its interim results for the six months to 31 December 2019.
Shabalala said the largest component of the escalation in the group’s debt — R147-million — was from recent acquisitions. It also spent a once-off R44-million to secure Oracle licences for its Hospitality business for the next five years, the benefits of which should accrue “in the next few years”.
Instead of focusing on acquisition-led growth, Adapt IT has turned its gaze inward to extract efficiencies, which has helped it defend its operating margins, Shabalala said. He expects a stronger financial performance in the second half, based on historically performance.
Adapt IT is not alone among small caps on the JSE to have its share price collapse, he said. There has also been “contagion” among JSE-listed IT shares, most of which have fallen sharply in the past year.
The group’s net asset value at the end of December was R705-million, significantly above its market capitalisation on Monday of R265-million.
Shabalala said Adapt IT’s shares are thinly traded, which has added to the volatility. In the past 12 months, only 7% of its shares have changed hands. “A lot of our holders understand the intrinsic value of this business” and hence haven’t sold, he said.
Adapt IT declared no interim dividend. Shabalala declined to say whether it would pay a dividend at year-end, but he cautioned it was unlikely without a successful review of its capital structure. — (c) 2020 NewsCentral Media