Adapt IT CEO Sbu Shabalala believes the JSE-listed software group is weathering South Africa’s tough economic conditions well and has said it will lift organic growth in the new financial year above the 6% achieved in the year ended 30 June 2017.
The 6% figure was a decline from the 9% achieved in the 2016 financial year, but an improvement on the 4% reported in the first half of 2017. That number, reported in February, has helped pile considerable pressure on Adapt IT’s share price, which has nearly halved since January.
Despite the share’s underperformance — it has been the weakest of all tech stocks listed on the JSE this year — Shabalala said the 2017 full-year numbers are “pleasing”. He said earnings before interest, tax, depreciation and amortisation (Ebitda) was 18%, with an Ebitda margin of 20% “still the highest in the industry”.
The group reported a 25% improvement in revenue. Headline earnings per share, up 2% (10% on a normalised basis), were depressed due to several adjustments made for acquisitions and required under international accounting rules.
Normalised earnings per share climbed by 22%, Shabalala said, which is “in line with the 25% growth” in revenue. The weighed number of shares in issue rose by 10%, with an issue of shares for cash used to finance the acquisition of retail IT specialist Micros.
There were also final share issues to vendors related to two prior transactions, representing a non-recurring type of dilution, explained commercial director Tiffany Dunsdon.
For the new financial year, Shabalala said Adapt IT is “excited” about the contribution that will come from Micros. He added that organic growth will improve from the 6% reported in 2017, in part due to improving market conditions.
Acquisitions
Further acquisitions are also in the pipeline, with Adapt IT looking at opportunities elsewhere in Africa and further afield. Almost a quarter of 2017’s revenue came from outside South Africa, with 14% from outside Africa.
Dundson said Adapt IT is “definitely finding” acquisition opportunities in the rest of Africa. “These are IP-rich businesses that are vertical market specialists — and not only in Africa, but globally, in the verticals where we already have expertise,” she said. She declined to comment further on specific opportunities.
She said the group’s depressed share price is not affecting its ability to do deals. “If vendors are taking our scrip, there’s more upside if the rating is more tempered. We’re not seeing resistance to taking our scrip.”
The growth opportunities in South Africa are mainly in adjacent sectors, like the public sector, said Shabalala. “We are seeing a lot of activity in that sector, so we are targeting it quite aggressively.”
He warned, however, that the level of economic activity is the lowest the group has witnessed in years. “In the sectors we are focusing on, especially energy, we have seen very low growth… Our margins were under pressure in that sector. In education, there’s been little or no activity. We are seeing an improvement, but it’s really focused in the next financial year.”
Shabalala said the low share price presents an opportunity for the group to buy back its own shares. “We will institute a buyback if we believe there is value in doing that,” he said, adding that management has authority from shareholders to buy back up to 10% of the issued shares.
He said he is confident margins can be maintained, and even lifted. “Our margins are quite good for the environment we are in. It’s a function of our business model, which lends itself to higher margins and that’s why we only look for software businesses. Because we build software once, those costs don’t reoccur. When we grow, we expect margins to follow suit.”
Margins should also be supported by the integration of acquisitions such as CQS into the group, with common functions centralised in the head office. “This is to enable the different businesses to focus on selling activities and using the platform to grow.”
It also means reduced statutory reporting requirements, which lowers costs, Shabalala said. — © 2017 NewsCentral Media
- The writer holds shares in Adapt IT