BUSINESS DAY TV: Adapt IT ‘will not become an acquisition addict’
Adapt IT CEO Sbu Shabalala on the company’s half-year results, which show a 20% rise in normalised headline earnings per share.
Sbu Shabalala is Adapt IT CEO.
BUSINESS DAY TV: Adapt IT shares hit a wobble today falling about 5% at one point this afternoon after the release of its interim results this morning. While turnover was 48% higher for the period, almost none of that, in fact only 4%, was due to organic growth. Operating profit rose by a third but headline earnings grew only 20% and joining me now is Sbu Shabalala, Adapt IT CEO.
Sbu ... if you strip out those acquisitions it almost looks as if Adapt IT has gone ex-growth, is that a fair assumption?
SBU SHABALALA: Not quite, it can’t be a fair assumption, given that the underlying business has grown by 4%. Yes, it has been a tough market. Our sectors like the education and manufacturing sectors did not give us the growth that we wanted to see. However, our underpin, which is the annuity revenue all came through and some of the sectors, that are high-growth sectors like the energy sector, got over 20% growth.
The Telecommunications Expense Management solutions getting over 20% growth, so it’s been a mixed performance in the sectors. But what’s more important for us is all the underlying businesses remain very profitable having improved the ebitda (earnings before interest, tax, depreciation and amortisation) margin to 21%.
BDTV: But there’s now also a difference that we’re seeing between operating profit which was up by a third and headline earnings or I’m not sure if that’s the normalised headline earnings that we need to be looking at?
BDTV: At 20%, so why is there that divergence?
SS: So the divergence between the earnings, we look at ebitda that’s what we track, and with the 48% growth, ebitda grew at 44% which was in fact in line. But what we’re finding is that we obviously have to have some normalisation and what that is brought by because we have to amortise some of the purchase price considerations that we make for the acquisitions that we do. And this is an IFRS (International Financial Reporting Standards) 3 requirement, it’s a reporting requirement that all of us now have. It started two years ago but that number has become material for us as Adapt IT, being R18m.
Now obviously these are non-cash flow items so we had to normalise those for our shareholders.
BDTV: And as far as the cash is concerned because you talked about slow payments to debtors thanks to market conditions, so are you increasingly seeing that businesses are struggling and they’re delaying payments to a company like Adapt IT?
SS: It’s a combination. Our education sector has been quite slow in paying and it’s a function obviously of their funding having been confirmed quite late last year. But we’re also seeing with the addition of the CQS business, we’re now a larger business. But we always know that our revenue is very cyclical. So we look predominantly at the full-year picture and I think we’ve got enough to go through and make sure that we get those collections in and our cash flow remains positive.
BDTV: Generally speaking is this second half a better period for Adapt IT?
SS: It always has been and it has been exacerbated by the fact that most of our licences, in particular for the CQS acquisition, which was a very large acquisition, they all come through in the second half of the year.
BDTV: So at this stage could you say to investors who are clearly a bit shaken by the result, because they pushed your shares down today that the second half is likely, on the basis of probabilities, to be better than the first?
SS: What I would say is Adapt IT has got a very good strategy of both organic and acquisitive growth. We’ve grown the business by close to 50%, at 48%. So that’s not growth that you can just find anywhere. So we are happy that the growth that we’ve achieved as a business is in line with our strategy and in line with what we’ve said to shareholders about wanting to grow the business. Together with the bottom line ... the bottom line has also increased but this is why we are saying just look at ... the numbers that you look at, we have to change the way we view Adapt IT because we will continue to be an acquisitive business. And IFRS 3 requires us to obviously amortise, and we expect that to continue, so going forward we’d expect that to happen.
BDTV: Just talking about acquisitions, in December you, under the general authority issued to you, well you raised some R84m through the issue of new shares, but you’ve said that you’ve temporarily used those funds to offset borrowings until they’re applied in due course, does that mean that you raised money for an acquisition that didn’t come through. What was the thinking there in raising that cash at that point and then actually using them to offset your borrowings?
SS: We obviously have to raise capital in time to be applied to capital expense. So if we are to buy another company we need time to raise the capital and have it to do so. So having raised this money in December, we’re only looking at the beginning of the year. So we have working capital facilities against which we just parked the funds.
BDTV: So it wasn’t a case that there was an acquisition on the cards and it fell through, and you’d raised the money and now you’ve used it against borrowing?
SS: So the timing of raising that was driven by when we believe we’re going to do the next acquisition and we still believe we’re on track to execute on the funds we have gone to borrow or actually that we’ve raised in the market.
BDTV: Is it a case that you actually become addicted to acquisitions that you cannot but do acquisitions, and you talk about acquisitive growth, and acquisitive growth was predominantly behind the revenue growth. Are you at risk of falling into that sort of trap where you just have to keep on making deals in order to satisfy, I guess, your shareholders?
SS: If we didn’t look at our acquisitions quite rigorously, as we do, we probably would be. But the last time we did the acquisition, if you remember, we announced the CQS acquisition which is the main contributor in these financials. We announced that in 2015 so that was around June of 2015, it was only consolidated post the Competition Commission’s approval. So we’re finding that the size of transactions that we’re doing require us to go through Competition Commission approval. So we’re sitting at 2017, the last acquisition, major acquisition, we did was 2015, so I don’t believe we run that risk at all.