Adapt IT’s profit slides as weak SA economy takes its toll
Accounting changes also weigh on technology group, with headline earnings per share falling 35%
Adapt IT, which on Monday reported a fall in earnings, is looking for growth outside SA and in the public sector, says its group CEO, Sbu Shabalala.
In an interview, Shabalala said Adapt IT’s international business accounts for 27% of revenues. This is up from 22% in the previous comparative period, with the aim to get this to about 30%, he said. Once done, the company will probably aim for an even higher contribution from its international operations. Adapt IT has operations in 32 African countries.
The Johannesburg-based company provides software solutions to the education, manufacturing, energy, financial services, communications and hospitality sectors, and has operations in Mauritius, Botswana, Ireland, Kenya, Australia and New Zealand.
A downbeat economy has knocked Adapt IT's half year profit. Business Day TV spoke to CEO Sbu Shabalala about how Adapt IT will be positioning itself to mitigate SA's tough trading conditions.
Almost three-quarters of revenue comes from SA.
“A lot of our clients are digitising,” Shabalala said, pointing to the opportunities seen in information communication technology consulting, cloud consulting, information technology strategy and advanced analytics services.
Despite business with the public sector having resulted in corporate governance issues at competitors such as EOH and Altron, the company sees a lot of opportunity for their public-sector unit, which accounts for less than 5% of their total business, said Shabalala, adding that he hopes to grow it to about 15%.
Adapt IT’s profit fell by more than a third in its half-year to end-December as SA’s weak economy and project delays took their toll.
Headline earnings per share fell 35% to 15.93c, partially due to accounting changes, though the company reported on Monday that some of its projects are taking longer than expected to complete.
Revenue increased 10% to R721m, with the company benefiting from acquisitions, including of Melbourne-based Wisenet Group, which provides education software.
“The SA market remains challenging, however Adapt IT continues to focus on leveraging its underlying diversification to offer more value to the current client base more effectively,” the group said.
Nitrogen Fund Managers director Rowan Williams said the tough operating environment “is taking its toll on the business, particularly in certain segments, such as hospitality and energy”.
He said the company needs to tackle the underperformance in these segments as this is overshadowing some decent performance from its other segments, which “have either grown earnings or managed to keep them flat”.
The company also needs to focus on cash generation to reduce its gearing levels, which are elevated after its acquisition drive, he said.
In the last financial year, Adapt IT spent R147m on acquisitions, R96m on buying back its own shares and R44m on a new five-year Oracle software licence, which reduces the group’s overall hosting costs for their hospitality business.
Shabalala said the company is likely to spend much less on capital expenditure in 2020, as it aims to reduce debt.
Williams said the outlook for the company remains strained as long as economic growth in SA stays subdued.
“The increased annuity nature of Adapt IT’s revenue does create a base for earnings, but growth is dependent on improved prospects for growth in SA and, more broadly, Africa, which look poor in the near term,” he said.
Shares in Adapt IT were 3.08% lower at R1.89 per share in afternoon trade on Monday.
Williams said reaction was muted given that the stock had already declined by 45% so far in February before the release of the results, “so the weak results have been priced into the stock already”.
With Karl Gernetzky