the g spot
How is Adapt IT coping with the fallout?
We asked CEO Sbu Shabalala whether its borrowings are under control
The shares of IT services company Adapt IT, once billed as a "mini-EOH", have suffered the contagion of association with its larger peer, with its stock losing 60% since January 31 2018. This week, it released full-year results to June, showing a 29% fall in EPS. Like EOH in its heyday, Adapt IT used its equity to buy companies. Those days are over; now it’s using debt. We asked CEO Sbu Shabalala whether its borrowings are under control.
You’ve got to see it in the context of the past financial year: making acquisitions became a bit of a challenge and the main contributing factor to that was our share price, which was not valued at levels that would have allowed us to do acquisitions we wanted.
So we made a strategic decision to only make cash acquisitions.
Or use debt?
Well, yes, but we utilised our cash for acquisitions and then we had to raise debt for working capital.
It’s not only that, we decided to buy back Adapt IT shares.
And then we also bought four smaller businesses.
Plus, towards the end of the year we had a very good transaction to do for our hospitality business: to buy a licence for Oracle, for us to be able to run the Oracle business for the next five years. So we made a R44m unplanned capital investment.
Will you be able to get the gearing down to the level of 50% you’re targeting in the next year?
Yes. If you look at our cash generation this year it was at about R179m, so I believe if we maintain the same cash generation we’ll be back below 50%.
The model of growth by acquisition seems to have been convincingly broken by EOH, to which Adapt IT was often compared as a smaller version. Is that a conundrum for you?
No, not really. Remember, the reason for us making acquisitions was to get sufficient software to support our international growth strategy. We have sufficient software sales now to generate over R200m worth of cash, and this we’ll do through organic growth.
The reason our organic growth is not to the levels we’d like is because of the SA environment. If SA were growing at a good pace, we would have double- digit growth and we wouldn’t need to supplement that.
So in my mind the acquisition growth strategy is valid. It’s how you fund it — you can fund it with scrip, but scrip has to be at the right level not to be diluted, right? Second, we can fund it out of cash, and if we fund it out of debt, we must have board-set debt levels. Banks will never give us debt that we can’t repay.
So the fact that we still have enough room to grow by acquisition, using our banks, gives you a view that the situation is not dire.
There’s a plan behind this; it’s not an EOH-type stack-up-companies approach.
Was EOH’s implosion a case study in what not to do?
It has had governance failures and certainly any business, not just in ICT, can learn from that. If you’re going to have governance lapses your business is not going to be sustainable, and that’s really the lesson that we’ve learnt.
Because you do say that the public sector is attractive to Adapt IT as it "becomes more accountable". Really?
We’re quite happy with the work the current government is doing to strengthen the public sector, and we as South Africans are very optimistic about the future and … somebody has to step up and assist the government. So where we’re focusing [our business] is on the government’s management solutions: project management for large projects; financial management in as far as reporting is concerned; and procurement management to make procurement transparent. We believe that as a company we must do what we can to ensure the sustainability of our country. If we don’t, we simply don’t have an SA business.
Have you begun to doubt the benefit of being listed, particularly given the bloodbath experienced by small and mid-caps on the JSE?
You know, we’ve been in business for a long time, particularly in the listed environment, and we’ve weathered a few cycles of this market. What we say to our shareholders is: patience is going to drive the returns.
Adapt IT has over the years given shareholders a lot of returns. As an investor myself I always look for a diversified portfolio and when you look at where ICT is at this point, there aren’t a lot of options for local investors and therefore we’re happy for Adapt IT to give that option. I mean, years ago we had less than R100m ebitda [earnings before interest, tax, depreciation and amortisation]; we’re on R223m now, we’ll get up to R400m and at some point we won’t be a small cap, but we will remain listed.
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