The g spot
Adapt IT: going it alone
Adapt IT’s latest results — the software firm grew interim headline earnings by 44% and slashed debt — weren’t enough to arouse much enthusiasm from market punters. The company is in the throes of evaluating an unsolicited bid from fellow small cap Huge Group, and has urged shareholders to wait for the findings of an independent board on the merits of the offer. We spoke to Adapt IT CEO Sbu Shabalala.
One argument Huge CEO James Herbst made was that without scale, you will never get the rating some of your offshore peers enjoy, which has implications for your growth prospects down the line. Do you agree?
SS: I do not agree with that statement entirely. The rating of any business is always driven by a few more factors than just size. So, the quality of a business is judged by the quality of its earnings … and part of what we’ve built within Adapt IT is a diversified software and digitally led business that has high annuity income. In the listed environment, it’s also important to note that the liquidity of our share is what drives the valuation.
Having said that, and despite Adapt IT’s recurring revenue now at 66% from 60% previously, your shares were on a one-way slide until the Huge offer. Doesn’t a poorly rated share price make life difficult for you as far as growing the business is concerned?
SS: We understand the fundamentals of the market and we don’t expect to be valued in only one way. When Adapt IT shares were positively valued by the market we never went out and proclaimed it, so we don’t when the share is undervalued either.
We try to understand the fundamentals of why our business is undervalued and then fix those. So we understood that our price was affected, first, by what was happening with our competitors. The second matter that affected our sector was the debt levels carried by these companies, including Adapt IT. You can see now that we’ve reduced our debt substantially.
A lot of JSE-listed companies in the tech sphere are looking at offshore listings, given the bias against locally listed stocks. If you’re not able to use your scrip to buy companies because you’re undervalued, and you don’t use debt because you’ve been trying to reduce that, does it mean you’ll have to be content with slow organic growth?
SS: If you’ve followed our history, you’ll know that we have used scrip and it’s only when our scrip is not valued correctly that we don’t. During the pandemic, we slowed down our growth to protect the same shareholders who understand our strategy. We believe that by the end of this financial year, we’ll have enough in our arsenal to resume our growth strategy.
Are you saying you’ll still grow by acquisition? What is the point of paying down debt only to take on new borrowings?
SS: Remember that we cut our debt to reduce the interest payable to lenders, and that’s why we’re reporting headline EPS growth of 44%. Now, in a market that’s not growing, I believe that was the right course of action.
We’ll always have debt; we’re comfortable with a 50% net gearing ratio and we are now below that with 42%. So our capacity to grow is sitting at 8% of net equity value.
Would you ever consider an offshore listing? More than a quarter of your revenue comes from sales abroad.
SS: Offshore listings don’t come cheap. We wouldn’t take that decision lightly, and remember, a listing is more to direct capital into the business. We believe we’re sufficiently capitalised for our strategy at this point and should we need further capital, we can go to the SA market.
What if there’s a terminal decline in demand for locally listed small caps?
SS: I don’t believe there’s a terminal path for JSE-listed stocks, I just do not support that view. We’re delivering earnings and we continue to diversify our business. If we get a better rating, it’ll be from our performance.
Was the huge rush to remote working beneficial to Adapt IT’s business?
SS: Most of our clients were shut down over Covid — our hospitality clients and our education clients in particular — so we had to ensure that we managed our costs. As the restrictions started being relaxed, we started seeing business grow again.
However, there’s growth we haven’t been able to enjoy from larger projects that haven’t started yet. We’ve got a good pipeline and we aim to execute on them as the economy starts improving.
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