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Adapt IT’s acquisition-led strategy pays off

Turnover up 34%; headline earnings increase 55%.

The step into the fast growing oil and gas sector has proved a good move for IT solutions provider Adapt IT.  As a result of the acquisition of the Aquilon Group last year the company was able to deliver good results for the year to June 2014.

Turnover increased 34% to R406.3 million and operating profit increased 69% to R49.6 million. Total headline earnings per share up 55% to 34.55 cents.

Much of this revenue growth was driven by Aquilon, which specialises in implementing SAP solutions in the energy sector and which was acquired in a R98 million cash and scrip deal in 2013.

From the date of acquisition, the Aquilon Companies contributed R13.6 million of the R38.1 million profit after tax and R70.6 million of the group’s turnover. The Group grew organically at 10% to 11% on a year-on-year basis.

“This is slightly below its historical average and below my forecasts, but its still quite a robust growth rate given the depressed South African economy,” says Keith McLachlan, a fund manager at AlphaWealth.

The reason results were below forecasts, he says, was because Aquilon only achieved 94% of its FY 14 profit warranty. “That said, the key attributes of strong growth and high cash conversion were achieved and the stock’s story remains intact.”

According to Adapt IT CEO Sbu Shabalala Aquilon is on track to deliver on its 2015 and 2016 profit warranties.

The other business units – education, manufacturing and financial services performed satisfactorily, with manufacturing coming under the most pressure.

Education Manufact-uring Financial Services Energy Other Total
Turnover R123.1 m R147.7m R64.8 R70.6m R406.3
Segment operating profit R15.1m R12.5m R6.4m R18.8m (R3.1m) R49.6m
% Change in profit from 2013 2.90% -4.50% 100.90% 100% did not own in 2013 -121% 69%
Operating profit margin 12% 10% 6% 27% 10%

“Last year’s acquisition of Aquilon gave us entry into a new business segment and was a highlight in our year,” says Shabalala. The business provides supply chain management solutions into the sector – this includes fuel delivery and fuel management solutions. While this applies mostly to the downstream sector, there are also opportunities in the fast-growing upstream (exploration) sector. “We have invested management time into understanding the whole space and will attempt to unlock opportunities this year,” he says.

The integration of Aquilon is largely complete, which means the ever-acquisitive company is keeping its eyes open for another acquisition. “We are looking for businesses with niche software and high annuity turnover – there are not many in South Africa, but if they are there we will find them.”

Some investors are wary of companies with acquisition-led strategies. While it’s good to be cautious McLachlan notes that “management has built a reasonable [acquisition] track record by now, which partly mitigates the acquisitive risk of the strategy.”

However, he says, that risk remains and a large, failed acquisition could well lead to a disaster.

Shabalala is quick to reassure that management remains equally focused on organic growth. “Within the education group we are focused on providing solutions to the FET [further education and training colleges]. Of the 60-odd colleges, Adapt IT is now supplying services to 23 of them.

Financial services doubled its turnover, off a relatively small base. However this sector is receiving attention. “IT spend in this sector is traditionally high, so we are pushing hard in this sector.”

The group is also succeeding in its efforts to internationalise the business and 25% of its turnover is now from foreign business, specifically Africa. “We provide software and services to 14 other African countries and a further six countries beyond Africa and this is a key factor in diversifying risk and growing our dollar-based revenues,” says Shabalala.

The Board declared its 12th ordinary dividend of 8.23 cents per share, payable in September, which represents a four times dividend cover ratio and a 48% increase on the prior year’s dividend.

The company ended the day on 699c, down 4.25% on a positive day for the JSE.

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