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Adapt IT is looking for acquisitions

Even while it might be acquired itself.
Adapt IT CEO Sbu Shabalala. Image: Supplied

Adapt IT is not letting the unsolicited takeover bid by Huge Group stop it from considering takeover bids of its own.

The specialised software and technology group is open to making acquisitions in the next financial year, says its founder and CEO Sbu Shabalala.

Preparations for such a move can be seen in it strengthening its balance sheet. In its results for the six months to end December, its cash and cash equivalents doubled from R73 million to R141 million and it reduced its net gearing ratio from 69% to 42%.

Shabalala says the company is looking for businesses that will give it international reach.

This can already be seen in the software businesses it has bought over the past few years, such as Nigerian-based Kura Holdings and Wisenet Information Systems, which has holdings in Australasia.

Prey to become the hunter?

With Huge Group interested in taking over Adapt IT, and Adapt IT on the acquisition trail, is possible that the prey could become the predator and make an offer for Huge Group, which tabled a R799.7 million bid?

Read: Nodus Capital to weigh up Huge Group offer price for Adapt IT

Not really. Adapt IT is looking for businesses that offer “digitally-led solutions” that come with specialised intellectual property which can be developed into a global software business, notes Adapt IT commercial director Tiffany Dunsdon.

“In the context of that strategy, one would ask one’s self why would you want to acquire a telco operator who is in a commoditised space, where they are under pressure in regards to margins on voice.”

“Huge has never been on our radar as a fit to our strategy.”

Marginal business 

Looked at inversely, Huge Group’s bid for Adapt IT might not make sense for Adapt IT, but would boost Huge Group because it would get control of a specialised software company that has a decent earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 18.05%.

In contrast, though Huge Group’s Ebitda margin is about 30% for the six months to end-August, it declined from 38% for the corresponding period and 36% for the full year. By comparison Adapt IT’s Ebitda margin had risen from 17.91% in the corresponding period.

Read: Adapt IT shares jump 165.5% in two weeks (Oct 2020)

The R799.7 million offer is still above Adapt IT’s market capitalisation of R709.9 million, even after its shares rallied from R4.01 when the offer was made to its current price of R4.75.

Adapt IT on the up

Aside from improving its margins, paying down its debt led to a big improvement in overall earnings. Though revenue was down 2% to R707.4 million, and operating profit was only up 1% to R79.8 million, a R174.2 million cut in overall liabilities played a part in finance costs dropping 21% to R33.4 million.

The lower financial cost played a big part in boosting profit before tax 26% to R46.2 million.

Well adapted

Shabalala says the group has adapted well to a world that has forced its employees to work from home. Adapt IT has long advocated the use of cloud computing, and the Covid-19 lockdown has accelerated this trend for both the group and its clients.

This has led to Adapt IT increasing its product portfolio resulting in it approaching its clients with new solutions that can solve their problems.

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