Organic growth at small-cap IT stock Adapt IT has slowed from 9% to 4% as clients in the higher education, manufacturing, resources and banking segments curb their spending in the face of extended slow economic growth.
However acquisitions made in the last year ensure that the ambitious IT firm, which hails from Durban, continues to grow turnover and earnings growth in the double digits – bringing the group slowly towards its goal of turning over R3 billion a year by 2020. It generated R578 million in 2015.
Turnover for the six months ended December 31 2016 increased 48% to R460.7 million, with acquisitions accounting for 44% of that growth. Growth was boosted by the inclusion of CQS, an expert in audit, financial and risk management, and EasyRoster, a provider of rostering optimisation software solutions.
These companies will add to the services offered to existing and new clients in the financial and manufacturing sectors and have extended Adapt IT’s offshore offering to 40 countries, up from 28 a year ago.
Earnings before interest, tax, depreciation and amortisation (Ebitda) increased 44% to R89.9 million. Operating profit increased 32% to R69.5 million.
Adapt IT has disclosed normalised headline earnings per share (Heps) for the first time as a result of the high non-cash expenses in terms of International Financial Reporting Standards related to its acquisitions.
These expenses are mainly amortisation of intangible assets (such as internally-developed software and customer relationships) and notional interest on deferred purchase considerations, which depend on the achievement of profit warranties.
Non-cash amortisation costs of R13.5 million and notional interest costs of R5.3 million were expensed, which totalled R18.8 million (2015: R7.7million) for the half year. As acquisitions will be an ongoing hallmark of Adapt IT, in line with its growth strategy, it has stated that it will report normalised earnings on an ongoing basis, as management believes this will add value to the user of the financial reports.
Normalised Heps grew 20% to 34.74 cents. By comparison, Heps grew 2% after taking into account the non-cash expenses described above, together with higher bank interest.
This resulted from the change in capital structure arising from the R160 million new debt taken on to fund the R217 million CQS acquisition, together with the debt acquired in CQS, which saw bank interest grow to R10 million from R4.5 million.
“Utilising significant gearing for the first time to acquire CQS was beneficial for our shareholders, as Adapt IT could quite comfortably take on the debt, avoiding unnecessary shareholder dilution,” says CEO Sbu Shabalala.
In December 2016, Adapt IT utilised the general authority granted by its shareholders at the previous AGM to issue shares for cash, raising R84.0 million of fresh equity in support of its acquisitive growth strategy. These funds have been temporarily offset against borrowings until they are applied in due course.
One consequence of the acquisition strategy is cash flow. The company notes that cash utilised in operations was affected by an increase in trade receivables due by slow payments to debtors due to market conditions.
The group paid a dividend, in respect of the year ended June 30 2016, of 13.40 cents per share, on a four times dividend cover ratio, on September 19 2016. It does not declare a dividend at the interim reporting date.