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Muted growth for Adapt IT as it moves on after Shabalala

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Specialised software solutions provider Adapt IT’s revenue increased by 1% to R1.503 billion (2020: R1.483 billion), comprising muted organic growth of 1%.

This emerged as the company today announced its results for the financial year ended 30 June.

Adapt IT has been under the spotlight in the past few months over a tense takeover race between Huge Group against Canadian software group Volaris, as they try to acquire a controlling stake in the JSE-listed software services company.

This is the first time Adapt IT has reported its financial performance without founder Sbu Shabalala, who resigned last month and was replaced by Tiffany Dunsdon earlier this month.

In a statement this morning, Adapt IT says the sector and geographic diversification served the company well, as some divisions outperformed while others had been affected by the COVID-19 pandemic.

The firm says the education division delivered excellent revenue growth of 27% compared to the prior period. It explains this was driven primarily by increased demand for e-learning solutions.

The division contributed 20% to total revenue and delivered earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 17% (2020: 20%).

According to the firm, the manufacturing division delivered revenue similar to the prior period. However, it has significantly improved its EBITDA margin to 23% (2020: 16%) as a result of improved operational efficiencies. The division contributed 17% to total revenue.

It notes the financial services division achieved revenue growth of 7%, contributing 22% to total revenue, with an EBITDA margin of 23% (2020: 24%).

Declining project-based revenue

The energy division experienced a decrease in revenue of 46%, contributing just 4% to total revenue.

“This is mainly due to the decrease in project-based revenue as a result of projects being postponed or cancelled and the inability of Adapt IT’s personnel to be onsite,” says the statement.

“This negatively impacted this division and resulted in a slower recovery. The EBITDA margin was -4% (2020: 12%), with further operational efficiency projects currently under way. Business development capability will be maintained to drive the sales pipeline.”

The communications division’s revenue declined by 3% due to attrition in this team impacting project delivery. It achieved an EBITDA margin of 26% (2020: 34%) and contributed 20% to total revenue.

The hospitality division was impacted by the measures implemented by government in response to the pandemic in this industry and, consequently, revenue declined by 3%. The EBITDA margin improved considerably to 11% (2020: 8%) due to the operational efficiencies put in place by the company in response to the pandemic. The division contributed 17% to total revenue.

Adapt IT’s international revenue contribution was 24%, of which 14% was from 38 African countries outside South Africa and 8% was from Asia Pacific, while Europe and the Americas contributed 2%. The annuity revenue ratio increased on the previous reporting period to 66% (2020: 62%).

EBITDA before corporate activity costs and bonus paid (on a like for like basis with the prior period) improved by 4% to R309 million. (2020: R297 million).

Tiffany Dunsdon, CEO of Adapt IT.
Tiffany Dunsdon, CEO of Adapt IT.

The company points out the restructuring of certain divisions in the prior period through operational efficiency projects, which were precipitated by permanent changes to the market, delivered increased profitability off lower revenue bases.

“The group had been highly defensive on cost and liquidity management and was pleased with the EBITDA margin before corporate activity costs and bonus paid (on a like for like basis with the prior period) improving to 21% (2020: 20%), and EBITDA at 18% (2020: 20%).”

Earnings per share reduced by 2% to 50c and normalised headline earnings per share grew 6% to 82c.

Cash generated from operations was R382 million (2020: R274 million) representing a cash conversion ratio of 2.25 times, says the firm, adding that stringent focus was placed on working capital management and cost control, and this focus will remain going forward.

On debt reduction, the JSE-listed firm says net gearing was reduced to 17% from 45%. It explains this was a result of the strong cash generation and the ability of the business to service and reduce its debt with operating cash flows.

“All debt covenants were met at 30 June 2021. The board has prioritised the reduction of borrowings and has remained prudent in preserving cash during these unprecedented times,” it says.

Takeover bid

Apart from COVID-19, the weak economy and the impact of the social unrest that affected many South African businesses, the past eight months have seen Adapt IT face two corporate activities and a change of CEO, it says.

The unsolicited Huge Group share swap offer closed with 1.9% of Adapt IT shareholders having accepted it.

“Huge subsequently disposed of all these shares. On 30 June 2021, the shareholder vote in favour of the Volaris deal was carried at 87%. There are several conditions precedent which remain to be fulfilled and the deal is now in the final regulatory approval processes which are expected to be implemented in December 2021.”

Adapt IT says it maintained its Level 1 B-BBEE contributor status.

“Adapt IT has long been committed to transformation as a social and a strategic imperative. We are pleased Volaris is aligned with us and supportive that we maintain our high level of transformation going forward,” says Tiffany Dunsdon, CEO of Adapt IT.

While the year was dominated by global macro-economic challenges and the COVID-19 pandemic, Adapt IT again proved to be highly-resilient, through its sound underlying business model of providing mission-critical software to its clients on a long-term basis, it points out.

“The response of our people to these ongoing difficult circumstances has been outstanding, with continuous service delivery to our customers. The already advanced state of our migration to cloud platforms was a significant enabler of our success, but the attitude of our people was the key success factor. We were delighted with the improved results of our annual independent employee engagement survey,” says Dunsdon.

“Adapt IT continues to take advantage of its underlying diversification. This is done by assisting the current client base more effectively, as well as cross-selling and carefully expanding on the Pan-Africa and the Asia Pacific strategy. With our debt level significantly reduced from two years ago, we are also ready to resume our acquisitive strategy,” she concludes.

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