Adapt IT looks poised to grow in niche software market
Software solutions firm Adapt IT has an enviable earnings record and looks poised to exhibit further strong and sustainable growth. Turnover has grown 29% compounded a year over the past five years, earnings before interest, taxation, depreciation and amortisation (ebitda) 38%, and headline earnings per share 17%.
It is well-diversified in terms of activities and geographies and its proprietary software can be adapted quickly and at low cost into new areas and countries.
Rather than competing headon with large firms such as Microsoft, Oracle and SAP, Adapt IT has concentrated on high-margin niche activities. And although year to June 2017 earnings were flat, the group appears to be back on its high growth trajectory again.
While players such as EOH and BCX, which operate in the services segment of the IT space, have done well until fairly recently, they are overly dependent on their mobile skilled personnel, who can walk out of the door at any time, taking their talents with them.
Other players such as Pinnacle and Datatec are effectively wholesalers of other people’s products, or “box droppers”. Adapt IT, on the other hand, produces computer code that generates software and if skilled staff leave there is little or no effect on the business.
According to Keith McLachlan of AlphaWealth, whose fund has an investment in Adapt IT, the technology market globally is growing at between 5% and 10% a year.
Within that broad category, the lowest growth of about 2% to 3% a year is found in hardware resellers, with services companies growing at about 4% to 5% a year. “Software, on the other hand, is growing at around 15% to 20%”, says McLachlan.
And it’s not just the high sales growth that makes Adapt IT attractive. “There is almost no cost involved in selling. And the billing cycle is such that software licences tend to be paid in cash in advance. This gives a stable, cash-generative underpin, with a 90% to 110% cash conversion ratio with respect to earnings,” says McLachlan.
In recent times, earnings from the educational segment have been hit by an extraneous event in the form of the #FeesMustFall campaign.
Adapt IT’s ERP software is run at South African universities, thus when budgets were frozen, this had a noticeably negative effect on earnings. But with that out of the way, earnings growth is back on track.
In the interim six months to December 31 2017, group turnover grew 46%, ebitda 29% and headline earnings per share 22%.
Growth has been organic and acquisitive and that mix should continue. While the group will consider larger, more transformational deals, it won’t go for scale at the expense of its proven strategy.
Increasing gearing for future acquisitions shouldn’t be problematic, as the group is so highly cash-generative. Diversification regarding acquisitions has worked well and single client concentration risk is now only 7% compared with about 90% a few years ago.
Penetrating the public sector is firmly on Adapt IT’s agenda, as is the objective of improving its broad-based black economic empowerment rating from level three back to level two.
“We believe we can gain new public sector business on merit as the political situation evolves,” says CEO Sbu Shabalala.
While the bulk of operations is in SA, there is ample scope to grow offshore. Commercial director Tiffany Dunsdon is based in Australia, where the group’s LGR subsidiary has been profitable. “Adapt IT can potentially internationalise quite successfully,” says McLachlan.