Ready to cash in on renewed spending
Since 2017, technology services company Altron has been on a mission to revamp and simplify its business, reduce its debt and become capital light, with the goal of improving shareholder returns.
This has been done by offloading noncore assets and, towards the end of 2020, unbundling to shareholders its investment in Bytes Technology Group. Bytes is listed on the London Stock Exchange with a dual listing on the local bourse.
In current market conditions the unbundling of Bytes has proved to be particularly rewarding for those shareholders who chose to remain directly invested in Bytes shares (shareholders received one Bytes share for every two Altron shares held). Despite the current Bytes share price being off the highs achieved during 2021, it is still comfortably above the original price offered at the time of the unbundling.
Bytes previously contributed a large portion of Altron’s revenue and earnings before interest, tax, depreciation and amortisation, and the unbundling effectively means that Altron is now very much focused on SA, with the bulk of its revenue coming from its local operations. Of the R7.9bn revenue (from continuing operations) reported in its latest full-year results, about R7.3bn was generated in the SA geographic region.
Altrons now operates under three main segments: own platforms (businesses under this segment include Netstar, Altron FinTech and Altron HealthTech); digital transformation (business units include Altron Karabina,
Altron Security and Altron
Systems Integration); and managed services (Altron Managed Solutions and Altron Nexus).
Altron recently released its year-end results, enabling investors to get a picture of how the group is performing without Bytes. This has been a challenging operating environment for the company, with Covid-related supply chain constraints leading to component shortages as well as customers reducing capex and therefore demand for the services Altron provides.
Despite these challenges, the group performed relatively well compared with its 2021 year, with revenue from continuing operations growing 6% to R7.9bn and operating income up strongly to R498m.
Though good growth could have been expected from the pandemic lows, the 2022 financial year operating profit is also up about 9% when compared to the pre-Covid 2020 year-end operating income. The numbers are even more impressive when you add back one-offs such as share-based payments (a net R30m as a result of the Bytes UK unbundling) and restructuring costs (R24m severance costs) and calculate a “normalised” operating income.
Generally, by removing these nonrecurring factors that influenced operating profit, investors can get an understanding of what the true operating profit is from the normal day-to-day operations and therefore get a better understanding what to expect from the remaining business.
Under Altron’s three trading segments, the own platforms sector performed relatively well on the comparable 2021 year-end, with business units such as Netstar even managing consistent subscriber growth despite the pandemic. The digital transformation business and managed services units underperformed compared with 2021 — the former despite the positive turnaround of Altron
Karabina, the latter mainly as a result of Altron Nexus experiencing challenges as a result of its exposure to business in the public sector.
Altron’s business unit Altron Arrow, which was up for sale, performed relatively well, and as no buyer could be found it will no longer be considered as “held for sale”, with a decision now made to keep the business.
The balance sheet was strengthened by a reduction in debt from the proceeds from the Bytes demerger in December 2020. Though gross debt increased for the 2022 financial year when compared with 2021, the current gross debt is considerably lower than the gross debt pre-Covid, meaning the group goes into a higher interest rate environment in a far stronger position and has capacity should any juicy potential acquisitions arise.
In the short to medium term the group will have to navigate the challenges brought on by continued supply chain pressures and component shortages (which put pressure on prices), an overhang from the pandemic. However, this will ease over time and in the meantime there are still opportunities to rationalise the business via further offloading of noncore assets — such as selling the banking business unit housed within Altron Managed Solutions.
Altron is now well on its way of becoming capital light and most of the businesses that remain in the fold are scalable. Demand in the ICT sector should become robust now that clients, who put capital expenditure in this area on hold during the pandemic, have to spend to catch up in a digital landscape that is constantly advancing. Altron is now well positioned to benefit from this.