AdEPT Technology Group PLC (LON:ADT) has more than doubled its share price since embarking on a radical transformation in May 2015, analysts at Cantor Fitzgerald said after the firm reported solid first-half results.
Cantor, which has a ‘buy’ rating and target price of 405p on AdEPT, said the communication and information technology services provider’s consistent earnings growth has been supported by recent acquisitions and a greater shift into managed services.
“Coming from its heritage as a telco calls and lines reseller, management decided to broaden the services being offered to its business and public sector customers, first by adding unified communications in the faster growing area of on-premise or hosted IP telephony and then by adding the secular growth area of IT managed services, the transformation being achieved via five key acquisitions,” Cantor said.
“The result is a company that has a much broader product and service set, offering one-stop converged delivery of a significant amount of an SME’s IT and communications infrastructure.”
Managed services now represent 74% of total revenues and Cantor believes the significance of the move into this area for the investment case is that it will bring organic growth.
In the year ended March 2018, the managed services business delivered 8% organic growth.
“The mix effect means that we believe AdEPT as a group is now entering a period of organic growth in recurring revenues,” Cantor said.
“Historically seen as a value stock, this changing dynamic, should change the market’s perception of the valuation.”
First-half earnings and revenues grow
In its most recent results, published in November, AdEPT posted a 9.5% rise in revenue to £24.4mln for the six months to the end of September with growth led by the managed services business.
Underlying earnings (EBITDA) increased 10.7% to £5.2mln while the EBITDA margin edged up to 21.2% from 20.9%.
The board recommended a 15.3% increase in the interim dividend to 4.9p, up from 4.25p the year before.
Chairman Roger Wilson said the company’s investment in its new AdEPT Nebula network and IT services infrastructure is already providing benefits across the group.
Adept Nebula connects three data centres that allow the company to provide its own cloud hosting capability. The network is now live, delivering Avaya IP [internet protocol] cloud telephony services, hosted IT services and a range of data connectivity services.
Wilson said the board was “delighted with the continued progress” being made by the group and trading continues to be in line with management's expectations.
“We continue to be highly cash-generative with a fully supportive investor base and funding partners to enable the board to continue to identify earnings-enhancing acquisitions whilst retaining scope for a progressive dividend policy,” he added.
Cantor sees further M&A on the horizon, thinks financial metrics are strong
Following the interims, Cantor raised its 2019 full year earnings per share forecast by 4% to 30.7p.
The new forecast takes into AdEPT’s £2.5mln acquisition of UK-based unified communications services provider ETS Communications Holdings Limited last month and the £7.9mln deal to buy fellow information technology services provider Shift F7 in August.
Cantor said it thinks AdEPT will comfortably meet its forecasts as the benefits of recent acquisitions kick in.
“Alongside the pivot to faster growth managed services as a key feature of the investment case, we believe AdEPT will continue to add significant value via M&A,” the broker said.
It added: “AdEPT describes its M&A pipeline as strong and it is at present reviewing at several opportunities with EBITDA around the £0.5-2.5m range, which would suggest deal sizes of £3-15mln.”
In terms of the financials, Cantor thinks the metrics are strong as 80% of revenues are recurring and the pre-tax cash conversion is “consistently high”, meaning the annual operating margin of 20% and above translates to a free cash flow margin of mid to high teens.
A changing of the guard
Since the first-half results, the company has announced that long-serving chief executive and founder Ian Fishwick will move into the role of chairman at the beginning of 2019.
Fishwick, who founded the company in 2003, will continue to lead AdEPT’s acquisition strategy in his new position. He will fill the role currently occupied by Roger Wilson, who will become deputy chairman.
Industry veteran Phil Race will succeed Fishwick as chief executive on January 1, taking over the day-to-day running of the business.
“AdEPT is one of only three companies on AIM to have increased EPS in each of the last nine successive years and we now have a platform that is suitable for building into a much bigger group, able to execute larger and more sophisticated client requirements,” said chairman Wilson.
“The board is very pleased to have secured the services of Phil Race, who has the experience to leverage this platform to further grow our recurring revenue streams organically.”