Adapt IT bounces back — and now has to deal with an unsolicited offer from Huge Group

It took small-cap software company Adapt IT a lot longer to recover from the beating that listed shares took in March 2020. That was when investors took fright at the looming coronavirus pandemic, causing global markets and the JSE to plunge by 25% or more over four days. 

While markets had almost fully rebounded by late July, Adapt IT was still hovering at R1.17 in late September, well off the R3.70 at which it started the year.

But that changed in the same month when the company released its results for the year to 30 June 2020 which reassured investors that it was not going down the tubes, it was cash-flow positive and could manage its debt.

Since then the share has risen four-fold to reach R4.90, helped along by the unsolicited and, it seems, unwelcome offer from the Huge Group to buy the company at R5.52/share, valuing it at R795-million.

Adapt IT’s latest results for the six months ended December 2020 should further reassure shareholders. Not only has the software and services firm managed to keep revenue and operating profit stable during a very tough economic period, but it has repaid a further R57-million of debt from cash flows. As a result, net gearing reduced from 69% to 42% in the interim period. 

Revenue fell by 2% from R721-million to R707-million, while Ebitda (earnings before accounting treatments) fell by 1% to R126.1-million. Annuity revenue rose to 66% from 60%, while the Ebitda margin was maintained at 18% as the company implemented cost containment measures, particularly in the manufacturing, hospitality and energy divisions, which were most affected by Covid-19. 

The impacts on earnings in the current period included a bonus provision of R16-million, a negative foreign exchange movement of R10-million and an increase in the allowance for expected credit losses of R7-million resulting from client segments most affected by Covid-19.  

However, the interest expense on borrowings decreased by 30% to R18-million, down from R25-million.

Profit from operations gained 1% to R79.8-million, while profit before tax rose by 26% thanks to lower finance costs and interest rates on the debt.  

The three business segments that delivered strong Ebitda growth were Education, which saw an increased demand for e-learning solutions and grew by 15%, Financial Services and Communication.

“We benefited from the portfolio effect,” says CEO Sbu Shabalala. “While some business units suffered during the lockdown, others have thrived, ensuring our operations remain sustainable.”

At the same time, the company has invested effort in its geographic diversification and 27% of revenues are now generated from other countries in Africa and Asia Pacific. 

Cash generated from operations after working capital changes amounted to R124-million, up from R74-million in the first half of 2020. Cash and cash equivalents of R142-million were available at the end of the period.

The second half of the year — which is typically the stronger half given the fact that the universities make their payments between February and April — will see the company focus on paying the debt down further and ensuring the company remains on a sound financial and operational footing through what remains an uncertain period. 

“We will continue to focus on building a pan-African business with an Australasian arm. We have navigated two waves of lockdowns successfully and won’t be deterred from that path,” Shabalala says.

Acquisitions, which have been a cornerstone of the company’s growth over the last decade, will most probably resume in the next financial year, he adds.

But first the company needs to navigate the unsolicited offer from telecoms company Huge Group. 

Huge will release an offer circular by 6 April, following which the Adapt IT board will make its recommendation to shareholders known, by no later than 23 April.

“Shareholders will have plenty of time to make their own deliberations after this,” adds Tiffany Dunsdon, Adapt IT’s commercial director.

While the directors cannot make public pronouncements on the offer, it seems clear that Huge’s offer is not welcome.

“Telecoms companies are under pressure as their services are increasingly commoditised,” says Dunsdon. “They need to diversify into higher-margin businesses like software.”

What is particularly attractive about Adapt IT is that it owns the intellectual property on roughly 50% of the software and services it sells, while the balance, third party software, is heavily customised by Adapt IT. 

However, while a small software firm may be attractive to Huge, “it’s not true that the inverse is attractive to us”, Dunsdon says. 

Another factor that makes the deal less attractive is BEE. While Adapt IT is a Level 1 BEE company, which enables its clients to claim the maximum BEE points when they appoint Adapt IT, the Huge Group is currently non-compliant. Any merge of the companies would dilute this status. DM/BM