AdEPT Telecom; (Update for today's acquisition) well managed small cap, good growth, debt down, good cash flow. Too cheap?

12th Nov '14 by johnrosier

3 comments 13751 reads

My review of yesterday's interim results:

AdEPT Telecom (Market capitalisation; £26.5m, 120p and 3.5% of JIC Portfolio): interim results for the six months ended 30th September show a 11.3% jump in revenue to £11.3m, a 12.7% increase in EBITDA to £2.4m, a 13.9% increase in adjusted pre-tax profits to £2.2m and a 12.2% increase in adjusted earnings per share to 8.38p. It generated £2.2m of free cash flow, up 29.1% from 2013, and reduced net debt by £0.7m to £3.2m despite spending £2.1m on acquisitions; £1.8m for Bluecherry Telecom, (which added £0.6m revenue and £0.15m profit), and £0.3m deferred consideration for Bluebell Telecom and £0.3m on dividends. Overall gearing was reduced to 29% from 38%. Lastly it increased the interim dividend by 50% and looks to be on course to pay its broker's target of 4.5p for the full year. On the outlook and dividend it says “this has been an excellent 6 months with improved results in all key areas. We continue to be highly cash generative and there is considerable scope for a progressive dividend policy whilst continuing to identify and integrate earnings-enhancing acquisitions."

Revenue split is now 26.3% from calls, down from 31.2% in 2013, which has seen pricing pressure in recent years due to lower volumes and regulatory changes. It is however still a decent margin area requiring no cap-ex and the regulatory environment for the next three years is expected to be more benign. Lines account for 46.9%, up from 45.6%, and whereas lines traditionally just carried calls they are now increasingly used for broadband, IP-CCTV, Alarms, PDQ machines and Faxes. Lastly network solutions, a higher margin, added value part of the business, accounted for 26.8% of revenue, up from 23.2% driven by demand for next generation services.

It has had great success on the new business front especially in the public sector where in October, the ESPO Framework was extended for two years under which it is the sole approved supplier of calls, lines, broadband, fibre broadband, super-fast internet access and SIP to the Public Sector and registered charities nationwide. In July the JANET framework was extended for four years where it is one of a small number of companies approved to sell data connectivity to UK Colleges and Universities. They must be doing something right to gain extensions to both these framework agreements. The importance of these frameworks can be seen in its new business wins…

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Ramridge

12th Nov '14

It looks a decent company and ticks a lot of boxes for me.
The one question I would have is that its book value net of intangibles is -ve. But then I suspect that this is a characteristic of the telecoms sector?
I will definitely look to get in on price weakness.

bsharman

Hi John, Hope you enjoyed the game on Saturday despite the score (and the torrential rain). I managed to find a reasonable pub in Derby showing the match. Hope for a better result on Saturday against South Africa!
Adept Telecom (LON:ADT) look like a very good company and seem good value on all the usual metrics. I like the fact that debt has been decreasing and cash increasing. Thanks for highlighting this and i'll do some more research today. Cheers. Ben

johnrosier

1st May '15

1st May 2015

AdEPT Telecom (Market capitalisation; £38.0m, 173p and 5.1% of JIC Portfolio): It has announced the acquisition of Centrix Limited, a UK based “specialist provider of complex unified communications, Avaya IP telephony, hosted IP solutions and managed services". It is paying £7m cash plus any cash balance on Centrix's balance sheet at completion; a further £ 3.5m may be payable in cash dependent on the trading performance of Centrix post acquisition.

In the year ended 31st December 2014 Centrix reported turnover of £8.75m and profit before tax of £2.26m. This increases AdEPT's annual turnover by around 30%. Approximately 80% of Centrix revenue is generated from recurring revenue streams. AdEPT Telecom expects the acquisition to be earnings enhancing from completion. Centrix skills and product set will complement and enhance AdEPT's existing services as it offers its clients the delivery of complex unified communications and managed service solutions, which is an increasing requisite for AdEPT's existing and targeted enterprise and public sector customer base.

Centrix offers smart building technology via the Medusa product, which is five products rolled in to one. Medusa is a bandwidth shaper/slicer, a firewall, a switch, a reporting engine and a billing engine. Medusa allows multi-tenanted buildings to take one or more internet connection and to share those connections to multiple businesses and then to report and bill those end users independently for their usage. It provides high end communication solutions to larger enterprise customers, particularly in the public sector, business centre and healthcare sectors which account for approximately 70% of Centrix total revenue. Therefore the Centrix customer base complements that of AdEPT. It is anticipated that the proportion of revenue derived from public sector and healthcare customers for the AdEPT Group will more than double as a result of the acquisition. AdEPT and Centrix have both adopted capital asset light strategies and are dedicated to offering a full suite of flexible data and unified communication strategies.

Ian Fishwick, Chief Executive of AdEPT, said "We are delighted to have acquired such a high quality, well-run and profitable business with a strong management team. Centrix is an excellent fit because, like AdEPT, it is asset-light, complements and builds upon AdEPT's existing expertise and skills, and further extends its offering in the unified communications space. Centrix has a high level of recurring revenue and offers a well-developed customer base with long term relationships across a range of medium and large enterprises, including the related vertical markets of public sector and healthcare. The acquisition is expected to be earnings enhancing from completion."

Conclusion: When you are borrowing money at just 2.8% it is not difficult to see how from a financial point of view this acquisition will be earnings enhancing, (an interest cost of around £300,000k per annum for £2.26m of operating profits), but it's not just about financial wizardry; this looks a very sensible acquisition from a strategic point of view as it clearly enhances AdEPT's skill set and product offering. The acquisition should not be a surprise given recent statements and the CEO's recent 2 minute videos and, given the extent of its new banking facility it has scope to make further acquisitions in due course. As a shareholder in AdEPT I welcome today's news and expect it to lead to further share price strength. Even before forecasts are adjusted for today's earnings enhancing news the shares looked good value to me on 11.7x March 2016 consensus earnings forecasts, 2.6% dividend yield and 12.2x free cash flow. On Jamie Streeter's Compound Income scores www.compoundincome.org it has a CI score of 92 and on Stockopedia a StockRank of 90. Happy Holder!

AdEPT Telecom; (Update for today's acquisition) well managed small cap, good growth, debt down, good cash flow. Too cheap?

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Johnrosier

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