Innovation that’s paying off

There is a lot of negative sentiment and volatility going on in the markets and in order to find value, one has to dig deep and look at all possible opportunities.

Lately we’ve been eyeing Adapt IT, an innovative IT services and solutions provider, which is still relatively low on the investment radar.

Adapt IT provides a variety of specialised services and solutions to the financial services, energy, manufacturing and education sectors.

Management, led by Sbu Shabalala and a very competent board of directors, has been able to grow the company from a small IT business to a group with a market capitalisation of R1.7bn and customers in 24 countries worldwide.

Its share price is up nearly 2 100% over the past five years. Revenue still mainly comes from South Africa (77%), with the rest of Africa (10%), the Americas (8%), Australasia (4%) and Europe (1%) catching up quickly.

The difference between Adapt IT and other ICT companies is mainly the fact that it provides tailored software solutions and support, whereas other comparable companies, like EOH for instance, are more focused on services and hardware.

In other words, Adapt IT owns a large chunk of its software and solutions, whereas EOH provides services and hardware solutions.

This means a large part of its income is annuity based, whether in the form of licence renewals, updates or general support; most of the time these fees are paid for in advance, also enhancing the business’s cash flow.

Scalability is also in Adapt IT’s favour, as it can increase revenues without adding too many costs.

As it’s been growing, Adapt IT has actually been able to increase its operating and EBITDA (earnings before interest, tax, depreciation and amortisation) margins, which we think are very impressive.

Effective 1 July, the group amalgamated 11 subsidiaries into the main operating company as divisions.

This should increase operating efficiencies even more and we expect it to start bearing fruit in the 2016 financial year.

This is an excerpt from an article that originally appeared in the 17 December 2015 edition of finweek. Buy and download the magazine here.