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Adapt IT
Industry: Information technology
Adapt IT – a provider of business solutions – has been on a buying spree over the last couple of years, adding niche software companies to its base. In the process the company, which develops solutions on platforms including Oracle, SAP and Microsoft, broadened its reach to include customers in the mining, education, manufacturing, energy and financial services sectors.
Adapt IT counts Tiger Brands, FNB, the University of Johannesburg and Shell amongst its customers. Adapt IT’s revenue jumped 42% to R578m and earnings per share rose 35% to 46.5c/share for the year ending June.
“They’ve done remarkably well,” says Irnest Kaplan, MD of Kaplan Equity Analysts. “All their growth metrics are intact.” Compared with EOH, another IT company that ramped up scale through buying out smaller technology companies, Adapt IT is in a sweet spot regarding acquisitions, according to Kaplan.
An acquisition of a company with sales of R30m would boost their R578m revenue by 5%, whereas it would lead to an increase of negligible proportions at EOH.
Adapt IT’s own revenue model consists of a large proportion of annuity income, which is more reliable than fluctuating sales.
When considering a new acquisition, the target company’s sales should be at least 25% of Adapt IT’s and also include a large annuity component.
Advanced Health
Industry: Healthcare- Hospitals
Advanced Health delivers short-procedure surgical services at its day clinics in Australia and SA. The bulk of the company’s revenue comes from its Australian operations; it is busy rolling out day clinics in SA. For the year ending in June, Advanced Health saw its after-tax profit jump by 43% to R22.2m.
The company’s business model relies on medical health professionals, such as surgeons, to take a minority stake in the management company of each day clinic. Advanced Health secures a long-term lease with a property developer that owns the site.
With rising healthcare costs in SA, the company is relying on patients to opt for surgery at day clinics rather than overnight stays in traditional private hospitals.
“The strategy that Advanced Health wants to undertake is sound, it’s solid and it should do well in this country,” says Anthony Clark, small-cap analyst at Vunani Securities. “However, I personally believe they hit the market too early.”
SA has a “cartel of private hospitals” running the healthcare industry and they won’t be too happy if an “interloper” comes into the market and undercuts them, Clark says.
Nevertheless, the model that Advanced Health brings to the local healthcare market has the backing of the country’s large medical insurers who look for ways to dampen healthcare inflation.
“Discovery Health has been the main supporter of Advanced Health,” he says. “They want medical aid costs to be lowered.”
Having the backing of the country’s largest medical aid is the first step in turning the culture of overnight hospitalisation around. The next is patient buy-in.
“Hospitals are nothing more than medical theatres with a fancy hotel room stuck on,” Clark says. “You need to get buy-in from the very customers who are used to going to hospital and staying overnight because they think it’s good for them.”
Holdsport
Industry: Retail
Holdsport, which owns the Sportsmans Warehouse and Outdoor Warehouse outlets, has seen its revenue increase by 9% for the 12 months through 28 February and after-tax profit rose 8%. The company recently announced that core earnings, excluding one-off items, probably rose between 18% and 22% for the six months ending August compared with the same period a year ago.hold
The company has been a consistent performer as other retailers are struggling to pass through price inflation in a dampened SA consumer market.
Holdsport is trading at a historic price-to-earnings ratio of about 13, making the stock relatively cheap, according to Anthony Sedgwick, a fund manager at Abax.
“All the other retailers are trading at relatively high ratings,” he says. “In the [retail] sector it’s been a lot cheaper.”
In addition, the company exhibited stable performance over the years, Sedgwick says. Holdsport maintains a strong position within the niche field where it operates, he says. The company has good management, generates strong cash flow and doesn’t rely on credit for sales, according to him.
“They sell a top-end product to the top end of the leisure market,” Sedgwick says. “It’s not the most exciting story in the world. But in an uncertain world, I think it would be a steady performer and as things improve and there is an increase in discretionary spending, they would proportionally benefit more.”
Metrofile
Industry: ?Support services – Document handling
Metrofile, which was created in 1983, stores and manages documents to large, medium and small businesses. Operations include the shredding of sensitive paperwork for the likes of banks. It operates in a number of other African countries, including Mozambique and Nigeria.
In the year ending June the company’s revenue, excluding an insurance claim received in the prior book year, rose 14% to R720.9m while normalised after-tax profit jumped 10%. “It is a highly cash-generative business,” says Abax’s Sedgwick. “The dividend cover has been coming down so the dividend yield is very attractive.”
Metrofile generated R222m in cash from its operations and increased its cash on hand by R85m for the 12 months ending June.
The board lowered the dividend cover ratio from 2 times to 1.5 times, resulting in a 40% jump in the full-year payout to 21c/share. This equates to a dividend yield of 3.6% after tax at the current share price.
“It’s a very steady, defensive business and it dominates its industry in SA,” Sedgwick says.
“It’s got all the key clients and that’s not going to change.”
OneLogix
Industry: Transport – Logistics
OneLogix is a logistics company with units that transport new and used passenger and commercial vehicles, bulk and heavy equipment and bulk freight.
It previously owned Postnet, but sold it to Aramex (UK) for R190m in the recent financial year.
During the 12 months ending in May, the company’s revenue grew 8%. It reported an after-tax loss of 2.5c/share from continued operations. OneLogix made a number of investments to strengthen its focus on specialised logistics.
During the 12-month period it bought a 74% stake in Jackson and Buffelshoek for R106m; bolstered its stake in Projex to 90% from 80% for R7.9m; increased its shareholding to 100% from 75% in CVDS for R15.4m; raised its ownership in United Bulk from 60% to 74% for R14.7m; and upped its stake in Quasar Software Developments to 85% from 55% for R2.5m.
“They are quite small and they are growing fast,” says Vunani Securities’ Clark. “Their upside is to specialise in some key areas of logistics and if you look at their recent acquisitions, it has been in the transportation of perishable goods and food.”
This niche market requires a high level of skill and expertise to manage the supply chain, Clark says. The company has done well in this sector, according to him.
“They’re sticking to a niche of logistics which could do quite well in this country as many companies outsource and as the population starts to demand and eat much more fresh and perishable food,” he explains.
This is an excerpt of an article that originally appeared in the 1 October 2015 edition of Finweek. Buy and download the magazine here.
