WH Ireland Research Analyst Brendan D’Souza caught up with DirectorsTalk to discuss AdEPT Telecom plc (LON:ADT)
Q1: Now I wanted to talk to you today about AdEPT Telecom since they’ve published their 2016 results this morning, what did you make of the results, how has the company progressed over the course of the last financial year and really how the financials compare against your forecasts?
A1: Let me just start with the year on year comparison, one of the things that is very clear is AdEPT has seen a very strong growth during FY16, this is for the year ending March 31st 2016.
Firstly the revenue came in 31% ahead of what last year’s level was, one of the key reasons why we’re having far stronger revenue growth this year is last year they bought a business called Centrix, that business contributed to 11 months of the year. The key part within the revenue growth has been the managed services business, that’s grown 112% year on year, the fixed line business, what I would say is the traditional business or some people might call it the legacy business, has flat growth so really the growth has been driven entirely by revenues. There’s been some other cool things that has happened during the results, one of the things is as you would imagine because managed services has grown so strongly it’s become a bigger part of the revenue mix and luckily for the company managed services is a high margin product so the margins have also improved. So all in all the number year on year number 1 you’ve seen growth of both I would say in quantity as well as quality, quantity being just on the revenue side and quality on the margin side.
What was our forecast, so revenue was bang on the button, we had absolutely no deviation on revenue so it came in at £28.9 million, bang on the button, on the margin side AdEPT Telecom did do a little better than we had forecasted. So we had forecasted 39.8% of gross margin, the company managed to come in at 40.3%, the main difference is as I just explained, the managed services is now just become a bigger part of the revenue mix, we were a bit conservative in forecasting what that would be. On the EBITDA side, they again benefited really from the pass-through from the gross margin side so the EBITDA came in 2% ahead of our number. I’ll also just flag up what was a bit surprising for us is their cash position and this is key for AdEPT because I think a lot of investor invest in AdEPT because it’s a very stable solid business which throws up cash and then in turn the company pays out a nice dividend. So cash is very important as far as AdEPT goes and the cash came in, or the net debt position came in at £6 million, we were forecasting £8 million so that’s remarkably stronger that we has them down for.
Q2: Now you’ve stated the fact that managed services had increased to 44% of the revenue mix, do you think this is sustainable in the current financial year?
A2: Yes, so I think one of the key reasons why managed services has become a bit part is Centrix, which was acquired in May, that’s the second month of the financial year of ’16, contributed 11 months and Centrix revenue is almost entirely from the managed services part. So I think it is sustainable and probably be seeing a little bit of upside from 44% because earlier this year, again in the month of May, we had AdEPT do another acquisition of a business very similar to Centrix but smaller called Comms. So this is a business up in Northamptonshire and that’s again, as I said, a managed services business so I think it’s definitely sustainable, in fact next year when we’re speaking I’ll probably be saying that has outdone last year’s numbers so yes, normally it’s sustainable but probably even eat a little more into the overall sales mix and become a bigger part of the sales mix.
Q3: Now, is there any impact on AdEPT Telecom from the Brexit?
A3: That’s a good question. I think, firstly, the business model of AdEPT is a very, I would call it, it’s a telecoms company so it’s a utility so it’s probably got lesser impact than say a cyclical company so just in general the business is very strongly managed and should have minimal impact from Brexit in our opinion. It also helps that the business is entirely in the UK, all revenue is coming in Sterling or costs are paid in sterling so from that point of view there’s no translation costs or any foreign exchange costs or anything like that. I think longer term if we have a very strong impact on the economy and some of the smaller businesses start to go out of business there may be some but I don’t think they will be alone in that scenario, I think there’ll be a number of stocks which will get hammered on the stock market so it’s not just AdEPT. I think the long story short is we expect minimal impact from Brexit on ADEPT really.
