Investment Summary
 

1. AdEPT Technology Group Plc (LON: ADT) has a variety of products and services offerings in the telecommunication domain.

2. The company has a variety of products and services offerings in the telecommunication domain.

3. The company provides world-class operational support which enhances efficiency and reduces costs for its franchise partners.

4. Group has made significant strategic acquisitions which will provide strength to the growth of its business.

5. The company has consistently shared its income with its investors in the form of dividends.

6. Stock is trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Business Overview

AdEPT Technology Group Plc (LON: ADT) is a Fixed Line Telecommunications company providing data communications and voice services to both domestic and international customers. The company is an independent provider, offering communications portfolio of fixed-line calls such as single analogue business lines and complex digital multi-site solutions; line rentals; mobile data and voice products, and others. The company has an employee base of 300 professionals, catering to the needs of its customers from multiple industries which include Central & Local Government, the NHS, retailers, construction companies and legal firms. The company is also offering its services to nearly 3,500 schools. The company’s products and services portfolio consists of Cloud Services, Voice Services, Data Networking, Cyber Security, Business Continuity, Professional Services and Managed IT services. The company’s commercial clients are Coca Cola, Asos, Citrix, Carluccio’s, TOG, Halfords, Sotheby’s, Holiday Inn Express, Sabre Insurance and Fidessa.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Business Process


(Source: Preliminary Presentation, Company Website)

The Group business process initiates with the decade long IT experience of the team, which benefits the company to capture partners and clients. The company provides proactive services to its partners which grow with the partners. The client gets a consistent trusted supplier which offers sustainable services and cost effectiveness. The partner or client can pay only for what they need. AdEPT empowers its partners and clients by proving the right tool to them.

Strategic Principles

The company follows seven strategic principles.
 

1. It utilises full capacity of its systems wherever possible to streamline business.

2. The company focuses on its recurring revenues which provide stability.

3. The Group focuses on its capital expenditure.

4. The company rewards its investors in the form of dividend cover of more than 2x.

5. The Group maintains a balance between public and private sector.

6. It strengthens its cores by evolving best practice and drive economies of scale.

7.  It tries to remove complexity from their clients’ business and make their work simple.
 

Products & Services Offerings


(Source: Preliminary Presentation, Company Website)

The Group offers a variety of products and services to its clients. These include Cloud Services, Voice Solutions, Audio Visual, Network Services, Desktop Support, etc.

Growth Outlook - Mega Trends


(Source: Preliminary Presentation, Company Website)

The market size of the above trends is expected to be multi-fold in the coming years. Cloud Computing market is expected to grow at a CAGR of 19 per cent while the unified communications market is expected to double its size to GBP 975 million in 4 years. SIP Trunks market is expected to be over GBP 720 million by 2021.

Strategic Acquisitions


(Source: Preliminary Presentation, Company Website)

AdEPT Technology made some successful strategic acquisitions since 2014, which includes the acquisition of COMMS Group, ACS, ETS Communication Ltd, Atomwide Managed Services, etc. These acquisitions benefited the company in its growth trajectory.

Partners


(Source: Preliminary Presentation, Company Website)

The company’s partners include BTwholesale, Dell, Cisco, Microsoft, etc. along which the Group works to create solutions.

Recent News

On 21^st February 2020, the company announced that the share placing had been increased and the company raised gross proceeds of approximately GBP 4.25 million through a placing of 1,320,312 new ordinary shares. The new shares represent approximately 5.60 per cent of the company's existing issued ordinary share capital.

Financial Highlights – H1 Financial Year 2020


(Source: Preliminary Report, Company Website)

In the first half of the financial year 2020, driven by an increase in the Managed services revenue by 39 per cent to GBP 25.1 million for the period (H1 FY2019 – GBP 18 million), the company’s total revenue increased by 26 per cent to GBP 30.8 million as against GBP 24.4 million in the first half of the financial year 2019. The company’s gross profit stood at GBP 14,797 thousand in the first half of the financial year 2020 versus a gross profit of GBP 11,988 thousand in the first half of the financial year 2019. The EBITDA of the company surged by 18 per cent from GBP 5.2 million in the first half of the financial year 2019 to an EBITDA of GBP 6.1 million in the first half of the financial year 2020, with an EBITDA margin of 20 per cent for the period (H1 FY2019 – 21 per cent). Due to an increase in the operating and non-operating expenses for the period, the company’s operating profit declined to GBP 2,434 thousand in the first half of the financial year 2020 from an operating profit of GBP 2,597 thousand in the first half of the financial year 2019. The company’s PBT (profit before tax) declined to GBP 1,145 thousand in the first half of the financial year 2020 from a PBT (profit before tax) of GBP 1,702 thousand in the first half of the financial year 2019. The adjusted PAT (profit after tax) surged by 4 per cent to GBP 3.9 million in H1 FY2020 from a PAT (profit after tax) GBP 3.7 million in H1 FY2019. The reported PAT (profit after tax) declined to GBP 866 thousand in H1 FY2020 from a PAT (profit after tax) GBP 1,373 thousand in H1 FY2019. The interim dividend surged by 4 per cent from 4.90 pence in the first half of the financial year 2019 to 5.10 pence in the first half of the financial year 2020.

Key Performing Indicators

Total Revenue


(Source: Thomson Reuters)

The revenue of the company grew to GBP 51.31 million in FY2019 from GBP 22.07 million in FY2015, reflecting a growth of 23.4 per cent on a CAGR basis.

Gross profit


(Source: Thomson Reuters)

The gross profit of the company grew to GBP 25.34 million in FY2019 from GBP 8.30 million in FY2015, giving growth of 32.18 per cent on a CAGR basis.

Financial Ratios
 
 

The reported EBITDA margin in FY19 was 20.90 per cent against the industry median of 33.70%. The reported operating margin was 8.50 per cent for the FY19. Net margin reported was 3.60 per cent for the fiscal year 2019, lower from the industry median of 6.6%. Return on equity for the same period stood at 11.70 per cent. On the liquidity front, AdEPT Technology Group Plc’s current ratio stood at 1.4x. On leverage front, the debt-equity ratio of the AdEPT Technology Group Plc’s was 2.59 i.e. the company is more leveraged than the industry with debt-equity ratio of 1.21.

Share Price Performance


Daily Chart as on 17^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 17, 2020, at the time of writing (before the market close, at 10:09 AM GMT), AdEPT Technology Group Plc shares were trading at GBX 250, down by 1.96 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 405.50/GBX 250. 

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare AdEPT Technology Group Plc with its peers, EV/EBITDA multiple has been used. The peers are Helios Towers Plc (NTM EV/EBITDA was 8.51), Bigblu Broadband Plc (NTM EV/EBITDA was 4.50), BT Group Plc (NTM EV/EBITDA was 3.92), Telenor ASA (NTM EV/EBITDA was 6.01), Cellnex Telecom SA (NTM EV/EBITDA was 16.30) and Elisa Oyj (NTM EV/EBITDA was 11.95). The Average of EV/EBITDA (NTM) of the company’s peers was 9x (approx.).

Method 2: Price to Earnings Approach (NTM)



To compare AdEPT Technology Group Plc with its peers, P/E multiple has been used. The peers are Bigblu Broadband Plc (NTM P/E was 8.07), BT Group Plc (NTM P/E was 4.60), Telecom Italia SpA (NTM P/E was 5.31) and Elisa Oyj (NTM P/E was 20.49). The average of P/E (NTM) of the company’s peers was 9.62x (approx.).

AdEPT Technology Group V/S FTSE-AIM All Share Price – 5 Years


(Source: Thomson Reuters)

In the last five years, AdEPT Technology Group Plc share price has delivered 72.88 per cent return as compared to negative 7.33 per cent return of FTSE-AIM All Share index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield


(Source: Thomson Reuters)

AdEPT Technology Group Plc has a dividend yield of 3.92 per cent which is lower than the industry dividend yield of 8.97 per cent and the sector dividend yield of 8.97 per cent.

AdEPT Technology Group V/S Industry V/S Sector – 5 years


(Source: Thomson Reuters)

In the last five years, AdEPT Technology Group Plc share price increased by 72.88 per cent which is higher than the industry growth rate of negative 72.24 per cent and sector growth of negative 63.75 per cent.

AdEPT Technology Group Total return - 5 years


(Source: Thomson Reuters)

In the last five years, AdEPT Technology Group Plc has delivered a total return of 99.95 per cent while the FTSE All share index has delivered a total return of negative 6.03 per cent.

Risk Assessment and Growth Prospects

The economic conditions within the geographic areas within which the company operates influence the operating and financial performance of the company and can face uncertainty in the medium-to-long term due to the ongoing Brexit. However, the company faces pressure on pricing and margins due to the mature and highly competitive markets it operates in, and material adverse changes in certain raw material prices could affect the profitability of the group. Due to a higher level of debt, the company might enter into credit risk in the near future. Recent Coronavirus outbreak has impacted the performance of the company; however the extent of impact would be determined in some time. The market in which the company operates will continue to grow and expand in the future, to benefit from this expansion, the company actively looking for acquisitions. The company is actively looking forward to investment opportunities for growth in its core businesses.

Conclusion

AdEPT Technology is a fundamentally decent companywith a proven track record. In the past year, the Group has made significant strategic acquisitions which will provide strength to the growth of the company with a considerable contribution in the top line. Despite a small-cap company, the Group has a track record of paying dividends, which is uncommon in many small-cap companies.

The company has delivered a good result in the first half of the financial year 2020, due to maintaining margin on customer contracts, combination of strategic acquisition and organic contract wins, and also focused on high levels of operational efficiency.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from £22.07 million in FY15 to £51.31 million in FY2019. Compounded annual growth rate (CAGR) stood at 23.48 per cent.

 Based on the decent prospects and supported by valuation done using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 250 (as on 17th March 2020 at 10:09 AM GMT) with lower double-digit upside potential based on 9x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 9.62x NTM Price/Earnings multiple (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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