AdEPT Technology Group PLC (LON: ADT) - Delivering services to the healthcare sector; NHS a key client

AdEPT Technology Group PLC is a FTSE AIM All-Share Company, which independently provides managed services for unified communications, information technology, voice solutions and connectivity.  The Company caters the education, health, commercial and public sector. Its portfolio consists of Cloud Services, Voice Services, Data Networking, Cyber Security, Business Continuity, Professional and Managed IT Services. ADT also provides tailored services to thousands of customers, including Apple, Openreach, Virgin Media, Microsoft, Avaya, BT Wholesale, among others. The Company has more than 300 talented staff to serve over 12,000 clients across diversified sectors.

On 17 November 2020, ADT expects to publish its interim results for the six months ended 30 September 2020.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

ADT has a variety of products and services in the telecommunication domain. It provides world-class operational support which enhances efficiency and reduces costs for its franchise partners. Moreover, it has undertaken several acquisitions which should provide strength to the business in the future. The Company also consistently shares its income in the form of dividends with its shareholders. In FY21, it is focusing on developing organic sales by taking the entire portfolio to its customers to address the increasing ICT needs.

Moreover, the recent partnership with 8x8, Inc. will strengthen the portfolio for rapid rollout of cloud Unified Communications and Contact Centre services. The stock is also trading close to a 52-week low, which gives an excellent opportunity to buy this stock. To minimize the financial impact of Covid-19, the Company is considering several options, including cancellation of the dividends, halting the acquisition activities, freezing the recruitment and pay. 

However, the slowdown in the UK economy has affected the demand in commercial space. Moreover, the foreign exchange fluctuations are increasing the cost of imports for UK ICT companies. Adjacently, the uncertainties of Covid-19 pandemic and Brexit are also posing a risk to supply chains and margins. Similarly, increasing competition can also put pressure over profitability margins amid recessionary economic conditions. Furthermore, macroeconomic uncertainties can impact consumer confidence and reduce non-discretionary expenditures. Global macroeconomic uncertainty, failure to identify, develop and deploy new technology could hinder growth. 

Industry Outlook Dynamics

According to Gartner's report, the market size of worldwide public cloud services is expected to grow by 6.3% from US$242.7 billion in 2019 to US$257.9 billion in 2020. By 2022, the sector is forecasted to reach US$364.1 billion in market size. Meanwhile, Desktop as a service (DaaS) is likely to have the most significant growth in 2020. During Covid-19 pandemic, cloud services have been playing a vital role to meet customers' preference of elastic, pay-as-you-go consumption models. The key trends that will influence the market in the future include growing pressure on the data centres, rising adoption of IoT, and increasing demand for cloud services.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of AdEPT Technology Group PLC

A Glimpse of Business Segments for the financial year 2020

(Source: Company Website)

Update on AGM Statement (as on 30 September 2020)

• The Company witnessed the resilient performance, with cash collection improving since the beginning of April 2020, order intake performing better than anticipated and will deliver projects on time.
• Due to the pandemic, the Company has migrated hundred of schools to the cloud, with the financial support from the Department for Education.
• With the support of the strategic partner LGfL (London Grid for Learning), ADT has completed the next phase of an eAdmissions development.
• With the help of various partners, ADT has provided network capabilities to several NHS Trusts and hospitals.
• The Company has launched the AdEPT Consulting initiative and has been awarded Platinum Partner status by Gamma. This will benefit both the Company and its customers.
• The Company expects encouraging progress in the interim results, but do not anticipate an interim dividend due to uncertainty brought by Covid-19.

Financial Highlights (for the year ended 31 March 2020 (FY20), as on 14 July 2020)

(Source: Company Website)

• The Company delivered another strong trading performance, with an increase of 20% in revenue and 9% in underlying EBITDA (on a year-on-year basis).
• It has also made considerable progress against strategic ambitions.
• The Company generated strong free cash flow, with an increase in cash of £4.2 million year-on-year.
• It witnessed a good operational performance, with an increase of 30% year-on-year in managed services.
• The Board believes that COVID-19 will have a modest impact on the business in the medium to long term.
• The Company’s client base is well diversified across both private and public sectors, and the long-term growth may expand the demand for the services (if there is an acceleration in digital transformation initiatives).
• Despite the current uncertainty, the Board stays confident that the continued strong cash conversion of operating profit will support ADT through the COVID-19 disruption.
• The Company reported decent fundamental metrics in FY20 along with geographic expansion into Yorkshire. It has low capital requirements and continues to operate an asset-light strategy.

Financial ratios for the period FY2020

Share Price Performance Analysis

On 27 October 2020, at the time of writing (before the market close, at 8:00 AM GMT), AdEPT Technology Group Plc shares were trading at GBX 234.00 and remained the same against the previous day closing price. Stock 52-week High was GBX 380.00 and Low of GBX 160.05, respectively.

From the technical standpoint, 90-day RSI is currently supporting an upside move (around 40.41 level), which means the stock price could increase in the short term.

Over the last 6-months, ADT generated a return of -2.09%, which was much better than the -7.32% return generated by the sector benchmark; FTSE All-Share Fixed Line Telecommunication.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Peers used in the valuation methodology (EV/NTM Sales)

Business Outlook Scenario

The Government recognized the workforce of AdEPT Technology Group as key workers since Telecommunications and IT support has become a 4th Utility Service to keep Government, education and the economy going in the prevailing crisis. The turnover of the Company is nearly 45% contributed through public sector while 55% is contributed by the commercial sector. Further, the Group reported that sales and EBITDA for FY20 were in line with expectations with an increase of 19% and 13%, respectively, against the previous year. The cash position as of 31 March 2020 was GBP 12 million, and net debt was GBP 28 million (GBP 3 million below the market expectation). Also, the Board had in the interest of cancelling the interim dividend in April to save GBP 1.2 million.

Looking forward, ADT believes that Covid-19 would continue to have a modest impact on the business in the medium to long term. However, AdEPT's client base is quite well-diversified across both the private and public sectors. It shall be able to expand the demand for its services since there is an acceleration in digital transformation initiatives. Considering the changing landscape of the pandemic, the Company could not provide financial guidance for FY20; however, it is well-positioned to take advantage of future opportunities for growth.

Considering the better order intake, improvement in cash collection, strong public sector presence, another solid trading performance in FY20, robust free cash flow and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on AdEPT Technology Group at the current price of GBX 234.00 (as on 27 October 2020, before the market close at 8:00 AM GMT), with lower-double digit upside potential based on 1.68x EV/NTM Sales (approx.) on FY21E sales (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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