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 consist 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. The company also stores 27 petabytes of information for its clients every night, managing more than 1,000 servers and hosted more than 2,000 desktop users for its clients, all across the United Kingdom. The company, in partnership with Ericsson-LG’s iPECS and Avaya, have deployed more than 50,000 phone handsets globally. With its MailProtect, the company scans more than 2 million emails every day.

Ian Fishwick is the Non-Executive Chairman of the group since January 2019. The Chief Executive Officer of the group is Phil Race and was appointed as CEO on 1^st January 2019. The CEO is supported by John Swaite, who is the Group Finance Director.

Key Statistics




Top Shareholders

 

Recent News

On 12^th November 2019, Adept Technology Group announced its interim results for the financial year 2020 ending on 30^th September 2019.

On 29^th October 2019, Adept Technology Group announced the selection of Craig Wilson. Mr Craig Wilson will join the group as director non-executive effective immediately. Mr Wilson previously worked as CEO (Chief Executive Officer) of Xchanging Plc and had an extensive experience in the IT Services and Software, and BPO (Business Process Outsourcing).
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Segments
The operations of the group are differentiated in two operating segments, namely Fixed line services and Managed Services. The company’s Managed Services segment incorporates VoIP services, hardware, mobile, data connectivity and IT services. In the first half of the financial year 2020, the company’s revenue from Managed Services business has increased, while the revenue from Fixed line services business has declined for the period.The company’s gross profit and EBITDA metrics increased from Managed Services business in the first half of the financial year 2020, while the gross profit and EBITDA from Fixed line services business declined for the period. In the first half of the financial year 2020, the company has reduced its expenses related to the amortisation from its Fixed line services business, while the amortisation expenses have increased from its Managed Services business for the current period. The company’s operating profit increased from both the Fixed-line services and Managed Services in the first half of the financial year 2020. The company’s PAT (Profit after tax) increased from both the Fixed-line services and Managed Services in the first half of the financial year 2020. The company generate all its revenue within the UK region.

Financial Highlights – H1 Financial Year 2020 (30^th September 2019, GBP, thousand)


(Source: Interim 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 Managed services revenue share went up to 82 per cent in total revenue for the period versus 74 per cent share in H1 FY2019. 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 inthe 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 aPAT (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 aPAT (profit after tax)GBP 1,373 thousand in H1 FY2019. The company’s adjusted basic earnings per share stood at 15.4 pence in H1 FY2020 versus adjusted basic earnings per share of 14.7 pence in H1 FY2019. The company’s basic earnings per share stood at 3.7 pence in H1 FY2020 versus basic earnings per share of 5.8 pence in H1 FY2019. The adjusted diluted earnings per share increased by 4 per cent to 15.3 pence in H1 FY2020 from adjusted diluted earnings per share of 14.6 pence in H1 FY2019. The company’s diluted earnings per share stood at 3.6 pence in H1 FY2020 versus diluted earnings per share of 5.8 pence 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 Performance Indicators


Revenue

Revenue is the income generated by the company from its normal day to day operations. AdEPT Technology Group showed an uptick in the revenue by 11 per cent to GBP 51.3 million in the financial year 2019 as against GBP 46.4 million in FY2018.


Gross profit margin

Gross profit margin gives the value of gross profit as the percentage of revenue. The company’s gross profit margin was up by 1.7 per cent to 49.4 per cent in FY2019 versus 47.7 per cent in FY2018.


Underlying EBITDA

AdEPT Technology Group’s underlying EBITDA increased by 11 per cent to GBP 10.8 million in the financial year 2019 versus GBP 9.8 million in the financial year 2018.


Dividend per share

DPS (Dividend per share) is the total announced dividends delivered for every share outstanding by the company. The company’s dividend per share increased by 12 per cent to 9.8 pence in FY2019 versus 8.7 pence in FY 2018.

Financial Ratios (H1 FY 2020)

 
Source: Thomson Reuters

The reported gross margin in H1 FY2020 declined by 1.2 per cent to 48 per cent as against a gross margin of 49.2 per cent reported in last year for the same period. The reported EBITDA margin declined for the H1 FY2020 to 19.7 per cent versus the EBITDA margin of 21.1 per cent reported in last year for the same period. The reported operating margin declined for the First half of the FY2020 to 7.9 per cent versus the operating marginof 10.6 per cent reported in last year for the same period. The reported Pretax margin stood at 3.7 per cent for the H1 FY2020 as against Pretax margin of 7 per cent reported in last year for the same period. The company reported a Net margin of 2.8 per cent for the H1 of the financial year 2020 as against the net margin of 5.6 per cent reported in the last year for the same period. Return on equity for the H1 of the Financial year 2020 stood at 5.5 per cent versus a return on equity of 8.5 per cent recorded in the last year for the same period. On the liquidity front, AdEPT Technology GroupPlc’scurrent ratio stood at 1.02x and was higher than the industry median of 0.79, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the AdEPT Technology GroupPlc’swas 2.73x, which was higher as compared to the industry median of 1.47x, reflecting that the company is more leveraged as compared to its peers.

Share Price Performance


Daily Chart as at December-10-19, before the market close (Source: Thomson Reuters)

On December 10, 2019, at the time of writing (before the market close, at 12:20 PM GMT), AdEPT Technology GroupPlcshares were trading at GBX 326.50, up by 0.46 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 405.50/GBX 300.00. Stock’s average traded volume for 5 days was 5,217.80; 30 days – 17,227.87 and 90 days – 13,487.00. The traded volume (average) for 5 days was down by 69.71 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly lower volatility as against the benchmark index based on the company’s beta of 0.46. The outstanding market capitalisation was around £77.03 million, with a dividend yield of 3.08 per cent.

Valuation Methodology
Method 1: EV/EBITDA Multiple Approach (NTM)



To compare AdEPT Technology GroupPlc with its peers, EV/EBITDA multiple has been used. The peers are Ovzon AB(NTM EV/EBITDAwas 20.26), Helios Towers Plc (NTM EV/EBITDAwas 10.94), Bigblu Broadband Plc (NTM EV/EBITDAwas 6.22), Cellnex Telecom SA (NTM EV/EBITDA was 18.82) and BT Group Plc (NTM EV/EBITDAwas 4.93). The average of EV/EBITDA (NTM) of the company’s peers was 10.10x (approx.).

Method 2: Price to Earnings Approach (NTM)
 


To compare AdEPT Technology Group Plc with its peers, Price/Earnings multiple has been used. The peers are BT Group Plc(NTM Price/Earnings was 7.84), Bigblu Broadband Plc(NTM Price/Earnings was 10.19), Zegona Communication Plc (NTM Price/Earnings was 17.12), Telecom Italia SA (NTM Price/Earnings was 8.25) and Proximus NV (NTM Price/Earnings was 14.80). The Average of Price/Earnings (NTM) of the company’s peers was 11.64x (approx.).

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. 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 company with 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 closing price of GBX 325 (as on 9^th December 2019) with single-digit upside potential based on 10.10x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 11.64x NTM Price/Earnings multiple (approx.) on FY20E earnings per share (approx.).
 
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 10^th December 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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