Software services group Adapt IT will return to its strategy of acquisitive growth in its next financial year after it addressed investor concerns about the debt load on its balance sheet.
The group reported net gearing of 42% as of end-December 2020, down from 69% a year earlier. That’s below the 50% level targeted by management.
Chief financial officer Nombali Mbambo said in an interview with TechCentral that the reduction in net gearing is “very pleasing” and was a function of a sharp increase in cash flows amid strong cost-management measures introduced as a result of the uncertainties created by the Covid-19 pandemic.
“We will continue to make sure that it (net gearing) remains below the 50% mark and reduces even further,” Mbambo said.
Chief commercial officer Tiffany Dunsdon explained that Adapt IT paused its strategy of making bolt-on acquisitions to sort out the balance sheet. She said management is comfortable with net gearing of between 30% and 50%.
The group will use cash and debt facilities to fund planned acquisitions, which will resume in the new financial year starting 1 July 2021.
“We have seen, through Covid, how resilient our business is,” Dunsdon said. “When one vertical is suffering, others are doing well. It’s a good engine that underpins the next phase of growth. We would like to get through this financial year and then we’ll be on the front foot and ready to proceed with the exact same strategy we had before” when it comes to acquisitions.
“We’d use cash and our facilities to the extent we are comfortable. If the share rerates higher, we could consider using scrip,” she said. Adapt IT shares have rallied strongly in recent months – at R4.78 on Tuesday afternoon, they’re a far cry from their 52-week low of R1.10. However, they are still a long way from their peak above R15 reached in 2016.
CEO Sbu Shabalala told TechCentral that whatever acquisitions Adapt IT makes, they must be “accretive” to its shareholders. “If the multiples we have to pay are higher than our own, it is very dilutive. We are conserving cash in the meantime and ensuring we have sufficient headroom for more gearing.”
It’s a long way back up. Adapt IT’s share price performance over five years. Image: Yahoo Finance
Dunsdon said Adapt IT intends remaining a listed company, despite little appetite among institutional investors in South Africa for small and mid-cap companies listed on the JSE.
“We have been listed for a very long time and we have seen the market cycles,” she said, adding that being listed provides a “certain credibility” and makes it easier to attract potential acquisitions. “If saw persistently low valuations for a very long time, then we might reassess.”
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