AdEPT Technology reports cash generation in line with management expectations

AdEPT Technology Group plc (LON:ADT), one of the UK’s leading independent providers of managed services for IT, cloud-services, unified communications, connectivity, and voice solutions, has provided the following trading update ahead of its AGM, which is being held later today.

At the meeting, the Chairman, Ian Fishwick, will make the following statement:

“I am pleased to report that cash generation for the year to date is in line with management expectations and the Group is making progress on its strategy to strengthen the balance sheet. In July 2022, the Group’s strong cash flows were used to fund the final deferred consideration payment for the acquisition of Datrix Limited, amounting to £4.3m, with no further amounts outstanding.

Sales progress

AdEPT has secured several important new contract wins and renewals since the start of the new financial year, with law firm Herbert Smith Freehills, manufacturer CPH2, the Arts University of Bournemouth and services company Construction Testing Solutions, amongst others. The solutions deployed by AdEPT for these organisations demonstrate AdEPT’s broad portfolio of products, which enable its customers to be secure, resilient, agile, and unified, and provide their employees with a flexible workplace. 

This success reflects the strong brand image that AdEPT commands in its marketplace, the focus on customer engagement, and its recognised ability to effectively deliver the technologies required to fulfill the demand for digitisation and cloud centric services in the UK.

New initiatives

There are two specific initiatives that are expected to have a positive impact on the Group in the coming months, adding to the Board’s confidence in a strengthening performance in H2.

Firstly, the Group has entered a strategic alliance with Canon (UK) Ltd, with AdEPT’s IT Services being promoted alongside Canon’s capabilities into their UK accounts.  This will be taken to market as ‘Canon IT Services, powered by AdEPT’ and we anticipate this will open up significant new opportunities for AdEPT over the coming months.

The second is the announcement in March 2022 by the then Education Secretary Nadhim Zahawi of a ‘Connect the Classroom’ initiative, supported by a £150m fund to facilitate the introduction of faster and more reliable connectivity for schools.  This presents an additional opportunity for AdEPT to help schools, a sector in which it has a particularly strong market presence, with c.4,500 schools as customers.

A significant increase in the dividend

The focus on securing recurring customer contracts continues, with these currently representing c.74% of total revenue and a further significant percentage being generated from re-occurring one-off revenues from existing customers. The strong underlying recurring revenue and margin stream, combined with continued operational efficiency, has generated strong organic cash flow.

As a result, the Board is pleased to announce a return to interim dividend payments, with an interim dividend of 2.50p per Ordinary Share in respect of the six months ended 30 September 2022. This represents an increase of 150% over the final dividend of 1p, proposed for the year ended 31 March 2022.

To put our dividend strategy into context: Pre-pandemic, our dividend policy was to return 30% of our Adjusted Earnings Per Share to shareholders in dividends. However, as a result of the significant uncertainty surrounding COVID-19 lockdowns, dividend payments were suspended.

While the macro-economic landscape remains uncertain, we are on a journey back to ‘normality’. Our reinstatement of interim dividends reflects this change in circumstance and remains conservative. 

We anticipate returning approximately 20% of our Earnings Per Share in financial year ending 31 March 2023 (“FY23”), compared to the pre-pandemic percentage of 30%. This leaves considerable scope for the Board to execute on its progressive dividend policy over the coming years.

This dividend will absorb approximately £0.6m of shareholders’ funds (September 2021: £Nil). It is proposed by the Directors that this dividend will be paid in early April 2023.

Considering this dividend policy and our assumptions on forecast rises in interest rates, we anticipate the Group’s EBITDA: Senior net debt ratio to be less than 2x within 12 months and is, therefore, in line with our declared strategy to reduce leverage.

Trading update

The Group’s resilience has been demonstrated under the challenging macro conditions of the first few months of FY23. It has grown its project backlog and continues to win new business and secure contract renewals and extensions. However, the anticipated growth of the business is being hindered by global chip shortages for certain types of hardware, which continue to impact the whole of our sector.  Lead-time issues on such products delay the delivery of client projects, as previously reported, as well as some service contracts and related recurring support agreements.

In addition, inflationary pressures are expected to increase product and operational costs in FY23. The Group is working closely with its partners to mitigate the supply chain delays and to pass on cost increases, where possible, in particular those linked to connectivity and telephony charges. This cushions the business, to some extent, from the inflationary pressures within its supplier base.

Outlook and Half Year Results

Underlying demand for digitisation and cloud-based services remains strong, as businesses and government continue to seek efficiency benefits, and we expect growth in the Group’s markets to return to anticipated levels as the supply chain blockages ease and the economy returns to more normal trading conditions.

AdEPT’s primary focus remains firmly on the three strategic pillars: delivering strong organic growth, minimizing management overheads by reducing to two divisions; and reducing gearing. Strong progress is being made in respect of debt and, with the Group’s strong portfolio of capabilities, the efficiencies driven by the new One AdEPT platform, and the significant growth opportunities presented by our markets, positions AdEPT well to benefit from improving macro market conditions and the normalisation of the supply chain.

AdEPT intends to announce its half year results for the six months to 30 September 2022 in mid-November 2022.”

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