Interim results for the 6 months ended 30 September 2016
AdEPT, one of the UK’s leading independent communications integrator and managed service providers, has given DirectorsTalk its unaudited results for the 6 months ended 30 September 2016.
Highlights
Revenue and EBITDA
-- Total revenue increased by 19% to GBP16.5 million (2015: GBP13.9 million)
-- EBITDA increased by 20% to GBP3.5 million (2015: GBP2.9 million)
-- EBITDA margin increased to 21.4% (2015: 21.1%)
-- Managed service revenue accounted for 53% of total revenue (2015: 41%)
-- Managed services revenue increased by 53% to GBP8.8 million (2015: GBP5.7 million)
EPS and Dividends
-- Adjusted EPS increased by 12% to 11.1p (2015: 9.9p) -- Interim dividend increased by 25% to 3.75p per share (2015: 3.00p)
Cash Flow and Debt
-- Operating cash flow before tax of GBP3.2 million (2015: GBP2.5 million) -- Reported EBITDA to pre-tax cash from operating activities 98.9% (2015: 89.8%)
— Net debt of GBP10.8 million (2015: GBP7.6 million), after GBP6.6 million acquisition payments
Acquisitions
-- Acquisition of Comms Group UK Limited completed in May 2016 -- Comms Groups UK Limited 5 month revenue contribution equating to 12% of revenue increase -- Acquisition of CAT Communications Limited completed post period end in November 2016
Business review
Total revenue increased by 19% to GBP16.5 million with the increase being a reflection of the 5 month revenue contribution from Comms Group UK Limited (“Comms”) following the completion of the acquisition in May 2016. Comms is a UK based specialist provider of unified communications, Avaya IP telephony, hosted IP solutions, IT and managed services, which is an increasing requisite for AdEPT’s existing and targeted enterprise and public sector customer base. Comm’s technical skills and product set complement and enhance AdEPT’s existing services, particularly in the Fleet office. Comms is an Avaya specialist and the acquisition has enabled AdEPT to offer a complete suite of unified communications products and services to customers of all sizes, from small retail through to large enterprise customers. Comms contributed 12% of the revenue increase in the interim period, which is in line with the expectation set at the date of acquisition.
AdEPT has had continued success in the public sector and healthcare space during the period, winning a number of new contracts with councils and other public sector bodies. Over the last 36 months, AdEPT has been successful in gaining new contracts with public sector and healthcare organisations as a result of its various framework agreements. This has seen an increase in contracts with 40 councils at the end of the interim period from 28 as at 30 September 2015. The acquisition of Centrix provided a complementary customer focus both in terms of size and sector. The Comms customer base was primarily small enterprise customers; however the continued targeting of larger contracts at Fleet and Tunbridge Wells has maintained the Premier Customer division (customers spending more than GBP5,000 per annum) proportion across the Group. The Premier Customer division accounted for 72% of total recurring revenue at 30 September 2016 which is in line with the prior period (September 2015: 70%). The contract success through AdEPT’s frameworks resulted in the public and healthcare sector customer base being extended and accounted for 29% of total revenue at 30 September 2016 (September 2015: 24%).
AdEPT continues to transition successfully from a traditional fixed line service provider to a complete communications integrator offering best of breed products from all major UK networks. Revenue from managed services, including data connectivity, hardware and cloud-based contact centre solutions, increased by 53% to GBP8.8 million and accounted for 53% of total revenue for the six months ended 30 September 2016 (September 2015: 41%).
Financing and cash flow
Cash generated from operating activities before tax increased by 39.5% to GBP3.2 million (September 2015: GBP2.3 million), which equates to a 98.9% reported EBITDA conversion (after GBP0.3 million acquisition fees). This increase is driven by the improved profit before tax whilst maintaining working capital terms and therefore driving high cash flow conversion.
Dividends paid in the period absorbed GBP0.7 million of funds (September 2015: GBP0.5 million), which is a reflection of the progressive dividend policy of the Board. The Company operates a capex-light model and therefore capital expenditure was low at 0.6% of revenue.
GBP3.6 million of available funds (net of cash acquired) was used to fund the initial cash consideration for the acquisition of the entire issued share capital of Comms on 1 May 2016. The interim results for the current period include a 5 month contribution from Comms, further details of which are included in Note 6. Deferred consideration of GBP3.0 million in respect of the Centrix acquisition (in May 2015) was paid during the period, with no further amounts due.
Net borrowings have increased to GBP10.8 million at 30 September 2016, largely as a result of the GBP6.5 million acquisition payments. Net Debt:EBITDA (annualised) ratio remained low at 1.5x at 30 September 2016.
Post-balance sheet events
On 1 November 2016 the Company acquired the entire issued share capital of CAT Communications Limited and Progressive Communications Limited (together referred to as ‘CAT’) for an initial consideration of GBP1.05m less the net debt of CAT at completion (approximately GBP0.07m), payable in cash. Further contingent consideration of between GBP0.2m and GBP0.95m will be payable, also in cash, dependent upon the performance of CAT post-acquisition.
CAT, based in Pewsey, Wiltshire, is a well-established UK-based specialist provider of unified communications, Avaya IP telephony, hosted IP solutions and managed services. CAT offers the delivery of complex unified communications, managed service solutions and specialist inbound call centre management to its customer base across the UK, and further supporting customers with global deployment planning and solutionsin Europe. The support function of the CAT customer base is to be transferred and integrated into AdEPT’s existing site in Fleet. CAT has a high level of recurring revenue and offers a well-developed customer base with which it enjoys long term relationships. The Board believes that the CAT technical skills and product set, particularly in relation to Avaya Aura, will complement and enhance AdEPT’s existing services already being provided from the Fleet office. The acquisition is expected to be earnings accretive from completion.
The last filed accounts of CAT for the year ended 31 March 2015 reported turnover, operating profit and profit before tax of GBP1.3m, GBP0.3m and GBP0.3m respectively. Capital expenditure in the year ended 31 March 2015 was insignificant. Net and gross assets at that date were GBP0.2m and GBP0.7m respectively. Acquisition related costs of approximately GBP0.1m will be recognised as an expense in the statement of comprehensive income for the year ending 31 March 2017.
Profit before and after tax and earnings per share
Reported profit before tax increased by 26% to GBP1.5 million (2015: GBP1.2 million) and reported profit after tax increased by 23% to GBP1.0 million (2015: GBP0.8 million). Both of these increases are a reflection of the improved operating profit over the prior period, less the movement in interest charges and tax liability respectively.
Adjusted (basic) earnings per share has increased 12% to 11.1p for the six months ended 30 September 2016 (September 2015: 9.9p) as a result of the GBP0.6 million increase to underlying EBITDA, less the additional tax liability.
Dividends
The Directors have declared an interim dividend of 3.75p per Ordinary Share in respect of the period ended 30 September 2016, an increase of 25% over the interim dividend for the comparative period (September 2015: 3.00p). This will absorb approximately GBP0.8 million of shareholders’ funds (September 2015: GBP0.5 million). It is proposed by the Directors that this dividend will be paid on 7 April 2017 to shareholders who are on the register of members on the record date of 17 March 2017. Subject to the audited results for the year ending 31 March 2017, it is the intention of the Board to propose a final dividend with the March 2017 final results.
Dividend cover for the interim period was 3.0x (September 2015: 3.3x). Strong free cash flow generation has continued since the end of the period, and there continues to be considerable scope for the Board to continue its progressive dividend policy.
Outlook
This has been another excellent 6 months with completion of an earnings enhancing acquisition during the period. Improved results in all key areas have been achieved from the underlying business combined with a positive contribution from the Comms acquisition completed in the period. Since the end of the interim period, the completion of the CAT Communications acquisition is expected to be earnings accretive from the date of completion and complements the existing skill set of the Fleet office to support enterprise customers. We continue to be highly cash generative with adequate debt facilities in place to enable the Board to continue to identify earnings-enhancing acquisitions whilst retaining scope for a progressive dividend policy.
Roger Wilson
Chairman
