When managements recognise that they need to change the business model of their company this cannot always be done in a short period of time. Sometimes there can be a couple of years of stagnation or lower profits.
Covid-19 has masked and delayed some of the improvement in this managed technology services business, but the work done behind the scenes provides a good base from which to return to the previous strategy of participating in the consolidation in the sector.
New borrowing facilities mean that there is the fire power to increase the scale of the business.
AdEPT Technology (LON: ADT) is back on the acquisition trail and it has made an earnings-enhancing purchase that broadens its portfolio of services.
Over the past few years AdEPT has been transformed with recurring revenues generating more than two-thirds of the group total revenues. Management spotted that focus on telephony in a world where technology interacts would have led to a decline for the group and managed technology services was the way forward.
Datrix is being acquired for an initial £9m, with potential deferred consideration of up to £7m based on the growth of the business. The business provides cloud-based networking and cyber security services, and the two firms already work together.
Software defined wide area networking (SD-WAN) is one of the services that Datrix brings to the group. The acquisition also adds scale to the public sector work with government and the NHS.
In the year to March 2021, Datrix is estimated to have generated revenues of £10.7m and pre-tax profit of £600,000. There should be £400,000 of annualised cost savings – mainly due to the departure of senior management. N+1 Singer has added £11m to forecast revenues, which appears conservative.
At the end of March 2021, net debt (before the acquisition payment) is estimated at £32.5m and strong cash generation means that it will only be slightly higher at £34m by March 2022. That still leaves plenty of head room on the facilities of £70m. There is no dividend for the time being.
Profit has plateaued in recent years. AdEPT has been investing in integrating its businesses and operations and it is in a better position to integrate new purchases. Part of the earn-out is based on the success of integration.
Datrix will be included for a full 12-month financial period and 2021-22 revenues of £70m are forecast. Earnings of 28.7p a share are expected, which is near to the previous peak.
At 269p, up 17p, the shares are trading on less than ten times prospective 2021-22 earnings. That is cheap for a company involved in providing managed networking services. Buy.