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Northland Capital Partners View on the City AdEPT Telecom, Eleco and Sage Group

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AdEPT TElecom (LON:ADT) – BUY*: Acquisition

Market Cap: £38.7m; Current Price: 173p; Target Price: 210p (from 175p)

Centrix acquisition significantly expands offering and business

NORTHLAND CAPITAL PARTNERS VIEW: The Centrix acquisition represents a significant step in AdEPT’s stated strategy of increasing its proportion of larger customers, expanding its Public Sector presence and reducing its reliance on calls and line rental. Centrix also brings long term relationships with Avaya and Medusa with the scope for system sales. Centrix is a long established and highly profitable business and AdEPT’s management has secured a keen deal. The acquisition, funded out of the recently agreed £15m facility, is immediately earnings’ enhancing and drives FY16 and FY17 upgrades and a new price target of 210p (from 175p). There remains headroom for further accretive acquisitions in the fragmented reseller market as well as cross-selling opportunities. We maintain our BUY rating. 

  • Acquisition increases customer depth and product breadth:  Centrix brings c. 300 new customers with more than 95% qualifying as AdEPT ‘Premier’ customers. It also substantially increases AdEPT’s presence in the Public Sector and Healthcare. In terms of products, Centrix is a well-established Avaya unified communications system and managed services provider and the leading vendor of Medusa, a product for multi-tenanted buildings. Centrix has long term relationships with its customers and c. 80% recurring revenues.
  • Keen price drives upgrades to the top and bottom line. Centrix is a highly profitable and asset light business and the valuation implied by the consideration (initial £7m and up to £10.5m) compares favourably to AdEPT’s own rating and other recent sector transactions. As a result, there are material upgrades at the FY16 revenue (+25%), EBITDA (+22%) and EPS (+20%) lines in spite of conservative assumptions on Centrix’s performance going forward and no assumptions made on cost/revenue synergies. Applying the sector rating to FY16 EPS indicates an increased target price of 210p. We maintain our BUY rating.

 

Week Ahead (04/05/15)

View from the trading desk

Next week UK markets will be dominated by the final run up to the General Election followed by picking through the results to work out the likely shape of the next Government. This, plus a shortened trading week, means markets are likely to struggle to find much direction or enthusiasm. 

There was a noticeable sell-off in European government bonds during the week that pushed up borrowing costs and raised concerns that the benefits of the Eurozone quantitative easing programme might be wearing off. The German 10-year Bund had appeared to be moving inexorably towards a zero yield and a number of shorter dated bonds had moved into negative territory. The reverse may suggest expectations for inflation and growth. Eurozone equities were also weak (for the first month this year) and the Euro strengthened against the dollar. That said, the ECB is committed to a €60bn-a-month bond-buying programme until September 2016 and this should cap euro appreciation and bolster the interest in Eurozone equities. 

The US economy seemed to stumble with Q1 GDP numbers coming in at a very sluggish 0.2% on an annualised basis, compared with expectations of 1% and the Q4 reading of 2.2% and 5% in Q3. Poor weather, port strikes, the strength of the dollar and the drop in oil-related investment were all cited as reasons. This could result in a further pushing out of the first interest rate increases. 

Sales & Research thoughts

TMT: The results schedule looks fairly light in the shortened trading week. Sage (LON:SGE) is due to report interim results on Wednesday. In January’s Q1 trading update the company reported organic revenue growth of 5.3% and management declared it was still comfortable with the target of 6% organic revenue growth and a 28% operating margin for FY15 with an acceleration in H2. Organic recurring revenue grew 7% in Q1 and this included 29% growth in software subscriptions (albeit from a small base). Growing this part of the business is key to Sage’s long term success as more business moves to the cloud. We would also expect updates on payments in North America and Europe Enterprise, particularly France, that were singled out as areas of weakness. 

Eleco (LON:ELCO) is set to release its first set of results since reclassifying as a software company on Tuesday following a substantial restructuring. The company is a provider of software for the architectural, engineering and construction industries and specialising in project management, visualisation, estimation, BIM and CAD/design. In H1, it reported revenue +4% to £8.6m in spite of a £0.5m negative FX impact. £2.9m was raised during the period to reduce debt that was expected to be £2.2m in October.

Mining: Next week we will travel to eastern Turkey to visit Mariana Resources’ (LON:MAR) Hot Madan project. The results of the phase I drill programme took everyone by surprise, including the Company, with exceptional intercepts for gold-copper including 103m at 9g/t gold (Au) and 2.2% copper (Cu) from 25m (HTD-04), 82m at 20.4g/t Au and 1.9% Cu (HTD-05) from 147m, along with large and high grade intercepts of zinc-lead mineralisation 31.5m at 1.8% zinc (Zn) and 0.6% lead (Pb) (HTD-05) and 28m at 1.28% Zn and 0.08% Pb from 41.7m and 27m at 2.3% Zn and 0.2% Pb from 75.5m (HTD-06). Mariana’s joint venture partner Lidya is funding the phase II drill programme that is currently under way. The first hole in phase II is testing the potential for a northern extension to the gold-copper and zinc-lead mineralised zones. In our view, the high grade nature of mineralisation defined to date means that even a small orebody could be highly valuable and we look forward to getting our boots on the ground and seeing the exciting drill core from phase I.


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