AdEPT stands out amongst its peer group for delivering consistent strong growth in profits (we focus on EBITDA, but it’s just as true for Operating Profit or EPS).
In this report we offer a snapshot comparison of AdEPT versus some of its closest peers, together with our analysis of the fundamental drivers of the company’s performance – essentially the ability to deliver strong cashflows and then redeploy cash effectively to drive growth.
An important factor in AdEPT’s growth strategy has been a highly disciplined approach to acquisitions which has allowed the group to drive EBITDA growth whilst also delivering strong growth in the dividend to shareholders.
THE BUSINESS MODEL
The company is a telecom services provider, offering voice and data solutions for enterprises in both the commercial and public sectors. There are two broad categories of service offered – the traditional fixed line business, and the higher value-added managed services segment which includes offerings such as unified communications, complex data networks and automated call centre hosting.
The growth dynamics for AdEPT reflect the trends for the industry as a whole – gradual decline in the fixed line business offset by growth in the managed services. Naturally AdEPT has focussed itself increasingly on the managed service side, which now accounts for more than 50% of revenues.
Another mix shift in recent years has been a move towards more customers in the public and healthcare sectors, which have grown to 29% of group revenues.
VALUATION
Our peer group comparison (next page) shows that AdEPT is trading on a trailing EV/EBITDA multiple of 10.8x, in line with the peer group, in spite of delivering a much better track record of growth. Similarly, on a cashflow yield of 10.2% we argue that the share represent good value. We note that we are factoring in no further acquisitions into our March 2018e forecasts, but should they arise then there would be further upside to the numbers, in our view.
We have commented that AdEPT does a good job of converting profit into cashflow and then recycling cash to drive EBITDA growth, this is made possible as the company being a non-infrastructure business has extremely low capital expenditure requirements. The charts above illustrate this, whilst the table below offers a comparison with some of the closest peers.
Some specifics about the metrics:
There are one or two anomalies to highlight. Maintel has an inflated cashflow conversion due to phasing issues, but conversely appears unjustly expensive on the EV/EBITDA metric due to a major acquisition. And Redcentric metrics are based on historic data as reported, but these are subject to downward revisions due to an accounting problem.
Apart from these issues, the table gives a pretty fair overview of the performance and valuation of these stocks. The stand-out conclusion (highlighted in bold) is that AdEPT achieves good cash conversion which drives good EBITDA growth, which has led to share price outperformance.
How has it been achieved?
The high degree of cashflow comes about due to a lean cost structure as a result of the highly automated back-office function and low capitalintensiveness as a non-infrastructure business. We would also argue high cash generation is partly an issue of company culture. AdEPT is 36% owned by its management (including family trusts). We tend to find that when a management team has capital committed to the business, this leads to a healthy focus on cashflow.
The cash can then be returned to shareholders through dividends and recycled into highly value-creating acquisitions, because the fragmented nature of the business telecoms sector gives rise to attractive deal multiples. The last acquisition that AdEPT made in November 2016 came on a multiple of 4x EV/EBITDA. Assuming a 90% cash conversion ratio then this would equate to a cashflow yield of more than 20% on the acquisition. The company has been able to keep growing by compounding its cashflows at high rates of return.