Adapt IT extends their international telecommunication reach
Adapt IT (JSE: ADI) announced that it will acquire US based, CDR Live Limited and its subsidiaries (the LGR Group), trading as LGR Telecommunications (LGR).
LGR is a telecommunications specialist service provider with an exclusive focus on global telecommunications, providing end-to-end data warehousing and business intelligence systems at leading international telecommunications operators.
With business operations in Mauritius, South Africa and Australia, and servicing major network service providers, the transaction is valued at ~ $5m (part cash, part share issue post two year earn out period) and will be added to the Group’s Service Provider Solutions division, extending the Group’s exposure to advanced network analytics.
CDR Live is a software-based business that owns its own intellectual property, has annuity revenue streams and global customer base. We expect the experience in working with large global telecom networks together with available cross-selling opportunities to make the acquisition accretive for Adapt IT.
The acquisition creates revenue diversification for the Group, being hard-currency-denominated from foreign customers. We expect the currency diversification to lower the Group’s effective tax rate with income coming from lower tax jurisdictions like Mauritius, Thailand and Botswana.
We expect management to maintain an acquisition focused strategy to bring upward momentum to the share price.
Core equity changes
Invicta (JSE: IVT) released interim results for the six months ended 30 September, seeing revenue up 2.7% to R4.8b, operating profit up 6.4% to R325m and EPS flat at 242 cps.
The Group has endured economic and environmental headwinds in the mining and agricultural sectors over the period, generating most of its revenue locally. Given the outlook for African construction spending and oil production to be somewhat dire, we expect management to seek growth opportunities elsewhere.
Economic consensus speak to mild advances in global spend and commodity prices, filtering into stronger currencies for commodity exporters and reeling in a positive effect on financing capabilities for commodity movers. This will be magnified by the remediation of an upward SA interest rate cycle, which could finally see downward pressure off the back of stabilising inflation owing to forecasts of drought recoveries, despite a pending US rate hike.
Management still expects tough conditions ahead, which will constrain earnings growth in the short term. As a result we only expect earnings to recover to and transcend 2015 levels within the next 3 years.
Our full report on IVT to be released shortly.
Rhodes Food Group (JSE: RFG) released annual results for the year ended 01 October, seeing revenue up 10.8% to R4.6b, operating profit down 16.3% to R358m and HEPS down 29.1% to 90.1 cps.
Over the period the Group acquired and successfully integrated the Ma Baker and Packo businesses while seeing strong regional turnover growth of 21.4%.
Despite this however, RFG saw a disappointing international performance, impacted by currency headwinds and a reduced demand for industrial products.
Local lacklustre market conditions have made the consumer environment increasingly tough, more notably in the lower end of the market. Together with persisting drought conditions in the Western Cape impacting on yield sizes, fruit quality and labour costs, the dilutive impact of the acquisitions created some margin pressure for the Group.
Our full report on RFG to be released shortly.
CSG (JSE: CSG) released interim results for the six months ended 30 September, seeing revenue up 26% to R1.1b, operating profit up 38% to R84.4m and HEPS up 19% to 11.37 cps.
The Group’s results were positively impacted by improved stability in the temporary employment industry as companies adapted to the changes in labour legislation. While low growth remains a concern in South Africa, recovering commodity prices should result in stronger performance for several of CSG’s main clients.
The Group’s temporary staffing services are showing good growth and are proving to be a resilient business model in tough market conditions as permanent staffing becomes a less appealing commitment for employers. We believe that despite lacklustre economic conditions, management has positioned the business for further growth and has the skill to grow operations in line with what we have been seeing.
During the period the Group acquired Revert Risk Management Solutions in May for ~ R100m. We expect management to maintain their acquisitive growth strategy.
Our full report on CSG to be released shortly.
The Merchantec Capital Small Cap Index
The Merchantec small cap index assumes an equal weighting into each of the stocks within our coverage to track performance against the larger JSE and to identify opportunities to buy (after major sell-offs) and opportunities to sell (after major rallying). The index highlights investor sentiment toward the small cap space.
MCSC Indices outlook over the past week
The Merchantec Capital Small Cap Index (MCSCI) yielded a ~ 0.4% gain over the past month and a ~ 0.2% gain over the past week in comparison to the ALSI (~ 12.3% 1 month loss and ~ 1.0% 1 week gain). On a P/E basis, the index is trading at a forward PE of 9.5x, which is relatively undervalued in comparison to the JSE All Share index which is trading at a forward PE of 14.3x.
Prepared by: The Merchantec Mid Cap Research Team
Contact: Brian Rainier, CFA
Tel: +2711 325 6363