AdEPT Telecom*,
a leading independent provider of voice and
data telecommunications services to small
and medium sized UK-based businesses,
announced on 6th July its
results for the year ended 31st
March 2010: underlying EBITDA and pre-tax
profit were in-line with our forecasts. We
continue to believe the resilience of the
business model and ability of the
management team to generate cash is far
from reflected in the share price and
reiterate our stance of
buy.
The company reported
adjusted EBITDA of £3.61 million and
an underlying pre-tax profit of £2.22
million, up from £3.52 million and
£2.06 million respectively despite a
near 10% decline in revenue to £25.73
million. This was achieved as the company
was able to increase gross margin by a
basis point to 37.2% and reduce underlying
operating costs by more than 15% to
£5.9 million as it served larger
customers and derived savings from
restructuring. However, a tax charge as
opposed to the prior year’s tax
credit saw adjusted earnings per share fall
from 10.44p to 9.27p.
The company generated
£3.29 million in operating cash flow
before working capital movements meaning,
despite a £559,000 working capital
outflow and £895,000 of interest
paid, net debt was able to be reduced from
£10.84 million at 31st
March 2009 to £9.22 million at
31st March 2010. The company
added that since the year end it
“has paid down a
further £0.6m of
debt”.
During the year AdEPT
continued to develop the stability of its
revenue and customer base. It continued to
reduce its reliance on variable monthly
call charges as – helped by a
continued focus on multi-product sales and
the launch of a number of data connectivity
products - the proportion of revenue
derived from fixed monthly charges was
increased from 43% to 48% of total revenue.
At March 2010 86% of revenue was also
generated from customers taking more than
one product, up from 81% a year earlier.
AdEPT noted in the current year it is
seeking to “continue to grow our
organic sales channels, invest in new
products and complement this with continued
investment in retention activities to
retain more
customers”.
It should be helped here by its
increasing ability to
provide complex multi-site, multi-product
solutions to larger
customers.
The overall
revenue decline was due to fixed line
revenues falling, with significant growth
in data product revenues (up 72.5% to
£1.1 million) and, albeit from a low
base, mobile revenues (up 86.1% to
£0.32 million). There is thus growth
within the company despite total revenue
being expected to decline again this year.
Our forecasts remain unchanged and the key
to the investment case remains the
company’s consistent, proven ability to generate
strong cash flows. This is facilitated by
its offerings being essential parts of
customers’ operational requirements
and a lean cost structure enabled by its
highly automated and scalable back-office
systems. There remains a commitment to use
the cash flows generated to further reduce
debt and we continue to believe £2
million of net debt reduction per annum is
realistic going forward. On this basis,
even assuming the current EV/EBITDA
multiple of 4.1 is unchanged (we would
argue debt repayment will see the company
perceived as being de-risked which will
likely foster a re-rating), within two
years the equity would be valued at
£8.42 million – equating to 40p
per share.
As ever, there are risks
– notably from “the
continued uncertainty of the economic
outlook”. However, the business
model has shown its resilience and
management its ability as, despite the top
line pressure in an exceptionally
challenging economic climate, the year
under review represents the seventh
consecutive of underlying EBITDA growth
since the company’s inception in
2003. As such, we continue to see our
target price as modest
and expect more
in the longer-term as investor focus
switches from AdEPT’s debt to the
multiple its consistent cash flows are
being afforded. At 21p, our stance remains
buy.
