AdEPT Technology – really going for strategic growth

Within a couple of months this technology services group will be announcing its final results for the year to end March 2022.

They should show an advance in both revenues and profits, while its earnings per share will highlight what a low rating upon which its shares are currently trading.

Determined objectives

This £48m capitalised group’s management is set upon creating one of the UK’s first managed services companies with expertise in Connectivity, Unified Communications and IT Outsourcing – delivering solutions that underpin several thousand companies across the UK. 

A very large marketplace

This company already knows just how big its market is and it is continuing to progress its strategy to gain more than its share.

It is assessed that the UK core addressable market for its services is a staggering £11.4bn.

Thehigher growth parts of that market, such as cloud services which are growing at a compound annual rate of 15%, are being fuelled by the growth in public cloud hosted Infrastructure as a Service (IaaS), Software as a Service (SaaS), and cyber security, now growing at over 9% per annum.

There are some mega growth trends showing through in the UK marketplace, such as a significant demand for high-speed networks, the critical challenges for cyber security, the rise for cloud-based communications and technology as a service, the work from home culture and the explosion of services like Zoom and Teams, as well as the fact that BT is switching off its copper network by 2025.

Its services are wide and varied

The group employs over 340 members of staff across 8 locations with its head office in Tunbridge Wells, Kent.

Established nearly 19 years ago it has expanded not only by organic growth but also through having made some 26 acquisitions over the years.

Today AdEPT is one of the UK’s leading independent providers of managed services for cloud, digital platforms, unified communications, and connectivity solutions. 

Its tailored services are used by thousands of customers across the UK and are brought together through the strategic relationships with tier-1 suppliers such as Google, Openreach, BT Wholesale, Sophos, Convergence, Ericsson LG, Cato, GTT, Extreme Networks, Gamma, VMware, Cogent, Vodafone, Virgin Media Business, Fujitsu, Avaya, Amazon Web Services, TalkTalk Business, Microsoft, Cisco, Dell, Fortinet and Apple.

For its clients the group provides a variety of services such as data networking, Cloud services, Business Continuity, Managed IT, Voice Services and collaboration, professional services, Governance, Compliance and Security.

Thousands of clients

The company empowers thousands of companies across the UK by applying unified technology.

The group has over 15,000 customers, 100 of whom are Local Councils, it aids 30 NHS trusts, it also has some 600 sites connected using the Health and Social Care Network.

It supports over 4,000 schools, 25 Universities, and has about 2.2m users of its education apps. Its MailProtect service scans around 2m education emails daily.

The group supports over 1.6m Microsoft 365 users, which is purportedly Europe’s biggest single deployment. The company has over 200,000 MicroSoft Exchange users, which is one of the largest such services in Europe. Each day over 1bn access requests are filtered by its WebScreen service.

AdEPT hosts around 2,000 desktop users and it backs up over 2,500 servers every day. It stores over 27 PetaBytes of data for its clients (a petabyte is a measure of data storage capacity, while a single petabyte of storage could hold 223,101 DVD-quality movies). 

The range of clients also include, amongst so many others, Serco, Citrix, Multi-Academy Trust, Rexel, ASOS, Coca-Cola, the Co-op, the London Stock Exchange, Sabre Insurance, Fidessa, Halfords, Swiss Re, Sothebys, Rolls Royce, Marstons, Opus Energy, NextPharma, talkSPORT, Ardmore, Soldo, Redrow Homes, Norwegian Cruise Line, TClarke, Wincanton, the TUC and Volker.

Amongst its thousands of clients, it also works for Parliament, The Cabinet Office, Central Government, the Crown Commercial Service and various Offices of State.

The Equity

There are some 25m shares in issue.

The larger holders include Christopher Kingsman, Dir (21,2%), Greenwood Investments (16.1%), Downing Ventures (8.95%), Rathbone Investment Management (8.72%), BGF Investment Management (6.57%), Liontrust Investment Partners (5.62%), Shelley Rosen (5.52%), Ryan Fishwick (4.40%) and Keenan Fishwick (4.40%), Rowan Dartington (3.5%), Octopus (3.1%) and Killik (2.2%).

Recent Trading Update

The group stated that it had a strong finish to the end of its year to end March in terms of its order intake. It also went on to note that it expected its revenues and EBITDA to be broadly in line with market expectations.

Like so many other quoted concerns, it also remarked about the enduring pandemic hassles, the supply chain disruptions, especially in ‘chips’ with several of its projects being delayed by hardware deliveries.

In the last year the AdEPT has undertaken a Strategic Review to enable it to take opportunities within its markets.

Broker’s View

Singer Capital Markets, which earlier this year stated that the company was one of its ‘Big Stocks for 2022’, noting in a comment entitled ‘Driving up the value chain’ that

“While the market accepts that AdEPT has successfully repositioned to Managed Services since 2015, what we think it is missing is the repositioning towards cloud services via acquisitions, organic product launches and partnerships.

As such, the company is increasingly exposed to the secular investment trend of Digital Transformation rather than “keep-the-lights-on” maintenance services.

The move deeper into higher growth areas such as SD-WAN, hybrid cloud and VoIP has the potential meaningfully to accelerate growth going forward both with existing and new customers.

As organic growth starts to be delivered on a sustained basis we expect the deep discount at which the stock is rated to narrow. In our opinion it should not be valued below the largely ex-growth hosting players such as Iomart and Redcentric.

We therefore target a forward FCF yield of 8% which suggests a price target of 350p and, accordingly, introduce a Buy recommendation.”

In early April, after the group announced its Trading & Strategy Update, the broker’s analysts – Kevin Ashton, Harold Evans and Caspar Erskine – continued to rate the shares as a ‘buy’, then at 165p, with the same 350p price objective.

Ahead of the 2022 finals being announced on 7 July, they have estimated revenues for the year to end March of £69.5m, up from £57.9m and adjusted pre-tax profits of £7.7m (£6.4m), generating earnings of 26.8p (22.3p) of earnings per share.

Into this current year they foresee £73.3m sales, £8.1m profits and 28.5p per share in earnings.

My View

As far as I am concerned this group is in exactly the right sector for growth.

And what is more it is operating on around a 75% annual recurring revenue, 48% of which is Public Sector and Health Care, with commercial customers making up the 52% balance.

Its shares are significantly undervalued when compared with its peers within the tech sectors.

At this time last year, they were trading at a 325p peak level, since when various market falls and rises have seen them slide back to 151p at their lowest, that was a couple of months ago.

They closed on Friday night at around the 182.5p level, at which they trade on a mere 6.8 times historic and just 6.4 times current year earnings.

The shares could well be heading up to Singer’s 350p price aim within the next year or so.

(Profile 22.02.21 @ 260p set a Target Price of 325p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)