Summary of Salient Features
- Revenue up by 10%
- Normalised operating profit for the year up 9%
- Headline earnings per share up 18%
- Normalised earnings per share up5%
- Interim dividend of 57 cents declared up 6%
- Cash generated by operations R 186.3 million
- Cash conversion ratio 152%
- Debtors’ days outstanding 34 days
- Gearing down from 10% to 9%
- EBITDA margin down from 5.1% to 4.9%
- Strong and robust balance sheet provides Group with strategic opportunities.
Listed human capital management group, Adcorp Holdings Limited, today announced that despite a relatively difficult trading environment it recorded modest profit growth for the six-month interim trading period ended 31 August 2011.
Adcorp Chief Executive Office, Richard Pike, said although the trading environment was characterised by economic uncertainty and a general reticence to commit to hiring decisions, normalised earnings per share of 155.7 cents per share (2010: 147.8 cents per share) were some 5% ahead of normalised earnings per share for the same period last year.
Headline earnings of 112.4 cents per share (2010: 94.9 cents) were 18% ahead of the prior year comparative figure.
Revenue for the period under review of R 2.85 billion (2010: R 2.58 billion) was some 10% ahead of the prior year whilst earnings before interest, tax and depreciation (“EBITDA”) of R 139.8 million (2010: R 131.3 million) grew by 6%.
The Group declared an interim dividend of 57 cents per share (2010 interim dividend: 54 cents) representing a 6% increase compared to the prior year’s interim dividend.
“Various prevailing staffing industry trends have contributed positively to this growth trend and to Adcorp’s overall performance,” said Pike.
“A persistent skills shortage with respect to certain scarce skills has resulted in relatively robust profit growth within the permanent recruitment operations of the Group. Its contract staffing operations, which comprise the largest constituent component of Adcorp, have seen centralised procurement departments playing a far greater role in the acquisition of people-skills. Many clients are significantly rationalising the number of vendors they use thus requiring the adoption of more sophistication and technology in the procurement process.”
Pike said that this trend has put margins under pressure, as reflected in the slight decline in gross margins from 20.7% in 2010 to the current 19.5% margin for the period under review. “It has also resulted in market share gains for the Group due to our unique positioning and our ability to meet these more onerous and sophisticated procurement requirements,” he commented.
The cash performance of Adcorp Holdings Limited during the period under review was once again commendable. Cash generated by operations topped at R186.3 million, resulting in a cash conversion ratio of cash generated by operations to operating profit of 152% versus an internal target ratio of 90%.
Debtors’ days outstanding were 34 days (31 August 2010: 33 days) whilst gearing levels were contained to 9% (31 August 2010: 10%).
Said Pike: “The Group’s commitment to the adoption of technology as an enabler and to value-added offerings to clients is also starting to pay dividends although its contribution is still relatively modest at this stage. We expect it to increase in line with the widespread international adoption of these technologies.
“As trends, the introduction of greater sophistication with regard to the procurement of people-skills plus the adoption of technology as an enabler have already contributed to a consolidation within, what up to now, has been a highly fragmented market. These trends are very encouraging for the future growth prospects of the Group.”
Pike added: “Also contributing to a further consolidation in the industry has been the ongoing debate regarding further regulation of the temporary employment services (labour broking) industry.
“As much of the debate has been centred on reputed exploitative practices of temporary workers by some rogue operators in the industry, procurers of these services have tended now to favour the well-established, reputable operators within the industry.”
He said that in terms of progress with regard to the resolution of the labour broking debate, negotiations are ongoing at Nedlac between Government, business and organised labour. “Some progress has been made to find common ground around developing an appropriate regulatory framework for the industry. However, the process is still inconclusive and will, in all likelihood, spill over into next year.”
He went on to say that the training operations of the Group continue to perform well, growing the number of internal and external candidates registered on learnerships. “In addition, the training operations have extended their capacity with regard to artisan training whereby the Group now has the capacity to train up to 2 500 artisans annually. Given the country’s imperative to rapidly increase the skills base of the workforce, the Group’s training operations are particularly well positioned for the future.”
FMS Marketing Solutions, which provides outsourced services to the life insurance industry, showed a decline in earnings reflecting lackluster trading conditions in that sector of the business.
Over the past years, the Group has rolled out certain relevant and affordable financial, wellness and lifestyle offerings to its considerable contract work force. These offerings have proved to be of benefit to the workforce and have also started to make a meaningful contribution to overall performance.
Said Pike: “It is anticipated that the range of these niche products, which are of particular application to contract workers, will continue to be expanded and will also now be offered to external contract workers.”
During the period, the Group embarked on an upgrade of its Microsoft Dynamics AX ERP system which will be implemented over the next year. The upgrade provides an opportunity to further optimise, standardise and automate back office processes so that the Group is better able to achieve economies of scale and cost containment.
On 6 September 2011, the Group announced that it had submitted a firm offer to acquire leading, listed specialist information and communications technology (ICT) resourcing and solution business, Paracon Holdings Limited, by way of a scheme of arrangement.
“The success of the offer,” said Pike, “is still subject to approval by the shareholders of both Adcorp and Paracon as well as approval by the relevant competition authorities.”
In terms of the offer, Paracon shareholders have been offered one Adcorp share in respect of every 13.812 Paracon shares held. The offer also makes allowance for a cash alternative to the share offer of R 1.97 per share at the election of Paracon shareholders, save that the cash alternative is limited to a maximum of R 265 million, which approximates 40% of the purchase price.
“The purchase price offered approximates R 662 million,” he added.
“Should the transaction be successful, it will significantly strengthen the Group’s offerings with regard to the resourcing and placement of professional ICT skills. The transaction will also add critical mass to the Adcorp Group, further diversify Group risk, provide greater career prospects for staff and realise better opportunities to incentivise and retain top talent. It is also likely that shareholders will enjoy greater liquidity in the tradability of the shares of the combined entity.”
Whilst overall employment trends in the South African economy are generally weak, the Adcorp Group is well placed due to its unique position in the market. The greater introduction of sophistication, adoption of technology and centralisation of the procurement of staffing services by clients all favour Adcorp because of this positioning.
Pike said that should the acquisition of Paracon succeed, the Group’s positioning will be even further strengthened.
“The national imperative to rapidly address the acute backlog in skills development should also favour the Group’s training operations.
“Strategically, the Group is focused on managing its costs, driving economies of scale, delivering value for its clients and increasing the level of sophistication and technological advancement it applies in its day to day operations. In addition, the Group has a strong and robust balance sheet.
“As such, the Group is well positioned for the future,” he concluded.