Human resourcing specialist Adcorp’s recently released results for the year ended February 2023 were, on the face of it, relatively good. Headline earnings from continued operations were up 48% to 147.8c per share on the back of 6.5% growth in revenue to R12bn.
Admittedly, the quality of the group’s profit is affected by a very low tax rate (-1.9%). This abnormally low tax rate was largely affected by a nonrecurring deferred taxation liability reversal and the group taxation principles applied in its Australian business. Current year income taxation losses in the allaboutXpert business — an Australian subsidiary of the group, which, after considerable contract losses, was placed in voluntary administration late last year — are deductible for tax purposes in the consolidated Australian group.
The revenue growth of the group is a significant milestone as it is the first time since 2016 that it has grown annual revenue. On top of this, long-suffering shareholders who have painfully held the share over the past five years will welcome a total dividend of 120c a share that was declared (16.5c a share final dividend and a whopping 91c a share in special dividends).
A stronger balance sheet is also starting to bear the fruits of the strategic repositioning of the group it started two years ago. Debt has been reduced from R133m to zero. In addition, at the end of the financial year the group reflected a net cash position of R416m, or about 378c a share.
So what does Adcorp do and is the business now poised for strong future growth?
Judging by the share buyback programme, management seems to believe the business is either cheaply valued or positioned for growth
Adcorp positions itself as a workforce solutions provider, which means it not only fulfils the recruitment function on behalf of businesses looking for temporary (contingent) and permanent new staff, but also trains, develops and manages people on behalf of other businesses. It does this in South Africa and Australia across different industries and under numerous brands such as Blu, DAV, Kelly, Paracon and Labour Solutions Australia, among others.
What all this means is that Adcorp will do well in an environment of high economic growth when the businesses it services are growing and hiring, which, as recent domestic labour statistics scream out, is not the case in South Africa. Economic activity remains subdued as higher inflation and interest rates start to bite, resulting in a higher cost of living and in less money in people’s wallets, which influences spending on goods and services and affects the profits of the companies that Adcorp services. South African businesses are also experiencing the hefty costs associated with blackouts and soare cutting expenses where they can. Labour is one of the costs that can be cut relatively quickly.
However, not all is doom and gloom for Adcorp, as one of the ways in which companies can quickly reduce costs is to outsource some of their noncore labour functions. Fortunately, placing contingent staffing is what Adcorp is good at.
Take its key brand, Blu, which operates in the group’s contingent staffing section. Despite the tough economic environment, it still grew revenue by 5% — which may just be a good indication on just how resilient this business can be during tougher times.
Though higher interest rates are also expected to affect economic growth in Australia, for now there still seems to be a persistent skills shortage in some areas of that economy which in the short term will benefit Adcorp’s Australian businesses.
So, on the whole the business now appears to be structurally in good shape as businesses adjust to a more challenging global economic environment. Judging by the share buyback programme, management seems to believe the business is either cheaply valued or positioned for growth. The group bought back about R20m worth of shares during the latest reporting period.
With a share price of only 630c (at the time of writing) and taking into consideration the latest results, it is clear the business now trades on attractive multiples across most historical valuation metrics.
The share price, which is still down on a one-year basis, has rebounded strongly from the lows it traded at during the height of the pandemic and may now be starting to reflect some of the good work done as a result of the strategic repositioning. Time will tell, however, if enough has been done to guide the business through the medium-term macroeconomic challenges that lie ahead.
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