Adcorp – time to play?
In this previous article in October, I flagged that there’s a new sheriff in town at Adcorp. Highly respected CEO Phil Roux has been making good on his promise to turn Adcorp around.
I’m going to once again quote from an interview he did with Giulietta Talevi of Financial Mail in July:
“I’ve identified eight value drivers and I’m going to manage the hell out of those over the next 12 months. It’s unfortunate that we’ll do all of this in a very, very difficult environment.”
Adcorp’s challenges are extensive, but that gives Roux plenty of areas to focus on. In a great turnaround strategy, CEOs typically follow an approach along these lines:
- Immediate freeze on cost growth and strict management of cash flows
- Any major capital or investment projects put on hold
- Honest conversations about every asset in the group
- Transparency with stakeholders over the turnaround plan
- Identify quick wins to stabilise profitability and win support from the market
- Build underlying growth engines to take the group back onto a positive trajectory
- De-risk the balance sheet by reducing debt as profits come through
- Once stabilised, invest in the most attractive growth areas of the business, focusing on key strengths and juicy target markets
It sounds simple but of course it hardly ever is.
There’s a wonderful turnaround underway at Adcorp. Massmart is another great example of where a “wartime” CEO that has been brought in to turn the ship around.
Adcorp just released a powerful set of the results for the six months to end-August 2020. Investors responded by flying into the stock, sending it up over 40% at one point before it eventually closed nearly 21% higher on the day.
Is the result really that good?
Revenue from continuing operations fell 11%, but strict focus on costs helped operating profit from continuing operations grow by 30%.
There are a couple of important concepts here:
- “Continuing operations” are the parts of the business not currently held for sale – this allows stakeholders to evaluate what the performance is of the company assuming that assets held for sale have already been sold
- When revenue falls but operating profit increases, the only way to achieve this is through a significant drop in operating costs (in this case 29% lower than the comparable period last year)
The market would’ve taken a lot of heart from the improvement in profitability, because much of the revenue pressure was outside of Adcorp’s control over lockdown.
Another huge win was the cash collection from outstanding debtors. Adcorp managed to generate R513m in cash flow by decreasing the debtors book, the major contributor to a vastly improved result in cash generated from operations (R861m vs. R110m for the comparable period).
The result last year was destroyed by a R452m impairment charge, which took the group to a net loss for the six months to August 2019 of R470m. If we strip that out and rather focus on profit before tax, Adcorp made a profit before tax in the comparable period of R7.25m.
The lockdown result reflects a R21m profit before tax, which is remarkable against this economic backdrop and shows real progress even if the impairment is stripped out of the prior year.
Thank goodness for Australia
Thanks to a combination of cost control and government initiatives in that country, Adcorp managed to grow EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) by 22.3% in Australia. This ignores Dare Holdings, the Australian business that Adcorp is selling after a painful life with that asset.
In South Africa, EBITDA from continuing operations only grew by 8.6%. Still a good result, but Australia was the star performer.
Where to from here?
This is a strong result. The share is trading at around R5.38 per share, vs. R13.73 at the start of the year. It’s been as high as R24 per share in the past few years.
Clearly, there’s further trajectory for the share price. Anything is possible of course and it remains a risky play, but Adcorp just survived the worst economic period of our lifetime and did so in style.
I’m not as bullish on Adcorp’s underlying businesses as I am on the likes of Massmart, but this is becoming a story that is hard to ignore. As an early Christmas present to myself, I think a punt on Adcorp is in order. I might really be smiling by this time next year if these results are anything to go by.