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Background and overview of Adcorp
Adcorp offers workforce management and resourcing solutions, permanent recruitment and selection, professional services, managed services providers (MSP), vendor management systems (VMS), Business Process Outsourcing (BPO), functional outsourcing, HR consulting, analytics, advisory and training for private companies and government departments.
The company has been operating for over 40 years in the industry and has a long and respected history in the sector they operate in.
The company has been operating for over 40 years in the industry and has a long and respected history in the sector they operate in.
Scroll over or click on the funnel chart to get more details of ADRs latest financial results
The net profit margin achieved by ADR amounted to 2.47%. The net profit margin is extremely thin. Considering over R15billion in revenues and only R394million in profits. Revenues did increase by 17% compared to the previous financial period though. Headline earnings per share came in at R2.99 a share compared to the previous year's R2.985, placing ADR on a PE ratio of 5.83. While this looks extremely low, one needs to remember their margins are extremely low, and they offer support services to companies and state alike, and the current economic climate is not conducive to increased employment, thus lowering the demand for their services. Another thing is a big chunk of their profits is due to exchange rate fluctuations. A weaker Rand massively boosting their profits. It would have been substantially lower if it was not for the exchange rate gains. Implying actual net profit margins earned would have been even thinner.
The pie chart below shows the contribution of ADR's different segments to their revenue and pre-tax profit earnings.
From the pie charts above its clear that their biggest margins are earned from the industrial and especially their BPO, training and candidate benefits. Perhaps to increase overall group margins Adcorp should start focusing on getting more business in this division, as it contributed just over 2% to revenue but made up almost 9% of pre-tax profits.
Adcorp is extremely cash generative and cash generated per share amounted to R565million (or R5 a share) and cash on hand amounted to R477million or R4.25 per share. Basically their cash position cash makes up 24.4% of their share price. While the above all sounds to good to be true, there is one big problem with Adcorp.
They sit with R1.6billion in interest bearing debt on their books that is weighing them down like an anchor holding a ship in place. They paid R133.7million in interest (or roughly 28% of their operating profit is paid towards interest). That is money that could have been paid out to shareholders, or used to finance acquisitions or growth. If they did not have that long term debt and paid that interest to shareholders instead, shareholders would receive almost R1.18 per share.
ADR investors/potential investors should ask the question. Is it wise for ADR to pay dividends instead of just paying off their interest bearing debt off quicker? Smells of a old school Supergroup who had mountains of debt, yet still paid lavish dividends. We urge current and potential investors to just be aware of this.
Adcorp is extremely cash generative and cash generated per share amounted to R565million (or R5 a share) and cash on hand amounted to R477million or R4.25 per share. Basically their cash position cash makes up 24.4% of their share price. While the above all sounds to good to be true, there is one big problem with Adcorp.
They sit with R1.6billion in interest bearing debt on their books that is weighing them down like an anchor holding a ship in place. They paid R133.7million in interest (or roughly 28% of their operating profit is paid towards interest). That is money that could have been paid out to shareholders, or used to finance acquisitions or growth. If they did not have that long term debt and paid that interest to shareholders instead, shareholders would receive almost R1.18 per share.
ADR investors/potential investors should ask the question. Is it wise for ADR to pay dividends instead of just paying off their interest bearing debt off quicker? Smells of a old school Supergroup who had mountains of debt, yet still paid lavish dividends. We urge current and potential investors to just be aware of this.
A few financial ratios to mull over for Adcorp calculated using our Financial Ratios Calculator:
- Debt to Equity Ratio: 1.38 (more than 2 shows high levels of financial leverage).
- Current Ratio: 1.71 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 1.71 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 6.03%
- Return on Equity (ROE): 14.33%
- Net Profit Margin: 2.47%
- Dividend Yield: 8.48%
Valuation:
While the popular well known and quoted financial ratios and figures for ADR looks very promising they do seem a bit deceiving. Low PE ratio, strong dividend yield, strong cash generation, solid ROE makes one think that ADR is an extremely good investment. But when taking low net profit margins and large interest bearing debt on their books into account they do look like less of an investment. Not only this but the sector they in looks set for a very tough time in the next 18months to two years as the South African economy struggles to gain traction.
Based on all the above we value ADR at between R22.80 and R23.00 a share. We therefore feel that at it's current price ADR does offer good long term value and it seems like the market has been a little severe on them, i.e ADR losing almost 53% in the last 12months.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
Based on all the above we value ADR at between R22.80 and R23.00 a share. We therefore feel that at it's current price ADR does offer good long term value and it seems like the market has been a little severe on them, i.e ADR losing almost 53% in the last 12months.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.