Why are Adcorp shares so cheap?

23 August 2015 - 02:00 By Paul Liquorish

When I look at what Adcorp has achieved over the past four years and compare it to the modest price performance of its shares, I get to wonder ... where is the catch? Shares in the human resources service company have gained just over 10% since 2011, while the All Share has climbed just short of 70% over the same period. A performance that baffles me, given that revenue since February 2012 has more than doubled, normalised earnings rose by 132% and earnings per share by 46% to R4.37. The per share figure bears the burden of a 59% increase in the number of issued shares.story_article_left1The dividend, however, has only increased from R1.37 to R1.48, but there are reasons for this frugality. Because the purchases of the Australian companies were financed in that country, there are covenants attached to the money earned there; these will fall away in about 18 months.During a period of rapid expansion - the purchase of Kelly Group last year the biggest - the expense ratio has fallen each year and profit margins have been maintained.An example of cost control is the fact that while revenues have more than doubled, the number of permanent employees has risen only 44%.From insignificance in financial 2012, earnings from outside South Africa rose to 33% this year and the target for next year is 45%. Adcorp now has a presence in 24 African countries and places around 113000 managed contractors each day across Africa, the Asia-Pacific region and the Middle East.So much for the past and present; the future is the allure that enhances the valuation.Profits for the first half of this financial year to August will benefit from the acquisition of Kelly (R248-million), whose results were only incorporated into the group from the fourth quarter of 2014, and the cost savings emanating from the integration of this company's operations into Adcorp.Figures for the final six-month period will be enhanced by the acquisition for cash of Dare Holdings, an Australian provider of qualified and experienced engineering and technical contractors, for a cost of A$30-million (R280-million). The company earned A$5.1-million for the year ended June 2014 and is expected to improve. Further enhancing earnings will be the additional three months' contribution from Kelly not included last year.The outlook for the South African operations is mixed. While the changes to the labour relations and basic conditions of employment acts have given employers headaches, these problems offer manpower agencies a new source of business in resolving them.Adcorp expects white-collar work to decline but hopes to offset this by gaining market share and cutting operational costs.Blue-collar work is expected to be unaffected by the changes and is reportedly "well-positioned for growth" - but with commodity prices coming under pressure from the slowdown in China, this side of the business may struggle in the second half.Earnings for the year should show strong growth from the non-South African investments, offset to some extent by the South African operations.mini_story_image_hright1Looking further ahead, there are two appetising developments. The first involves Nihilent, an Indian IT solutions business, in which the group has a 35% stake. This company has been doing well and management has indicated they intend pursuing an initial public offer of its stock in February of next year.Should Nihilent's aspirations transpire and Adcorp sell its minority stake, the group could end up banking between R7 and R8 per share. Not bad. But there follows a main course.To streamline the group's structure, Adcorp intends to move all its non-South African assets to Singapore from where any future international activity will be handled.Reasons for this move are: simplicity of doing business ; raising capital more cheaply and more cost-effectively; and the possibility of listing the group's non-South African assets in Singapore in 2018.The listing would remain a subsidiary of the existing Adcorp Group.As I conclude the writing of this article, the share price is R29.50 - the same price it briefly reached in 2010 and 2012.On a historical PE of 6.7 and a dividend yield of 5%, a share of this quality should not be sitting in the bargain basement of our market.Guest columnist Liquorish was first published by Business Times in 1969. He is an investment consultant...

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