Adcorp : 2016-05-24 Adcorp prevails in difficult trading environment

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Listed workforce management group, Adcorp Holdings Limited, announced today that Group revenues increased by 17% to R15.6 billion for the financial year ended 29 February 2016. Normalised Earnings Per Share of 365,3 cents (FY2015: 352,9 cents) were 4% ahead of the prior year whilst Headline Earnings Per Share of 299,6 cents (FY2015: 298,5 cents) were 0,4% ahead of the prior year comparative figure. This financial year saw the introduction of the long-awaited, substantial changes to South African labour laws.

'Initially, these new laws impacted volumes negatively in Adcorp's core South African market where a number of contract staff were either taken on as permanent employees by clients or simply had their contracts of employment terminated,' says Adcorp Group CEO, Richard Pike. 'In response to this net loss of volumes, the Group successfully embarked on a major operational restructure during the year, focused on shedding costs and attracting new business which offset much of the negative impact of these lost volumes,' he says.

Normalised earnings before interest, tax, depreciation and amortisation (EBITDA) of R621.5 million were 7% below the prior year's comparable figure of R668.5 million reflecting a tougher trading environment and lower sales volumes achieved during the financial year. 'The Group's cash performance has once again been extremely positive,' says Pike. In this regard, the Group's cash conversion ratio was a creditable 87% compared to the Group's target conversion ratio of 80%.

Pike maintains that the passing of the new Labour Relations Act (LRA) initially led to a high degree of uncertainty in the South African market resulting in a knee jerk reaction from a number of prominent clients. 'The initial resultant negative impact on volumes was due largely to an element of ambiguity in the interpretation of these laws by employers,' says Pike. The main source of this ambiguity related to the status of contract workers, earning below a certain threshold and employed by Temporary Employment Service providers (TES). In question was the status of these employees after an initial three month contracting period.

​This was clarified in a milestone Labour Court ruling in September 2015 where the court found that, after this initial three month contracting period, the TES retains the employment contract and that the client becomes a concurrent employer with the TES for the purposes of the LRA. Accordingly, both parties need to ensure compliance with the LRA in a co-employment relationship.

Pike says that, 'subsequent to this ruling, much stability has returned to the TES market. As a consequence, there has been a relatively strong recovery in volumes, albeit not yet to the levels achieved prior to the new legislation'. ​Adcorp also acquired the business of Kelly Group in the prior financial year. 'The integration of the operations of the Kelly Group is now complete and, although Kelly's white collar operations were similarly, negatively affected by the recent changes to South African labour laws, the acquisition will benefit the Group going forward,' he maintains.

With regard to the Group's international operations, Australian IT specialist, Paxus, produced a solid performance, recording real earnings growth in its local currency whilst earnings in respect of Australian blue collar business, LSA, were slightly lower than in the prior year due in part to an increase in costs invested in positioning the business optimally for growth. 'During the year, the Group's Australian operations were bolstered by the acquisition of oil and gas focused business, Dare,' says Pike. 'Dare has integrated well into the Group and has identified a number of potentially lucrative cross-selling and collaborative opportunities with other businesses within the Adcorp Group,' continues Pike. The recent decline in global oil prices had a negative impact on the Group's African business beyond South Africa's borders which is highly dependent on the oil and gas industry.

​'The global oil and gas industry remains an important industry sector of focus for the Group, offering up much potential, even at the current lower energy prices. Accordingly, the Group has adopted a global approach to acquiring business in this industry sector given our advantage in terms of its extended geographic reach,' says Pike. The Group has established a physical presence in Singapore which now serves as the hub for its international expansion. The Group is in the process of raising capital in international markets necessary to fund its international growth strategy. This strategy should advantage Adcorp's existing shareholders as it has the potential to unlock meaningful value for shareholders,' maintains Pike.

​'The strategy is in line with the Group's intended objective of becoming a player of consequence, focused on emerging markets and the Southern Hemisphere and, in particular, Africa, Asia, Australia and the Middle East,' he says. Pike feels that the global outlook for economic growth, and the associated growth in employment, remains relatively muted. Against this background, he believes that the Group is well positioned strategically, has the advantage of a cost competitive and operationally efficient back office, as well as access to the funding necessary to fulfil its international expansion aspirations.

'Whilst general market conditions are not expected to improve substantially in the foreseeable future, the Group remains positive about its prospects in this environment given its relevant strategic positioning, its extended geographic reach, its efficient operating platform, its international expansion strategy and its globally relevant sales proposition,' Pike concludes.