AdaptIT: Still Growing Strongly

As a software company, AdaptIT (ADI) has a number of advantages of its listed peers (see here). Not least of these advantages, AdaptIT continues to grow.

Yesterday, AdaptIT announced a trading update indicating that H1:18E EPS and HEPS are expected to be between 20% to 25% higher.

I am forecasting FY 18E HEPS growth of c.15%, so this is materially better than I expected. AdaptIT shares have also halved in the last twelve months and they are trading on a Price Earnings (PE) of only 14.2x. Hence, I suspect that this trading statement is also materially better than the rest of the market expected.

But what is AdaptIT actually worth?

Well, I do have a value based on my Discounted Free Cash (DCF) model.

I use a conservative 17.2% Cost of Equity (CoE), assuming no debt (unrealistic) making WACC equal CoE, and assume a steadily 4.0% y/y dilution from acquisitions while maintaining an organic growth rate of c.10% supplemented by equivalent acquisitive growth.

Based on these numbers and a number of other simplifying assumptions, I think that AdaptIT shares are worth at least 1234cps on a 21.4x PE. This PE may feel high, but don’t forget that AdaptIT generates a very high, recurring cash flow. Hence, while PE’s may appear high based on IFRS-earnings, a DCF captures cash flows (which are reality) to arrive at a risk-adjusted valuation. Interestingly, like this trading update indicates, if AdaptIT is growing at 20% to 25% p/p, then a 20x PE is very achievable as it provides the share a 1.0x PEG Ratio

Rolling this forward at CoE, I arrive at a 12m TP of 1446cps, which implies a 73% return in this share.

This may sound high compared to the share price, but consider many of my conservative assumptions above. Also, consider that AdaptIT shares were trading at nearly 1600cps only twelve months ago and the Group is obviously still growing very nicely. So, I ask, is this really such an aggressive target?

Hence, while it may be academic to state exactly what figure AdaptIT shares are worth, I think one can confidently say that they are worth a lot more than they are currently trading at. Thus, I hold it within the AWSM Fund.

Afterall, as a software group, AdaptIT has some key advantages over its other listed peers and this recent trading update does go some distance in helping prove this.

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