Altron Limited (AEL) Earnings Call Transcript & Summary

Hi, everybody. Welcome to Altron's pre-close call for the half year '27. Today with me, I have our CFO, Carel Snyman. Unfortunately, Werner is ill and couldn't join us today, but he will be at the RMB Morgan Stanley Conference in September. So you will have access to chat to him then. You would have seen the voluntary trading update published this morning on SENS. Carel will quickly take you through some of the key takeaways, and then we can open [Technical Difficulty].

Good afternoon. I hope everybody can hear us. Thanks very much for taking time to come and listen to us. As Phil said, the voluntary operational update is out. Maybe just as a starting point, many of you attended the Capital Markets Day in June this year, where we laid out our plans for the next 2 years and the strategy for Altron. So what we've done in the first 5 months until the end of July or 6 months ending today is execute on that plan. So from our side, nothing has changed from a strategic perspective. We still are working towards the leading platform and data ecosystem. This is what Altron -- what we want Altron to become. So overall, I'm quite happy with the first 5 months of trading. As in business, there's always ups and downs, which I'll go through in a little bit more detail. But overall, I think the business is much stronger and much more resilient than what it's been in the time that I've been here over the last 3.5 years, and that's evidenced through higher growth in revenue, EBITDA, operating profit, margin expansion. And that's all driven by this deliberate move to become the multi-platform business that we want to be. That platform portfolio remains the growth engine of the group. You would have seen the metrics that we provided in terms of growth. But the business -- the Platform segment is 45% of our revenue and 95% of our profits. And we don't see any reason why that would go backwards going forward. Our aim is to improve that even further. And with that also then comes healthier margins and healthier cash conversion. So overall, a more robust business from an annuity revenue, profits, cash consideration. Having said that, what we do -- what we have done in the last 5 months and will continue to do for this year is invest behind this growth. Netstar, specifically, we are deliberate in our investment spend into that business. And it is in multiple parts of the business. We need to improve and modernize the systems that the business runs on. because we will find ourselves in a situation where legacy systems can stop you from being able to scale. And as all of you know, we are in a very competitive market. And so the need for this modernization of the business is critical, and we are currently in that process. On top of that, we are also investing behind customer acquisition, opening new revenue channels, new product sets. And that's all because of our conviction in the business and its ability to deliver a high return on capital. Similarly, but to a smaller scale, we are investing behind our fintech business. That business continues to deliver very strong results. But we want to be able to manage this growth and to be able to support it and be able to have a sustainable business for the long term. And so investment is also going into the fintech business. But this is also all in line with what we said to you when we saw you at the Capital Markets Day, and this is the strategy that we've set out for the next 3 years. I think the business, if you look at it from H1 to H2 -- from an H1 to H2 perspective, H2 will look like last year. It will be stronger than our H1 results, as you would expect from a platform business where you keep on adding to the subscriber base. And that puts us in good stead going forward for platform specifically. If I maybe just switch over to our IT services business quickly. Our ADB business, as you might recall, turned profitable in H2 last year, and that has continued into this year. But what is most promising to me for that business is that we've seen revenue growth come through. You would have seen in the last couple of reporting periods, it was a turnaround plan where we've taken deliberate corrective action, costs out of the business. We've stepped away from nonprofitable contracts. But now that revenue growth is starting to come through, which is very promising and which should put the business in good stead going forward. Revenue growth for us overall is now a very critical measure. We've done all of the fixing and growing, if you will, over the last couple of years. But if we don't get the top line to move now, that would be problematic for the future. And so that's a very strong drive for us. It's -- some of the KPIs for our MDs in the business is all behind revenue growth. And when we talk about revenue growth, this is profitable, high-quality revenue. This is what we're after. I think having said all of this on the business, the IT services component of security is not performing the way that we wanted to perform. Whereas the platform side of the security business in signing and digital identity, that part of the business is doing well, even though there is a shift in some of the revenue recognition from H1 to H2. So on a like-for-like basis, that will come through later in the year. On IT services, we are not happy with the performance, and we are currently going through corrective action in that business. It's a much smaller part of the security business, but still one that we want to perform better than what it currently is. Andrew and his team is busy looking at that business. But this is just par for the course, I guess. Sometimes something goes for you and other times it goes against you. It's the speed at which you can take corrective action that's important. I think after all is said and done, the business is still financially very healthy. The balance sheet is strong. Post paying out the special dividend of about ZAR 750 million, the business is still in a net cash positive position, and it's -- the balance sheet is ungeared. So we -- even though we are investing into the business and even though we see top line growth coming through, what's important to us is to maintain the discipline around capital the way we have in the past 3 years. One item that I just want to point out again, we have mentioned it before. But in this year, our tax rate will normalize to 27% for the full year, and that will have an impact on the numbers that we report -- we've said it before, but I just thought it's worthwhile calling it out again. And then the last thing is the change in the depreciation in Ned Star is now in the numbers. So there's no more normalization for that. The numbers that we will report will reflect that on a like-for-like basis. So I think overall, we are sticking to our plan. We are transitioning the business into a multi-platform, high profitability and high cash conversion business. we are careful in how we allocate capital. We want to have the conviction that when we deploy it, that we have a high degree of certainty around return on that money. And then our IT services business is now having returned to profitability puts us in good stead going forward. And so overall, I think -- we're happy with the performance for the first 5 months, but as always, there will be improvements that we would want to get out of it. Phillipe I missed anything?

No, I think we're good. In the interest of time, I [Technical Difficulty] [Operator Instructions] Katherine Thompson from Edison.

Yes, I've got a few. I just wanted to get my head around the kind of the revenue and the profit movements within the IT Services segment. So I think you didn't explicitly comment on the revenue progression in security or Document Solutions. So I'm assuming that a big factor was a revenue decline in security. And I'm not sure what happened the document solutions, whether we were kind of broadly flat there?

Yes, Katherine, maybe I can talk about that. So Document Solutions specifically, revenue is very close to flat -- but that, as you will recall from that business transitioning to higher-margin services and support and maintenance, we are seeing that changing the shape of the business. So from a profitability perspective, the business continues to deliver profits. It continues to improve the margin even though the revenue is flat or flattish. So that's document solutions specifically. Security, we are under pressure with the IT services part of security. So that's not grown as much as we wanted it to.

And I'd just say both of them, they're not an enormous contributor in terms of composition to revenue. Out of it. So have I missed anything?

No. No security in the IT Services segment, the security part is the smallest part of the group, digital business, ADB, the largest. It's about more than twice the size of ADS, then ADS and then security.

And within ADB, could you kind of characterize what you're hearing from customers now? Are there any specific verticals that are improving? Any particular product lines or areas that are more popular than others?

Yes. No, I just -- I want to say something that we noticed on our side is just in the value proposition to our actual customers. when we sort of leverage the benefits of AI factory into the offering, it's really something that they find beneficial and supports the ongoing growth of the business with that customer or the renewal of the contract.

Okay.

Katherine, I don't think that the broader market out there in South Africa has changed significantly from what it's been. I think it's still tough. But as Phil was saying, our ability to deliver our services more efficiently. That -- a lot of that sits behind the growth that we're seeing. And we've done some interesting work on AI factory -- it's too early to mention specific contracts, but they are in 1 or 2 POCs at the moment. And the only thing I can tell you is whenever you take a product like that to a blue-chip customer, the decision-making process around wanting to move to POC is significantly faster than anything else. So clearly, they see the value in it. We think there's value in it. So that's going to be interesting to see how that plays out.

Okay. And then could I just ask a question on Netstar, talking about modernization of the system. Just trying to understand what that's going to entail.

So we are putting a whole new system in place ERP system in place, D365. We've been busy with it for about 12 months already. And you can imagine a business like that, that's 20, 30 years old, the systems are creaking -- and a lot of it -- the -- it's not able to cope with the amount of data and detail that we put through it. So we have been careful about not going about it too quickly because we most certainly want to make sure that we plan the process correctly, but it is required to make sure that we can actually scale the business. The subscriber base has grown significantly over the last 3 years. The number of data points flowing through that business is chalk and cheese to what it was. So we now have to invest behind that to be able to extract the value that we think is in the business. Because at this stage, our visibility on that data and how difficult it is to get it, it's just -- it's too slow.

So it's about the data intelligence being able to utilize it to make better decisions in growing your subscriber base going forward, and it's about integrating all of that into 1 system. Next up, we have Anthony Geard from Investec Securities.

Sorry, can you just help me with a little bit with the math. So you're seeing the group EBITDA and operating profit up low to mid-teens, and then we go through all the divisions, you're talking mid-teens or high teen. So you've spoken about the services segment being a little bit disappointing. And I'm just trying to understand the year make the connection between the narrative and actually what's going on. And so -- so digital business has made a strong improvement. And then there seems to be a little bit of a well inside the security business? Is that where there's a sort of profit slippage which has resulted -- which has really dragged down the overall group EBITDA growth?

Correct. 100%. So there's 3 things. It's the security business, as you've pointed out now. In platforms, the security business is just a delay in when we can recognize the even. That's shifted from H1 to H2. In the IT services part, the security business is underperforming. And then overall, in our head office section, that's where we put the investment into AI factory, which is bigger than what it was previously. So those are the big sort of items bringing down the group number.

Okay. So part of it is timing, or of it is services where you're taking corrective action and part of it is cost relating to AR factory.

Correct.

Yes. And then if I can just press a little bit, you said EBITDA and operating profits, low to mid-teen growth. Can we assume because of some leverage in the income statement that depreciation is not growing quite as quickly as EBITDA, that operating profit is still growing faster than EBITDA.

I'd say at the other faster or the same. But the margin yes. So...

Because the depreciation obviously steps up inside Netstar, as you continue to grow the top line. But for other businesses is not, let's say, like fintech. There's not really a reason for depreciation to be stepping up a lot.

Anthony, just -- sorry, just on that. Fintech is -- the depreciation is stepping up. Because remember, the past rental model is actually picking up quite a bit of steam whereas last year this time, you would have had very little of that depreciation in fintech, and now it's in there. So it's both Netstar and FinTech.