Altron — Further margin expansion in H125

We summarise Altron’s H125 results in Exhibit 1. Comparatives have been restated to include ADS in continuing operations. Revenue declined 1.7% y-o-y; excluding ATM revenues (the business was sold in H124), revenue increased 5.4% y-o-y. Annuity revenue, which made up 63% of the total, increased 12% y-o-y or 19% excluding ATM. EBITDA before capital items increased 49% y-o-y (or 53% excluding the ATM contribution), helped by strong growth in Netstar and FinTech and a return to profitability for ADS, and the EBITDA margin expanded 6.3pp to 18.6%. Operating profit before capital items increased 105% (116% excluding ATM) and the operating margin increased 5.1pp to 9.8%. This supported a 182% increase in HEPS for continuing operations. The loss from discontinued operations reduced significantly, taking group HEPS from -ZAR0.65 in H124 to ZAR0.74 in H125. Company adjusted net debt reduced 44% to ZAR312m. Adjusted to exclude back-to-back rental finance advances in ADS, Altron had a net cash position of ZAR93m at the end of H125, resulting in net debt/EBITDA of -0.06x. The company announced an interim dividend of ZAR0.4, up 60% y-o-y.

Exhibits 2 and 3 below show performance by business line in H125. As announced in July, the company has brought ADS back into continuing operations within IT Services; H124 results have been restated accordingly.

Altron Digital Business comprises the three businesses that were previously reported separately – Altron Managed Solutions, Altron Systems Integration and Altron Karabina. Since 1 March, the businesses have been combined to create one entity. As part of this process, the business has developed a unified sales strategy that has better price discipline and has incentives aligned to company objectives. In H125, the division incurred non-recurring costs of ZAR16m relating to low-margin contracts, two customers reduced their spend and three material projects were delayed (ZAR18m impact on EBITDA), although these have since started in H225. Revenue declined 14% y-o-y; once the ATM business is excluded, revenue increased 5% y-o-y, with annuity revenues making up 50% of the total. Excluding ATM, EBITDA declined 42% y-o-y, resulting in a 46% decline in operating profit with an operating margin of 2.1%. Despite the weaker-than-expected performance in H125, management pointed to several leading indicators that bode well for H225 and onwards. Upselling and cross-selling to the existing customer base have improved, there has been a 6% increase in new annuity contracts signed and an 87% increase in the annuity pipeline.

Revenue declined 12% y-o-y while EBITDA was flat y-o-y. Operating profit grew 1.5% y-o-y and the margin increased 3.6pp to 26.7%. Management noted that one large customer reduced its capex plans. It also sold a higher proportion of net revenue accounted software (deemed sold on an agency rather than principal basis), which has the effect of reducing absolute revenues but increasing profit margins as it is recorded at a gross margin of 100%. At the FY24 results, the company noted that it had taken corrective action to protect gross margin and manage expenses; this also contributed to the margin expansion. Annuity revenues increased to 84% of revenue from 69% a year ago.

Revenue increased 10.9% y-o-y, helped by new customer wins and higher public sector contracting, and EBITDA improved from a loss of ZAR123m in H124 to positive ZAR30m in H125. This resulted in the operating margin increasing from -20.5% to 2.7% over the year. We would expect the decision to bring ADS back into continuing operations to help in the renewals process, giving existing customers comfort that they will continue to work with the same team and that ADS will continue to invest in the business.

The business continued to make good progress in improving operational performance and growing revenue. Revenue was 11% higher year-on-year, helped by 21% growth in subscribers to nearly 1.9 million and 26% growth in connected devices to 2.4m. Churn of 17% was slightly higher than the 16% reported in FY24, but in line with guidance. The retention rate was above 90%, pre-fitment conversion was above 60% and contract fulfilment was above 90% (10 new fitment centre partnerships were signed). The business opened its new global fleet bureau in April which is already tracking more than 30,000 assets and recently launched FleetAI software, a fleet management system for corporate customers. The business recently won a contract with Orica, a provider of mining and infrastructure solutions, to provide a full managed service which includes AI cameras and asset management across Africa and Europe. EBITDA increased 34% y-o-y expanding the margin by 7.3pp to 43.1%. Reflecting the higher level of depreciation due to the growth in subscribers (tracking devices are depreciated over three years), operating profit increased 44.6% y-o-y and the operating margin increased 3.0pp to 12.9%. Annuity revenues increased to 90% from 87% a year ago. The business added new strategic partnerships, including 17 insurers and 16 motor dealers. Netstar estimates that it is gaining market share in South Africa. Future growth is focused on growing the enterprise side of the business, winning more fleet managed services contracts and expanding further outside of South Africa, particularly in Asia-Pacific where it is already active in Malaysia, Thailand and Australia.

Revenue increased 10.0% y-o-y and EBITDA increased 53.6% y-o-y, resulting in margin expansion of 10.9pp to 38.2%. Operating profit increased 62.9% and the operating margin expanded 11.5pp to 35.4% helped by a higher margin annuity mix (82% versus 69% in H124) and a 5% reduction in operating expenses. The main growth driver was a 33% increase in collections and payments revenue, helped by a 17% increase in the customer base and an 18% increase in the value of debit orders processed after a period of focus on SME customers. The business continued to upsell value-added services such as strike date adoption.

Revenue increased 6% y-o-y, EBITDA increased 4% and operating profit 8%. The operating margin increased 0.5pp to 26.9%. The business signed up 504 net new practice management customers, with 1.7 customers added for every customer churned, although revenue from practice management was flat y-o-y. The business added seven new corporate customers, driving corporate revenue up 22% y-o-y. The business expensed ZAR15m of platform investment (vs ZAR5m a year ago). It is focused on building its data business, providing AI-driven data insights and in H125, 18 new practices signed up for HealthTech’s oncology solution. Annuity revenues remained high at 92% of divisional revenue.

The joint venture saw a previously flagged revenue decline of 11.3%, reflecting a cyclical downturn in the industry. However, EBITDA was down by only 6.7% and operating profit by 5.4%, resulting in operating margin expansion of 0.4pp to 9.2%.

With ADS now back in continuing operations, Altron Nexus is the only business included in discontinued operations. In H125, it generated revenue of ZAR236m (-49% y-o-y), LBITDA of ZAR14m and an operating loss of ZAR14m. In total, discontinued operations contributed a net loss of ZAR22m, greatly reduced from ZAR385m in H124.

Management has updated its medium-term outlook, partly to reflect the inclusion of ADS in continuing operations (see Exhibit 4), taking its FY26 operating profit target from ZAR1.1bn to ZAR1.15bn. Post the election and creation of the government of national unity, the company has not yet seen a noticeable uptick in customer demand but sees opportunity if the digitisation agenda is followed. Management is focused on controlling what it can and providing continuity for its customers.

At a business line level, management aims to maintain Altron HealthTech, Altron FinTech and Altron Security margins at current levels, while targeting Netstar margins of 16%. Within IT Services, the company is targeting operating margins of 6–8% for Altron Digital Business and c 7% for the whole division. As there is a global ongoing correction in demand in Altron Arrow’s market, we are forecasting a revenue decline in FY25 but management is aiming to maintain the operating margin.

We have revised our forecasts to reflect H125 results and to include ADS in continuing operations. For FY25, we have increased our operating profit before capital items forecast by 7.6%, reflecting better profitability from the FinTech business and the inclusion of ADS, partially offset by weaker profitability in Altron Digital Business. For FY26, we have increased our operating profit before capital items forecast by 9.5%, reflecting better profitability from Netstar and FinTech and the inclusion of ADS, partially offset by weaker profitability in Altron Security. We are forecasting operating profit before capital items of ZAR1.06bn in FY26, slightly below management’s target. We have reduced our expectations for losses in Nexus, the remaining business in discontinued operations. This results in HEPS from continuing operations increasing by 12.6% in FY25 and 10.5% in FY26 and group HEPS increasing by 26.8% in FY25 and 8.9% in FY26. With the dividend payout policy set at 50% of HEPS from continuing operations, this also drives up our dividend forecasts.