Altron — Rising star

Altron (JSE: AEL)

Last close As at 18/05/2024

ZAR11.30

−0.45 (−3.83%)

Market capitalisation

ZAR4,647m

More on this equity

Research: TMT

Altron — Rising star

Altron is a South African-based provider of platforms and IT services, helping businesses transform and operate their IT. As part of the plan to refocus on strategic growth opportunities and to improve profitability, management has set ambitious medium-term profit targets. The group has made good progress to date, and we forecast a headline EPS CAGR of 21% from FY23 to FY26e. In our view, this performance is not yet reflected in the current share price. Full FY24 results in May should provide better clarity around individual business performance and we expect the discount to peers to reduce as positive margin progress becomes evident.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Altron

Rising star

Initiation of coverage

Software and comp services

4 April 2024

Price

ZAR11.39

Market cap

ZAR4,313m

Net debt (ZARm) at end H124

558

Shares in issue

378.7m

Free float

35.7%

Code

AEL

Primary exchange

JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.6

14.0

30.0

Rel (local)

6.6

14.6

34.4

52-week high/low

ZAR12.10

ZAR6.90

Business description

Altron is a South African provider of platforms and IT services. The company operates via three divisions: IT Services, Platforms and Altron Arrow. In H124, 89% of revenue was generated in South Africa and annuity revenue made up 60% of total revenue.

Next events

FY24 results

20 May

Analyst

Katherine Thompson

+44 (0)20 3077 5700

Altron is a research client of Edison Investment Research Limited

Altron is a South African-based provider of platforms and IT services, helping businesses transform and operate their IT. As part of the plan to refocus on strategic growth opportunities and to improve profitability, management has set ambitious medium-term profit targets. The group has made good progress to date, and we forecast a headline EPS CAGR of 21% from FY23 to FY26e. In our view, this performance is not yet reflected in the current share price. Full FY24 results in May should provide better clarity around individual business performance and we expect the discount to peers to reduce as positive margin progress becomes evident.

Year end

Revenue* (ZARm)

PBT**
(ZARm)

Diluted EPS**
(ZAR)

HEPS*** (ZAR)

DPS
(ZAR)

P/E
(x)

Yield
(%)

02/23

8,445

482

0.88

0.85

0.35

12.9

3.1%

02/24e

8,337

575

1.02

1.00

0.49

11.2

4.3%

02/25e

8,508

653

1.18

1.16

0.57

9.7

5.0%

02/26e

9,192

841

1.53

1.52

0.74

7.4

6.5%

Note: *Continuing operations. **PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items, and are for continuing operations. ***Basic continuing headline EPS.

Building the leading platform and IT services group

The Altron group consists of six businesses, grouped into Platforms (Netstar, Altron FinTech, Altron HealthTech), IT Services (Altron Security, Altron Digital Business) and a distribution business (Altron Arrow). The IT Services division provides digital transformation and identity security services; the Platform businesses operate in structural growth areas such as payment processing, healthcare software and telematics. South African technology markets are forecast to grow ahead of GDP, supporting organic revenue growth, which management would consider supplementing with acquisitions in the Netstar, Security and FinTech businesses.

Continuing operations show improvement

In our view, the key drivers of profit growth will be returning Netstar to a 16% operating margin (H124 10%) and growing the Altron Digital Business margin to 5.3% (H124 3.9%) by FY26. The FY24 year-end trading update confirmed that continuing headline EPS (HEPS) is expected to be at least 16% higher year-on-year, with double-digit growth in EBITDA and operating profit. We forecast growth in operating profit before capital items of 18% in FY24 with 1.4pp margin expansion to 8.5%, which implies meaningful progress towards management’s medium-term target of tripling operating profit over FY21–26.

Valuation: Undervalued versus international peers

We have undertaken a sum-of-the-parts valuation to reflect the different dynamics across the group. After a 30% holding company/South Africa discount, we arrive at a valuation of ZAR21.0 per share, 84% above the current share price. A reverse DCF implies the current share price is factoring in only modest revenue growth and minimal margin growth from FY27. In our view, evidence of positive margin progress and clarity over the disposal of the two discontinued businesses should provide triggers for share price upside.

Investment summary

Building the leading platform and IT services business

Altron has a long history of providing technology products and services to the South African market. The group helps businesses operate their IT, optimise their services and processes, and build new products or business models. Growth rates in its key technology markets are well ahead of GDP, supporting organic growth. The relatively new management team has put in place a transformation plan to evolve Altron into the leading platform and IT services business in its chosen markets. This includes hiving off non-core businesses for sale and putting in place profit improvement plans for two of the largest businesses, which had seen deteriorating performance in recent years. Key investment considerations include:

Altron’s telematics business, Netstar, is in the midst of a turnaround. Improved operational processes and technology innovation should help the business grow consumer market share, build the higher margin enterprise side of the business and monetise the high volumes of data generated by customers.

Altron FinTech benefits from the shift from cash to card and digital payments and is supporting South African businesses to make this transition. For example, it provides infrastructure to help provide regulated lending to the large informal economy in South Africa.

Altron HealthTech helps private healthcare providers to digitise their working practices and has a leading market share of private practices.

Altron’s IT services businesses have been restructured and combined into one division, Altron Digital Business. With cost optimisation largely complete, the new division is positioned to drive revenue growth through cross-selling and improving operational efficiencies through shared practices.

Altron Security helps businesses to meet their regulatory requirements, providing cryptography and data, edge and identity security software and services specific to the South African market.

Altron Arrow, an electronics distribution business, generates industry leading operating profit margins.

Annuity (recurring) revenue made up 59% of H124 revenue, and with the focus on driving managed services across the group, we expect this to grow, providing more predictable revenues.

Low gearing (net debt/EBITDA 0.23x at end-H124) provides headroom for internal and external investment.

Financials: Part-way through turnaround

The company’s recent FY24 year-end trading update confirmed that continuing operations improved versus FY23, with HEPS from continuing operations expected to be at least 16% higher year-on-year. Management has set a medium-term target to triple operating profit over the period FY21–26, with targeted margins of at least 19% for the Platform division (including at least 16% for Netstar) and at least 7% for the IT Services division. We forecast operating profit before capital items to grow 18% in FY24, 14% in FY25 and 24% in FY26, with the margin expanding from 7.1% in FY23 to 10.8% by FY26. This results in HEPS from continuing operations growing at a CAGR of 21% from FY23 to FY26e.

Valuation: Growing confidence in progress towards targets

Our sum-of-the-parts valuation uses average peer multiples for each division, adjusted for performance, resulting in a fair value per share of ZAR21.0, 84% above the current share price. We believe that as the company shows evidence of progress towards its medium-term margin targets, the discount to fair value should reduce. The stock has already gained 17% since the year-end trading update on 26 February confirmed positive progress.

Sensitivities: Disposals, regulation, integration

As well as the usual risk factors relating to competition and technology, we view the following factors as having the potential to influence our forecasts and the share price: timing and proceeds of disposals, the integration of three companies into Altron Digital Business, regulation, geographic expansion, exposure to South African political and economic risk and disproportionate voting rights.

South African technology services provider

Altron is a South African-based provider of platforms and IT services, partway through a transformation programme designed to optimise growth and profitability.

Background

Altron was founded in 1965 as Allied Electronics Corporation. The company built and acquired a series of IT-related and industrial businesses, mainly focused on serving the South African market. Altron listed on the Johannesburg Stock Exchange in 1975. Since 2016, management has been streamlining the group, selling off non-core businesses to focus on the IT sector. In 2020, the company spun-off its UK-based IT services business, Bytes Technology Group, which is now listed on the London Stock Exchange. As a result of the demerger, Altron shareholders received c £542m/ZAR10.9bn in cash and Bytes shares.

In October 2022, the current CEO, Werner Kapp, joined the company with a view to further restructuring it, improving profitability and driving growth. As part of this process, the company has undertaken a series of disposals and has several businesses held for sale.

Until the end of H124, seven of the eight businesses that make up continuing operations were combined into four groups, Platform (Netstar, Altron FinTech, Altron HealthTech), Digital Transformation (Altron Systems Integration, Altron Security, Altron Karabina) and Managed Services (Altron Managed Solutions), with Other including the Altron Arrow distribution business and central costs. In Exhibits 1, 2 and 3 we show the split of revenue, EBITDA and operating profit in H124 by business line. Annuity revenues made up 59% of group revenue in H124, with 50% for Digital Transformation and Managed Services combined and 82% in the Platforms group.

Exhibit 1: H124 revenue by business

Source: Altron

In H124, Platforms contributed 73% of EBITDA before central costs and 62% of operating profit before corporate and consolidation costs, while Digital Transformation and Managed Services combined contributed 22% and 30%, respectively.

Exhibit 2: H124 EBITDA by business (ZARm)

Exhibit 3: H124 operating profit by business (ZARm)

Source: Altron

Source: Altron

Exhibit 2: H124 EBITDA by business (ZARm)

Source: Altron

Exhibit 3: H124 operating profit by business (ZARm)

Source: Altron

Group strategy

The new management team put in place a strategy that aims to create the leading platform and IT services business in its chosen markets, with the key levers outlined in Exhibit 3.

Exhibit 4: Altron transformation strategy

Source: Altron

Management is focused on the following three growth levers:

partnering with customers to get the most value out of their digital spend;

driving operating leverage through gross margin improvement and disciplined cost management; and

investing in data-as-a-service and scaling Altron Security, Netstar and Altron FinTech.

Exhibit 4 shows the progress update reported with H124 results. Initially, management undertook a detailed review of each business in the group and initiated profit improvement strategies in Netstar and Altron Systems Integration (ASI), which had already started to bear fruit by H124. ASI reported a year-on-year increase in EBITDA margin from 1.6% to 3.5% and Netstar reported an increase from 33.0% to 35.7%. The company has developed target operating models for each business to reduce cost inefficiencies and improve operating margins. Management has also worked to optimise the balance sheet and improve capital allocation.

Altron Nexus, a provider of enterprise connectivity and critical communications services, was restructured and moved into discontinued operations as management believes it no longer fits with the core business. Altron Document Solutions (ADS) remains within discontinued operations as a previously agreed disposal did not complete. We discuss the performance of the individual businesses within continuing operations later in the report.

Exhibit 5: H124 strategy update

Source: Altron

The charts below show the structure within continuing operations up to the end of FY24 and the new structure implemented from 1 March this year, when Altron Managed Solutions, Altron Karabina and ASI were combined to create Altron Digital Business. We note that FY24 results will be reported under the previous group structure.

Exhibit 6: Previous group structure

Exhibit 7: Group structure from H125

Source: Altron

Source: Altron

Exhibit 6: Previous group structure

Source: Altron

Exhibit 7: Group structure from H125

Source: Altron

Medium-term financial targets set

As part of the strategy, management has put in place the following operating margin targets:

Platforms: combined operating margin of at least 19% (H124: 16%), with Netstar achieving at least 16% (H124 10%).

IT Services: operating margin of at least 7% (H124: 6%) with ASI targeting 6–8%.

Overall, the target is for continuing operations to generate operating profit of ZAR1.1bn by FY26, tripling from the ZAR371m achieved in FY21. Adjusting for a disposal within Altron Managed Solutions in H124, Altron reported operating income of ZAR352m in H124 and we forecast ZAR695m for FY24.

We forecast steady growth in revenue and margins across the two divisions, with Netstar the main driver of profit growth as it regains market share, grows its enterprise business and optimises its cost base, followed by the turnaround in ASI. At a group level, management is keen to harness the large volumes of data it generates and the recent hire of Dr Bongani Andy Mabaso, previously CEO of SITA (State IT Agency), as chief technology officer (CTO) supports the group with this strategy.

Management

Board of directors

Group CEO Werner Kapp joined Altron in October 2022 from Dimension Data, where he spent 22 years, most recently as CEO for Middle East and Africa. CFO Carel Snyman joined Altron in June 2023; he was most recently CFO of Aztomix Proprietary and prior to that held finance roles at MultiChoice Africa and Naspers. There are nine non-executive directors (NEDs) on the board. Independent NEDs include Stewart van Graan (chairman), Alupheli Sithebe, Sharoda Rapeti, Grant Gelink and Dr Phumla Mnganga. Other NEDs include Antony Ball and Tapiwa Ngara (who represent Value Capital Partner’s 24.2% indirect non-beneficial shareholding), Brett Dawson and Robert Venter (son of the original founder of Altron and 13.7% shareholder via Biltron).

Management team

The group executive committee includes the CEO and CFO as well as Collin Govender (chief operating officer), Marisa van Vuuren (chief marketing officer), Dr Bongani Andy Mabaso (CTO), Hansie Schutte (legal) and Mbali Ngcobo (company secretary). Werner and Carel are also supported by the managing directors of the individual business, as per Exhibit 7.

Exhibit 8: Senior management by business line

Business line

Managing director

Netstar

Grant Fraser

Altron FinTech

Johan Gellatly

Altron HealthTech

Leslie Moodley

Altron Security

Andrew Whittaker

Altron Digital Business

Craig Stewart

Altron Arrow

Renato Martins

Business line

Netstar

Altron FinTech

Altron HealthTech

Altron Security

Altron Digital Business

Altron Arrow

Managing director

Grant Fraser

Johan Gellatly

Leslie Moodley

Andrew Whittaker

Craig Stewart

Renato Martins

Source: Altron


Altron Platform businesses

Altron groups the three businesses that are based on proprietary technology into its Platforms division. These three businesses are run independently with separate management teams. The table below shows revenue, EBITDA and operating profit by business line and for the division as a whole. We discuss each business in more detail below.

Exhibit 9: Platforms financial performance

ZARm

FY20

FY21

FY22

FY23

FY24e

FY25e

FY26e

Revenue

Netstar

1,541

1,549

1,670

1,859

2,131

2,396

2,678

Altron FinTech

909

817

854

1,044

1,079

1,100

1,188

Altron HealthTech

321

314

323

350

373

403

433

2,771

2,680

2,847

3,253

3,582

3,899

4,298

Revenue growth

Netstar

1.3%

0.5%

7.8%

11.3%

14.6%

12.5%

11.7%

Altron FinTech

N/A

-10.1%

4.5%

22.2%

3.4%

1.9%

8.0%

Altron HealthTech

N/A

-2.2%

2.9%

8.4%

6.5%

8.0%

7.5%

N/A

-3.3%

6.2%

14.3%

10.1%

8.8%

10.2%

EBITDA

Netstar

611

602

631

629

795

983

1,192

Altron FinTech

213

180

223

271

295

301

325

Altron HealthTech

115

109

101

103

106

115

121

939

891

955

1,003

1,197

1,399

1,638

Operating profit before capital items

Netstar

244

233

262

192

212

307

436

Altron FinTech

170

135

193

233

255

255

275

Altron HealthTech

104

99

91

96

100

109

115

518

467

546

521

568

671

826

EBITDA margin

Netstar

39.6%

38.9%

37.8%

33.8%

37.3%

41.0%

44.5%

Altron FinTech

23.4%

22.0%

26.1%

26.0%

27.4%

27.4%

27.4%

Altron HealthTech

35.8%

34.7%

31.3%

29.4%

28.5%

28.5%

28.0%

33.9%

33.2%

33.5%

30.8%

33.4%

35.9%

38.1%

Operating margin

Netstar

15.8%

15.0%

15.7%

10.3%

10.0%

12.8%

16.3%

Altron FinTech

18.7%

16.5%

22.6%

22.3%

23.6%

23.2%

23.1%

Altron HealthTech

32.4%

31.5%

28.2%

27.4%

26.9%

27.0%

26.6%

18.7%

17.4%

19.2%

16.0%

15.9%

17.2%

19.2%

Source: Altron, Edison Investment Research

Netstar: 23.6% of H124 revenue, 27.9% of operating profit

Netstar is a vehicle telematics business, predominantly supplying stolen vehicle tracking devices and related recovery services. The business was founded in 1994; in H124 80% of revenue was generated in South Africa and 20% in the rest of the world (mainly Malaysia and Australia).

Key business areas

Netstar operates across three end markets: original equipment manufacturer (OEM), consumer and enterprise. OEM made up 8% and consumer and enterprise combined made up 92% of H124 revenue. We discuss the three areas separately as they have differing dynamics.

OEM – exclusive relationship with Toyota

Netstar has an exclusive relationship with Toyota where it fits Wi-Fi-enabled telematic devices on the production line in all Toyota vehicles in South Africa. In Malaysia, Netstar has an exclusive relationship with a distributor to supply hardware which is fitted into certain Toyota models. The device enables Toyota to offer services to customers via its Toyota Connect app (eg maintenance reminders, promotions, purchase of cellular data for use in-car), and it also provides the driver with information such as trip and behaviour data. For this, Toyota pays an upfront fee to Netstar, which Netstar recognises as revenue over five years. Netstar also shares in the profit from the sale of top-up cellular data to customers who choose to buy it, with the transaction taking place through the Netstar platform. The original contract with Toyota is nearly five years old. Netstar is in the process of developing a second-generation device as part of Toyota’s new vehicle roll-out. Once the car has been sold, the customer can choose to have a stolen vehicle recovery (SVR) device fitted by signing up for a subscription with Netstar.

Consumer – four routes to market

Netstar sells its SVR and telematics devices and services to the consumer market via four channels: 1) auto dealers, 2) insurers, 3) direct and 4) digital. It offers four tiers of stolen vehicle recovery service, ranging in price from ZAR99 to ZAR199 per month for a three-year contract. Netstar also sells a number of value-added services such as personal security (Netstar Companion).

Auto dealers: Netstar estimates it has a more than 50% share of the auto dealer market in South Africa. Netstar provides its SVR devices to dealers to protect their cars while on the dealer forecourt (described as ‘pre-fitment’). The majority of dealers pay a fixed fee upfront for the hardware. Once the vehicle is sold, the customer decides whether to use the service – described as ‘pre-fitment conversion’. Previously, Netstar used to provide the devices to dealers for free, only charging for them if the customer chose to take the service. With low pre-fitment conversion rates (eg 32% in FY23), a large proportion of the cost of devices was being written off through cost of sales. The business has since improved pre-fitment conversion rates to 66% in H124. Dealers earn commission for customer conversion.

Insurers: only c 30% of South African cars are insured as it is not a legal requirement. Insurers typically require two SVR devices in a car, sometimes from different suppliers. If a car thief finds one device and removes it, it may not find the second one, or the time taken to find the second one and remove it might be enough for Netstar to track the location of the vehicle. Netstar has exclusive relationships with a number of insurers including Dotsure and Telesure and estimates it has a number two position in the insurance market. Commission is payable to insurers.

Direct: Netstar has 13 offices and 53 fitment centres across South Africa. The network of fitment centres has been expanded to increase the speed with which consumers can get devices installed in their cars, as delays were causing potential customers to switch to competitors.

Digital: online purchase (www.netstar.co.za), a growing channel for Netstar.

Enterprise – offering a growing range of telematics services

Netstar offers its services in five areas: 1) light fleet (eg delivery vehicles), 2) medium/heavy fleet, 3) public enterprise, 4) mining and 5) the rental car market.

The Netstar telematics and SVR device installed for enterprise customers can be used for:

Safety and security (eg stolen vehicle recovery);

Compliance (eg to help generate compliance reports);

Sustainability (eg to measure fuel usage, etc); and

Efficiency (eg to measure excessive idling, route optimisation).

Overlaid with dash cams and AI cameras, drivers can be monitored for fatigue and non-compliance (eg not wearing a seat-belt, abnormal behaviour).

Netstar recently opened a new 52-seat enterprise fleet bureau that operates 24/7 and can offer a managed service for live fleet tracking globally. According to the company, it is the largest and most technologically advanced bureau for vehicle telematics in Southern Africa. As well as offering Netstar’s traditional managed services, such as asset tracking, driver behaviour management, automated incident alerts, reporting and analytics, the bureau will facilitate and manage live video monitoring through Netstar’s advanced Streamax onboard cameras.

For mining vehicles, Netstar offers a collision avoidance system that can be used in open cast mining. This complies with South Africa’s Department of Mineral Resources and Energy’s (DMRE’s) Collision Awareness Systems (CAS) Level 9, which requires that the system automatically takes mechanical control of the vehicle, slows it down and applies the brakes if there is a significant risk of collision. Netstar also offers a pedestrian unit that communicates with vehicle units. This product is currently only available in South Africa, but the business is planning to offer it in Australia.

Business model – high recurring revenues

The majority of customers pay for Netstar’s solutions on a monthly subscription basis; this includes the cost of the hardware device and the ongoing related services. A smaller number of customers pay for the hardware devices upfront and then separately pay for services on a subscription basis.

The charts below show the progression in the number of subscribers by geography (Exhibit 9) and by end market (Exhibit 10 – data only available for these periods). The growth in subscribers via the Toyota relationship has been the biggest driver of growth over the last three years, although we note that average revenue per user (ARPU) is significantly lower for Toyota (c ZAR24 vs the non-OEM ARPU of ZAR151 in H124) as it does not include the recovery service and it contributed 8% of H124 revenue. At the end of H124, Netstar had 1.9m connected devices across 1.6m subscribers, as some subscribers have more than one device in their vehicle. In its year-end trading update, the company noted that as at the end of January 2024, subscribers exceeded 1.7m and connected devices exceeded 2.0m, and subscriber growth was 12% for consumers and 30% for enterprise (January 2024 compared to January 2023).

Exhibit 10: Subscribers by geography

Exhibit 11: Subscribers by end market

Source: Altron

Source: Altron

Exhibit 10: Subscribers by geography

Source: Altron

Exhibit 11: Subscribers by end market

Source: Altron

The recovery of stolen vehicles and the personal security service is outsourced to a private security company, Rentrak. This company uses vehicles for ground crew to track stolen vehicles, and where difficult to track by road, also has helicopters to track vehicles from the air. Netstar operates its own radio frequency (RF) network in combination with the GSM network to track SVR devices and has a stolen vehicle recovery rate above 90%. Hardware devices are designed by Netstar and manufacturing is outsourced, with Netstar owning the intellectual property (IP).

For the devices paid for on a subscription basis, Netstar owns the devices and includes them on the balance sheet as ‘Capital rental devices’; it also capitalises the device fitment costs in this category. The device and fitment costs are depreciated over three years and charged to cost of sales. The company is reviewing the useful economic life of devices to verify whether this is still appropriate as peers tend to depreciate over a longer period, for example Cartrack over five years and Matrix over five years for its Africa segment. The hardware for the mining collision avoidance systems is paid for upfront and costs at least an order of magnitude more than an SVR device.

The company also capitalises the commission paid to dealers and amortises this over three years, again through cost of sales. In H124, annuity revenues made up 87% of total revenue.

Growth drivers: Crime, hardware innovation, data monetisation

South Africa has a car parc (total number of cars on the road) of c 13m vehicles. The key driver of demand for stolen vehicle recovery services is the high level of crime in South Africa, particularly car hijackings (carjackings). The chart below shows the number and growth rate of carjackings from 2009–23, with 2023 representing the highest year.

Exhibit 12: Carjackings in South Africa, year-end 31 March 2009–23

Source: Statista (sourced from South African police reports)

In South Africa, Netstar competes mainly with Cartrack (owned by Nasdaq-listed Karooooo) and MiX Telematics (owned by Nasdaq-listed PowerFleet). Cartrack operates across 23 countries and at the end of November 2023 had 1.91m subscribers, with 1.45m in South Africa. MiX Telematics operates across 120 countries and had 1.09m subscribers at the end of September 2023, with 58% of subscription revenue from the Africa segment.

As well as driving revenue growth from increasing the number of subscribers in South Africa and internationally, Netstar is broadening its offering with the following product development:

Asset monitoring: this uses tracking devices on assets rather than the vehicle they are transported in. Netstar has developed a GPS-based battery powered device using narrow band IoT (NBIoT) technology that can transfer a higher volume of data in a less contested frequency range. Most asset tracking devices use Bluetooth rather than GPS.

Data analytics: as Netstar products generate a large volume of data (181bn IoT transactions processed per month), the business is keen to develop solutions that help customers to make use of this data. The business recently announced a partnership with Microsoft: Netstar integrates with Microsoft Connected Fleets Architecture, allowing the visualisation of high-volume telematics data and providing data-driven insights.

Upgraded recovery device: this uses a higher frequency range and an active beacon. It is due for launch in June. This higher frequency band improves communication over longer distances and also allows Netstar to expand sales into its international markets.

Mesh network for early warning device: adding vehicle-to-vehicle communications to the next-generation device to create a mesh network.

The business is also working with partners to enhance services. In October 2023, Netstar announced a partnership with the SafeCity initiative powered by Vumacam. Vumacam operates a network of CCTV cameras across Gauteng and Netstar will be able to enhance its surveillance services with data from the CCTV network. This includes automated number plate recognition (ANPR) and AI-powered image analysis of vehicles. The partnership operates as a revenue share of services that leverage Vumacam’s data.

Forecasting strong growth and margin expansion

Revenue growth slowed during FY20–22, picking up again from FY23 and reaching 12.1% y-o-y in H124. Over the same period, EBITDA and operating margins declined, with a further decline in FY23 as, among other things, pre-fitment conversion dipped and component costs increased. Since the new management team put in place various measures to improve operational efficiency (driving pre-fitment conversion up, growing the network of fitment centres, establishing an in-house retention team which reduced churn) and has invested in product innovation, revenue growth and margins have started to improve. In the year-end trading update, the company noted that H224 performance was stronger than in H124 and that churn was now at 16% compared to 22% in FY23. We forecast double-digit revenue growth for FY24–26, with operating margins reaching the targeted 16% by FY26.

Altron FinTech: 12.8% of H124 revenue, 36.5% of operating profit

FinTech provides infrastructure and services for card-based and digital payments. The business was the largest contributor to operating profit in H124 with a 23.9% operating margin. The FinTech business was established in 1993 to supply point of sale (POS) systems in South Africa and has grown to encompass four business lines. In H124, 99% of revenue was generated in South Africa with the remainder from the rest of Africa and annuity revenue made up 69% of total revenue.

Key business areas

Collections and payments: 59% of divisional revenue

Under the NuPay brand, Altron provides a DebiCheck service, enabling companies to debit payments from their clients’ accounts. DebiCheck is the South African debit order payment system created by the Payments Association of South Africa (PASA). When a consumer sets up a DebiCheck mandate for a regular payment, the bank will contact the consumer to confirm the details supplied for the debit order are correct. Once confirmed, the debit order is processed; if rejected, the order will not go through. DebiCheck is similar to the Direct Debit scheme in the UK or SEPA Direct Debit in the EU. Altron works with four sponsor banks to ensure it can offer choice and provide high platform uptime to its customers. The majority of revenue is generated from processing payments and collections for microfinance lenders (see below).

Credit management solutions: 6% of divisional revenue

Delter designs and supplies software for the unsecured microfinance lending market. The software supports lenders over the entire lifecycle of a loan, including file capture; e-signatures; fingerprint capture; credit bureau, interest and affordability calculations; fee structures; disbursement of funds and repayments. The software is available for on premise or cloud deployment. Lenders can disburse funds direct to bank accounts via electronic funds transfer (EFT) or can load the cash onto a NuCard, a Mastercard-branded debit card that can be used at ATMs and retailers. Altron only works with lenders that can prove they are certified by the National Credit Regulator (NCR) and has c 2,700 customers, which it estimates make up c 65% of the NCR market. There is a link to the Collections & Payments part of the business, which processes the debit orders for borrowers receiving and repaying their loans.

Integrated transaction solutions: 20% of divisional revenue

Altron operates in two main areas: supplying payment acceptance devices and processing payments (financial transaction switch):

Payment acceptance devices: Altron supplies devices from one of three OEMS – PAX, Urovo or Bluebird – and can provide repair services. Altron has developed software to run on the terminals. The largest customers are banks, which then on-sell their own merchant acquiring services.

Financial transaction switch: payment processing. Altron can provide the merchant acquiring relationship or the customer can use Altron’s switch to drive transactions to its acquiring bank (online payment gateway). When Altron has the acquiring relationship, it can also add other services such as QR codes or vouchers.

Personalisation and issuance (P&I): 15% of divisional revenue

This is predominantly a hardware business; Altron resells machines from ENTRUST that are used to personalise and issue debit, credit, access and identity cards. It operates in the following areas:

General purpose desktop printer for cards with RFID or NFC chips; typically used for building access in universities, mines, schools and corporates.

Financial institution issuance: a machine used by banks in-branch to print and personalise cards.

High-end: used in bureaux for high volume card production, for example to print a batch of cards overnight to deliver to end customers the next day.

Physical ID cards: machines to create ID cards. Altron FinTech has worked with the National Department of Home Affairs in South Africa for 10 years. Altron Security encrypts and embeds the personal data into the cards.

Self-service kiosks: allows customers to print their own cards in branch or in a shopping mall.

Business model

Collections and payments: Altron earns a percentage of the value collected. It also sells value-added services such as strike date optimisation, which estimates the best date to take a payment based on previous behaviour.

P&I: the customer pays for the hardware upfront, Altron then makes money selling consumables and spare parts and providing maintenance services.

Payment acceptance devices: customers buy outright or rent, with rental becoming more popular. Those that are rented are included on the Altron balance sheet within ‘Capital rental devices’ and depreciated over five years.

Financial transaction switch: fees are charged in several ways, based on the number of transactions (in some cases with volume price breaks), bundled volumes or a fixed fee for ‘all you can eat’.

Credit management software: charged on a monthly basis; customers only need to give one month’s notice. Customers can buy additional services such as funeral plans.

Growth drivers: Shift away from cash

South Africa has a large informal economy, which according to a Mastercard white paper, includes c 3.3m micro and informal businesses primarily using cash to make and receive payments. Altron FinTech’s credit management software helps microfinance lenders service this market in a regulated manner and promotes financial inclusion for all.

The division benefits from the shift from cash to card payments, although South Africa is behind countries such as the US and the UK when it comes to debit and credit card ownership. According to the World Bank’s Global Findex report in 2021, 60% of people in South Africa aged 15 and over held either a debit or credit card in 2021, up from 46% in 2011. This compares to 97% in the UK and 91% in the US. Bank account ownership is also slightly behind the UK and the US, at 84% compared to 100% and 95% respectively. As more citizens gain access to bank accounts and the ability to pay by card, this supports growth in digital payments. According to Statista estimates, digital payments worth $19.8bn were made in South Africa in 2023 and this is expected to rise at a CAGR of 9.2% pa to $30.8bn by 2028.

In the P&I business, Altron is considering how to manage the shift from physical to digital cards. Digital cards, for example, cards held within wallets such as Apple Pay and Google Pay, require a virtual token on the phone. ENTRUST can provide software tokens and related back office and verification services. Altron is considering dual issuance (ie a physical card plus a digital card on the mobile phone). In our view, consumers are unlikely to shift to using only digital cards in the near term, as this presents too much risk if there is unreliable internet access or a phone is not working.

Forecasting steady growth and margins

The FinTech business saw strong revenue growth in FY23 (22%) as it saw a higher-than-normal level of hardware purchases. Hardware purchases remained high in H124, with revenue growth of 1.8% reported. We expect growth of 5% in H224, which results in FY24 revenue growth of 3.4%. In the year-end trading update, the company noted that H224 performance was similar to H124. We expect hardware purchases to normalise in FY25 resulting in a lower level of revenue growth of 1.9%, rising to 8% in FY26 based on growth in annuity revenues. We expect margins to remain relatively stable over this period.

Altron HealthTech: 4.4% of H124 revenue, 13.8% of operating profit

Altron HealthTech was founded around 30 years ago and in 2016, its MedeMass, MediSwitch and MedeServe offerings were consolidated. In H124, 53% of revenue was from software licensing, 43% from claims processing (c 100m claims processed per annum) and 4% from services. Annuity revenue made up 93% of revenue. 99% of revenue is generated in South Africa, with the remaining 1% from other African countries. Altron HealthTech provides technology solutions in three main areas:

1.

Private practice solutions.

2.

Corporate solutions.

3.

Data-as-a-service.

Private practice solutions

Altron HealthTech targets the privately insured healthcare market. Solutions include:

Practice management administration software – ME+ (MedeMass) and Elixir, which is cloud-based. After a small set-up fee, the software is charged for on a monthly subscription basis.

Electronic healthcare record software – HealthONE. More than 7m healthcare records have been created with this software. This is also paid for on a monthly subscription basis.

Claims switching – SwitchOn (MediSwitch). The company has integrations with all 71 medical aids (healthcare insurance companies) in South Africa. Practices use this software to claim the cost of their services from medical aids on a real-time basis. The company earns a fee for each transaction switched.

Corporate solutions

Altron HealthTech works with corporates in two areas:

Clinical software solution for primary health clinics with occupational health solution. This software supports clinics set up by corporates in sectors such as automotive, manufacturing and mining and helps them meet their statutory requirements. The company also has an occupational health offering which includes an app that helps employees access mental health support. After initial project fees, the company charges licensing and support fees.

Claims switching for pharmacies. The software is integrated into all pharmacies apart from GEMS (government employee medical scheme) pharmacies. Medical aids are the customers and they pay a fixed fee per annum, typically on three-year contracts.

Data-as-a-service

While strictly adhering to POPIA, the business has built new solutions from its practice and claims switching data. The data is being augmented to improve its relevance to industries such as insurance, financial and retail. Recent offerings in this space include:

Oncology solution. Oncology practices that jointly share anonymised patient data which is analysed to assess the best treatment options for specific cancers, on a molecular level.

Retail loyalty programmes. Matches pharmacy data to loyalty programmes to encourage certain shopping behaviour (eg encouraging the purchase of fruit and vegetables).

Regional health outcomes. Uses geospatial data as an overlay to anonymised patient data to assess the burden of disease by suburb/community.

Growth drivers: Adoption of enterprise solution

In FY23 HealthTech launched four new offerings and is currently focused on growing its occupational health business. Revenue from enterprise customers for its occupational health solution grew 19% y-o-y in H124 to 25% of revenue. We note that profitability has been supressed over the last few years as the business has expensed investment in its cloud offerings. This had the effect of reducing EBITDA margins by 0.6pp in FY22, 3.4pp in FY23 and 2.6pp in H124. We understand this investment in broadly complete.

In the year-end trading update, the company noted that H224 performance was similar to H124. We forecast revenue growth of 7–8% for FY24 and FY25 with stable margins.


Altron IT Services businesses

This division contains four businesses: Altron Security, Altron Managed Solutions (AMS), Altron Systems Integration (ASI) and Altron Karabina. The table below summarises the historical performance and our forecasts for each business.

Exhibit 13: IT Services financial performance

ZARm

FY20

FY21

FY22

FY23

FY24e

FY25e

FY26e

Revenue

Altron Security

0

102

204

436

451

492

536

Altron Managed Solutions

1,393

1,454

1,760

1,882

1,174

870

927

Altron Systems Integration

2,076

1,914

1,695

2,003

2,104

2,240

2,386

Altron Karabina

177

215

317

350

368

392

417

3,646

3,685

3,976

4,671

4,097

3,994

4,266

Revenue growth

Altron Security

N/A

N/A

100.0%

113.7%

3.4%

9.0%

9.0%

Altron Managed Solutions

19.3%

4.4%

21.0%

6.9%

-37.6%

-25.9%

6.5%

Altron Systems Integration

2.4%

-7.8%

-11.4%

18.2%

5.0%

6.5%

6.5%

Altron Karabina

68.6%

21.5%

47.4%

10.4%

5.1%

6.5%

6.5%

10.5%

1.1%

7.9%

17.5%

-12.3%

-2.5%

6.8%

EBITDA

Altron Security

0

40

43

104

102

121

131

Altron Managed Solutions

103

97

88

117

57

44

46

Altron Systems Integration

125

74

51

5

85

115

150

Altron Karabina

2

5

36

43

54

47

50

230

216

218

269

297

326

377

Operating profit before capital items

Altron Security

0

29

23

74

72

89

97

Altron Managed Solutions

47

26

34

73

35

20

20

Altron Systems Integration

99

49

10

(20)

79

109

144

Altron Karabina

(21)

(16)

16

23

38

31

32

125

88

83

150

223

248

293

EBITDA margin

Altron Security

N/A

39.2%

21.1%

23.9%

22.6%

24.5%

24.5%

Altron Managed Solutions

7.4%

6.7%

5.0%

6.2%

4.8%

5.0%

5.0%

Altron Systems Integration

6.0%

3.9%

3.0%

0.2%

4.0%

5.2%

6.3%

Altron Karabina

1.1%

2.3%

11.4%

12.3%

14.7%

12.0%

12.0%

6.3%

5.9%

5.5%

5.8%

7.3%

8.2%

8.8%

Operating margin

Altron Security

N/A

28.4%

11.3%

17.0%

16.0%

18.0%

18.2%

Altron Managed Solutions

3.4%

1.8%

1.9%

3.9%

2.9%

2.2%

2.2%

Altron Systems Integration

4.8%

2.6%

0.6%

-1.0%

3.7%

4.9%

6.0%

Altron Karabina

-11.9%

-7.4%

5.0%

6.6%

10.3%

7.9%

7.7%

3.4%

2.4%

2.1%

3.2%

5.4%

6.2%

6.9%

Source: Altron, Edison Investment Research

Altron Security: 6.5% of H124 revenue, 18.0% of operating profit

Altron decided to enter the identity security market in FY20 and Altron Security was created from the acquisition of two businesses: Ubusha in FY21 and Lawtrust in FY22. Ubusha was founded 20 years ago to provide identity management services to enterprises, automating user management, reducing attack surfaces and aiding regulatory compliance. Lawtrust was founded in 2006 and is Africa’s leading Trust Centre, security integrator and security solutions developer. The business now provides cryptography, signing, identity, fraud prevention and compliance solutions to banks, telecom operators, insurance companies and manufacturers in South Africa

In H124, 94.7% of revenue was generated from South Africa, 1.8% from the rest of Africa, 0.7% from Europe and 2.8% from the rest of the world. Annuity revenue made up 83% of total revenue.

Key business areas

The goal of the business is to provide preventative controls to companies with regulatory requirements to automate their compliance. Altron Security operates across two main areas:

crypto (two-thirds of revenue): includes encryption solutions, PKI (public key infrastructure) solutions, digital signing solutions and TLS (transport layer security) certificates; and

identity (one-third of revenue): includes identity (ID) security, fraud prevention, and compliance reporting.

Crypto: Strong presence in digital signing and TLS certificates

Altron Security provides encryption solutions, for example securing GSM networks and enabling the South African national smart identity card (where it works in conjunction with Altron FinTech). It sells TLS certificates to consumers, providing the majority of certificates in the South African market. A TLS certificate is a digital certificate that authenticates a website’s identity and enables an encrypted connection. A website needs a TLS certificate to be able to keep user data secure, verify ownership of the website, and prevent attackers from creating a fake version of the site. Altron Security also provides the security element for the South African identity card (managed by the Department of Home Affairs). The business resells software from ENTRUST, Ascertia and Venafi.

Altron Security is one of a limited number of companies certified to issue Advanced Electronic Signatures (defined by the Electronic Communications and Transactions Act as high assurance digital signatures) and offers its own SaaS-based digital signing platform called SigningHub, which enables users to sign documents electronically. It is similar to DocuSign but is locally hosted by Altron, offered to the South African market as a public cloud offering, priced in rand and can offer high level assurance. High level assurance requires face-to-face verification, which can either be performed in an enrolment centre or by a team sent to the customer. Altron Security’s digital signatures are also approved by the Adobe Approved Trust List. Altron is increasingly integrating SigningHub with customer applications.

Identity: Helping customers with identity and data security

Altron provides solutions and managed services for identity access management, identity governance and privileged access management, working with software partners such as CyberArk, OneTrust, Ping Identity and SailPoint. Altron’s Biotrust solutions use multi-factor authentication (MFA) to secure transactions, including the option to use biometric security based on fingerprints. For compliance reporting and data governance, Altron helps companies to comply with POPIA (Protection of Personal Information Act) and with non-financial reporting such as ESG, cybersecurity and governance. Fraud prevention is the smallest part of the business and the company is working to develop its offering.

Business model

The business generates revenue in five ways:

1.

Third-party software resale, where Altron reports the gross profit it earns as revenue.

2.

Own platform software, where Altron reports 100% of the revenue; includes SigningHub, PDO (personal digital onboarding) and Biotrust. Cost of sales includes the cost of third-party software that is integrated into the platform.

3.

Projects – charged on a time and materials basis.

4.

Managed services – charged according to monthly milestones.

5.

Support contracts – charged according to uptime.

The business generates around one-third of revenue from its own platforms. Most customers use cloud-based solutions although a few prefer to use on-premise software (eg banks). All software is sold on a subscription basis, even if deployed on-premise. Customers tend to prefer to pay using an opex model rather than capex and pay for software licences on an annual basis, although many third-party software vendors are moving to three-year terms. Altron Security’s own platform is charged for on an annual basis paid upfront. In H124, annuity revenue made up 83% of total revenue.

Growth drivers: Cross-selling, international expansion

Altron Security operates in the growing market for regulatory technology (RegTech), designed to automate regulatory compliance as additional regulations are introduced.

Cross-selling is a key growth strategy for Altron Security. With its focus on supporting smaller businesses to access the same level of security as enterprises, it looks at ways to sell additional services to customers using SigningHub. There is also scope to team up with Altron Digital for shared opportunities. While Altron Security currently sells projects and software, it is shifting to selling access to its platforms and growing managed services, which should improve gross margins.

From a product perspective, the business is aiming to widen identity verification to citizens who are not South African, although this is only realistic in countries with well-established identity databases. The business sees an opportunity to support other African countries that are implementing public key infrastructure (PKI).

The company would consider making bolt-on acquisitions to accelerate growth. Countries/regions under consideration include South Africa, South-East Asia, Belgium, the Netherlands and the UK. Targets would ideally have at least 70% annuity revenues.

In the longer term, the emergence of quantum computing is likely to make current encryption techniques obsolete as encryption algorithms are cracked. We expect the industry to develop quantum-proof encryption methods, which should ultimately drive an upgrade cycle.

In FY22 and FY23 the company worked to integrate the two acquisitions and invested in headcount to drive growth, with FY23 the first full year after the two acquisitions. Revenue grew 5.6% y-o-y in H124 and we expect limited growth in H224 (as per the year-end trading update) – FY24 forecast revenue growth of 3.4% reflects a digestion phase after customers upgraded to meet regulatory requirements in previous years. We expect growth to accelerate from FY25 as cross-selling increases. Management pointed to a small drop in profitability in FY24 and we forecast a lower operating margin of 16.0% compared to 17.0% in FY23. We expect a recovery from FY25 as revenue growth reaccelerates.

Altron Digital Business: 43.7% of H124 revenue, 20.1% of operating profit

From 1 March 2024, Altron Managed Solutions, ASI and Altron Karabina were combined to create Altron Digital Business (although these businesses will be reported separately for FY24 results in May). These three businesses service the same customers and have similar competitors. Management has already restructured the individual businesses to optimise their cost bases so that the focus when combining the businesses can be on driving growth. The businesses, with a combined headcount of 2,100, will be collocated with the aim of limiting disruption during the integration process. The new operating model will seek growth from cross-selling and improved service delivery.

New operating model to drive growth and margins

The changes to the operating model that have been made to drive growth include:

Implementing a new sales strategy and operating model, using a matrix sales approach. Customers have been segmented and the sales teams will focus on outcomes as opposed to selling lines of business. This should drive better collaboration and cross-selling as sales quotas are set at a customer and go-to-market level.

Investment in people to deliver the sales strategy.

A focus on service delivery.

A shift to deliver more managed services, which drives more annuity revenue and tends to be higher margin.

Shaping the services that are offered to be more centrally delivered, scalable and repeatable.

Measures to drive margin expansion include:

Centralising service delivery. Previously, each individual unit (Karabina, ASI, AMS) had its own operations and service delivery. Now service delivery is centralised with a standard delivery model under a central management office and have centres of excellence for field services business and managed services business, making it more scalable and repeatable.

Addressing low margin projects, with the aim of preventing them from happening through the sales process and how the project is architected and delivered.

Room to grow

The three businesses operate across two main areas:

Systems integration, hardware and software deployment and support.

IT outsourcing and managed services.

According to Statista, the South African IT services market was worth $6.14bn/ZAR113.3bn in 2023 and is forecast to grow at a CAGR of 12.1% to 2028. The table below shows the relative size of the sub-segments of the market and forecast growth.

Exhibit 14: IT services market in South Africa

$bn

CY23e

CY28e

CAGR

CY23e ZAR* bn

IT outsourcing

2.06

4.86

18.7%

38.0

BPO

1.97

2.98

8.6%

36.3

Other IT services

1.77

2.51

7.2%

32.7

IT consulting and implementation

0.34

0.50

8.0%

6.3

6.14

10.85

12.1%

113.3

Source: Statista. Note: *US$/ZAR average exchange rate 18.45 in 2023.

With revenue of ZAR4.2bn in FY23, Altron has a relatively small market share. The South African economy is relatively stagnant (the IMF forecasts 0.9% real GDP growth in 2024), leading to customers seeking ways to use technology to grow revenue, become more efficient and reduce costs. We discuss each of the individual businesses in more detail below.

Exhibit 15 shows the geographic spread of revenues and the level of annuity revenue in each business.

Exhibit 15: Divisional revenue by geography

South Africa

Other Africa

Europe

Rest of the world

Annuity revenue

Altron Managed Solutions

96%

4%

0%

0%

46%

Altron Systems Integration

87%

8%

2%

3%

53%

Altron Karabina

98%

1%

0%

1%

24%

Source: Altron

Altron Systems Integration: 22.7% of H124 revenue, 8.6% of operating profit

Roughly 40% of ASI revenue comes from IT outsourcing, where customers buy IT infrastructure from Altron combined with managed services, covering areas such as unified communications, network switching and routing, managed cloud, managed security, storage and enterprise architecture. The main OEMs that ASI resells are Cisco, Huawei and Microsoft.

The remaining 60% of revenue comes from its professional services business, covering:

Data and AI. Big data management, organisation, analytics, business intelligence and AI consulting services; customers are in the banking, telecoms and retail sectors. The service is evolving from on-premise to cloud-based in conjunction with hyper-scalers.

Software engineering. Altron designs, builds and implements software applications and provides managed services. An example of work includes churn management for a telecom operator.

Enterprise applications. Microsoft D365 consulting, implementation and managed services.

Workforce management. Altron provides time and attendance software to customers in the healthcare and retail space. The software is used to manage and monitor labour schedules, overtime, leave and absence as well as to predict future labour requirements. Altron has a hub in the Middle East to support a customer with hospitals in the region.

Smart industrial solutions. Altron helps smart battery customers to optimise their manufacturing facilities.

Contact centre solutions, providing software, professional services and managed services to call centre operators in South Africa and Kenya.

From 1 October 2023, the Huawei networking and enterprise services business that was in Nexus was transferred into ASI.

Altron Managed Solutions: 16.8% of H124 revenue, 6.4% of operating profit

AMS provides technology solutions with related managed services. It is focused on the retail market, which includes petrol station forecourts. Its largest customer is MassMart in South Africa where it provides end user support for head office and stores, POS support and support for the digital workplace. There is some overlap between ASI and AMS, and management believes that AMS’s service delivery skills will be valuable in the combined Digital Business as it has expertise supporting large-scale customers and supply chain management. On 1 July 2023, Altron sold the ATM hardware business within AMS for proceeds of ZAR13m and an additional ZAR119m received from retained trade receivables. This has not been treated as a discontinued operation; the company provided data on revenue and EBITDA excluding the sold business.

Exhibit 16: Revenue and EBITDA adjusted for disposal

ZARm

FY23

H124

FY23

H124

AMS revenue

As reported

1882

724

Excluding sold business

773

391

Group revenue – continuing operations

As reported

8445

4321

Excluding sold business

7336

3988

AMS EBITDA

AMS EBITDA margin

As reported

117

34

As reported

6.2%

4.7%

Excluding sold business

51

19

Excluding sold business

6.6%

4.9%

Group EBITDA – continuing operations

Group EBITDA margin

As reported

1251

724

As reported

14.8%

16.8%

Excluding sold business

1185

709

Excluding sold business

16.2%

17.8%

Source: Altron

Altron Karabina: 4.3% of H124 revenue, 5.2% of operating profit

Altron Karabina, originally founded around 20 years ago, was acquired five years ago. Karabina specialises in systems integration for Microsoft solutions. It provides licensing advisory services, Microsoft 365 managed services, cloud migration, cloud infrastructure, business application implementation and data and AI services. The data and AI practice has won the Microsoft South Africa Data & Analytics Partner of the Year award every year for the last 17 years.

ASI the key lever for profit growth

The business has already made good progress in improving the performance of ASI, with H124 operating profit of ZAR31m, which was 80% of the cumulative operating profit over FY21–23. We forecast mid-single-digit revenue growth for each of the three businesses in FY24, excluding the disposed ATM business within AMS. In the year-end trading update, the company noted that the performance of ASI and AMS (adjusted for the ATM disposal) was better in H224 than H124. Karabina’s H224 performance was in line with H124. We forecast relatively flat margins for AMS and Karabina in FY25 and FY26, while we forecast margin expansion for ASI over the same period. We forecast the entire IT Services division to reach the 7% operating margin target in FY26.

Altron Arrow: Electronics distributor

Altron Arrow is a distributor of electronic components in sub-Saharan Africa. In H124 it generated 10% of group revenue and 10% of operating profit.

Exhibit 17: Altron Arrow financial performance

ZARm

FY20

FY21

FY22

FY23

FY24e

FY25e

FY26e

Revenue

463

377

507

679

771

726

748

Revenue growth

-18.6%

34.5%

33.9%

13.6%

-5.9%

3.0%

EBITDA

16

14

25

52

71

65

67

EBITDA margin

3.5%

3.7%

4.9%

7.7%

9.2%

9.0%

9.0%

Operating profit before capital items

14

12

23

50

69

63

65

Operating margin

3.0%

3.2%

4.5%

7.4%

8.9%

8.7%

8.7%

Source: Altron, Edison Investment Research

Altron Arrow is a 50/50 joint venture between Altron and Arrow Electronics (NYSE-listed). Altron Arrow is consolidated in Altron’s accounts, with the 50% stake owned by Arrow treated as a minority interest.

The main areas in which AA operates are:

Electronic components: semiconductors, connectors, electro-mechanical components, wireless modules, frequency products (capacitors, crystals and oscillators), lighting and optics, passive components, batteries, solar panels, displays and power supplies.

Enterprise computing solutions: data storage, memory, AI and Edge, industrial computing, embedded computing and cybersecurity software solutions.

Supply chain solutions: end-to-end solution including delivery, warehousing, kitting, automated reporting and technical support.

The business has access to more than 140 electronic component suppliers in South Africa and more than 600 through Arrow Europe. Altron has a 4,000m2 warehouse in Johannesburg that holds approximately 32,000 line items while also having access to more than one million product lines held at Arrow Electronics EMEA warehouse based in the Netherlands.

The Altron Arrow engineering team specialises in helping customers with their specific electronic component needs, ensuring the optimal solution for their requirements. Through careful analysis and expertise, they provide specific recommendations ensuring efficiency, cost optimisation and effectiveness.

Altron Arrow saw strong revenue growth from FY22–23 as the component supply chain started to ease up after COVID disruption and the business pursued new opportunities. Demand remained strong in H124 (revenue up 32.1% y-o-y) but we expect demand to moderate now that supply chain issues have eased. The business reported an operating margin of 7.4% in FY23 and 8.7% in H124, impressively high for a distribution business. We expect the margin to be maintained at this level in FY25 and FY26 even as demand moderates.

Sensitivities

In addition to the usual competition and technology risks, our forecasts and the share price will be sensitive to the following factors:

Disposal of discontinued operations: group financial results will include discontinued operations until they are sold. The timing of disposal and the expected proceeds are currently unknown.

Creation of Digital Business unit: integrating the three businesses carries execution risk.

Regulatory requirements: Altron is subject to regulation in several parts of its business, in areas such as card payments, data privacy and healthcare, and will need to meet all current and emerging regulatory requirements.

Changes to accounting policies: Netstar is currently considering revising the useful economic life (UEL) of stolen vehicle recovery devices. While not having a cash flow impact, a longer UEL would change the profile of operating profitability at a divisional and group level, improving it in the earlier part of contracts and reducing it in the latter part.

Voting rights not proportional to shares held: there are 410m A ordinary shares and one high voting share outstanding. The Venter family (family of the founder) holds the high voting share – this entitles them to voting rights of 25% plus one vote as long as members of the Venter family are the ultimate beneficial owners of at least 10% of the ordinary shares. Currently, family ownership meets this threshold. We understand that this high voting share has never been used.

Geographic expansion: the large majority of group revenue is currently generated in South Africa. Expansion into other countries could increase political, regulatory and currency risk.

Exposure to political and economic risk in South Africa: with close to 90% of revenue generated in South Africa, the company is sensitive to changes in the political and economic environment.

Financials

Exhibit 18: Summary forecasts

ZARm

FY21

FY22

FY23

FY24e

FY25e

FY26e

Revenue

7,505

7,930

8,445

8,337

8,508

9,192

Revenue growth

1.7%

5.7%

6.5%

-1.3%

2.1%

8.0%

EBITDA before capital items

1,033

1,140

1,251

1,488

1,689

1,973

EBITDA margin before capital items

13.8%

14.4%

14.8%

17.8%

19.9%

21.5%

Normalised operating profit

371

518

621

727

825

1,017

Operating profit before capital items

371

498

599

705

803

995

Operating margin before capital items

4.9%

6.3%

7.1%

8.5%

9.4%

10.8%

Capital items

(23)

(213)

(59)

(59)

(15)

(15)

Operating profit

348

285

540

646

788

980

Profit before tax

128

142

401

494

616

804

Profit after tax

94

79

296

362

449

587

Minority interest

12

(9)

(17)

(25)

(23)

(24)

Net income - continuing operations

106

70

279

337

427

564

Net income - discontinued operations

12,048

(174)

(283)

(500)

(84)

(84)

Total net income

12,154

(104)

(4)

(163)

343

480

Reported basic EPS (ZAR)

32.70

(0.28)

(0.01)

(0.43)

0.90

1.27

Reported basic continuing EPS (ZAR)

0.29

0.20

0.74

0.89

1.13

1.49

Headline basic EPS (ZAR)

1.35

0.37

0.29

(0.20)

0.95

1.31

Headline basic continuing EPS (ZAR)

0.37

0.51

0.85

1.00

1.16

1.52

Normalised diluted EPS (ZAR)

0.33

0.53

0.88

1.02

1.18

1.53

Dividend per share (ZAR)

1.44*

0.30

0.35

0.49

0.57

0.74

Net debt - group

453.0

811.0

563.0

672.3

716.4

729.4

Net debt/(cash) - continuing operations

(142.0)

341.0

173.0

282.3

326.4

339.4

Source: Altron, Edison Investment Research. Note: *Includes ZAR0.96 special dividend from the demerger of Bytes Technology for which shareholders also received a dividend in specie worth ZAR28.54 per share.

In the recent year-end trading update, the company disclosed the following expectations for FY24 EPS. Our forecasts are at the lower end of these ranges.

Group EPS: at least 35c lower than in FY23 (which was -1c);

Group continuing EPS: 89–101c;

Headline EPS: -21c to -16c; and

Headline continuing EPS: 99–105c

We forecast group operating profit of ZAR1.0bn by FY26, which is just below the company target of ZAR1.1bn. We expect Netstar to have the biggest impact on operating profit growth (+ZAR244m FY23 to FY26e), followed by ASI (+ZAR164m FY23 to FY26e).

Within discontinued operations, we have modelled continued ownership of ADS and Altron Nexus. We note that the large loss that we forecast for discontinued operations in FY24 includes c ZAR392m of one-off write-downs that were made in H124. In the FY24 year-end trading update, the company confirmed that ADS had returned to profitability in H224 although would be loss-making for the full year. We assume ADS is profitable in FY25 whereas we continue to model losses for Altron Nexus. The company noted in the trading update that it is managing both entities for value and is currently in negotiations with potential buyers of ADS.

The company targets a dividend payout ratio of 50% of headline EPS from continuing operations.

Capex reflects Netstar’s investment for growth

Altron’s capex includes:

Capital rental devices – more than 95% for Netstar with the remainder for FinTech. We estimate 18% growth in FY24 from the ZAR259m spent in FY23 followed by growth at the same rate as Netstar revenue in FY25 and FY26.

Property, plant and equipment – we estimate c ZAR100m per annum.

Capitalised development costs – we estimate c ZAR100m per annum.

Contract costs capitalised – this is recorded within operating cash flow. We forecast growth of 5% per annum from the ZAR330m reported in FY23.

We forecast that depreciation and amortisation from the items above as well as depreciation of right of use assets (c ZAR130m pa) and amortisation of acquired intangible assets (ZAR22m pa) will total ZAR783m in FY24.

Gearing well below 1x at end H124

The company reported net debt of ZAR558m at the end of H124 (continuing and discontinued operations combined). Discontinued operations included debt of ZAR412m relating to rental finance advances for which the corresponding receivable was recorded in finance lease assets. For gearing calculations, net debt at the end of H124 was ZAR164m (it excludes the back-to-back financing described above) and net debt/EBITDA was 0.23x, leaving plenty of headroom for M&A.

Valuation

As the group consists of six businesses with varied business models, we use a sum-of-the-parts (SOTP) valuation to reflect the different dynamics within the group. In Exhibit 19, we summarise the peers used for each business. There is a limited number of peers listed in South Africa so we have expanded our peer group to incorporate European and US companies. We have grouped Altron Managed Solutions, ASI and Altron Karabina together as Digital Business, as they have similar operating characteristics and are now operating as one unit. We do not assign any value to the discontinued operations. Exhibit 20 shows forecast growth and margins for each peer group as well as revenue and EBITDA/EBIT multiples, and the same for each Altron division. Exhibit 21 shows the SOTP valuation. We have applied a 30% discount to reflect a holding discount and the higher risk from the South African market. We have used our forecast for continuing operations net debt at the end of FY24.

Exhibit 19: Peers by division

Peers

Ticker

Exchange

Market cap $m

Business description

Netstar

Karooooo

KRO

JSE

771,785

Telematics

PowerFleet

PWFL

NASDAQ

183,341

Telematics and related SaaS software

Quartix

QTX

AIM

102

Telematics. GPS fleet tracking, mostly Europe, some US

Altron FinTech

Capital Appreciation

CTA

JSE

82

FinTech investments. Includes terminals and payment processing

Evertec

EVTC

NYSE

2,541

Transaction processing services in LatAm and the Caribbean (merchant acquiring, payment processing, business solutions)

Lesaka Technologies

UEPS

NASDAQ

246

South African. Banking and payment technologies for the underbanked

Nuvei Corporation

NVEI

TSE

4.530

Payment processing and technology

Paypoint

PAYP

LSE

446

In-store payment services, multi-channel payment solutions, gift cards

Priority Technology Holdings

PRTH

NASDAQ

244

Integrated payments and banking solutions

Shift4 Payments

FOUR

NYSE

5.590

Integrated payments and commerce technology

StoneCo

STNE

NASDAQ

5,043

Financial software and solutions for merchants

Usio

USIO

NASDAQ

43

Integrated payments solutions

Altron HealthTech

Carasent

CARAC

OSL

77

Healthcare, occupational health, return to work rehab technology solutions

Cegedim

CGM

EPA

197

Wide range of healthcare software and services

CompuGroup

COP

ETR

1,653

Wide range of healthcare software including e-prescribing

Equasens

EQS

EPA

843

Wide range of healthcare software and services

Nexus

NXU

ETR

1,049

Wide range of healthcare software

Veradigm

MDRX

NASDAQ

846

Practice management and EHR software

VitalHub

VHI

TSE

195

EHR and other software for acute, community, mental health

Altron Digital Business

EOH Holdings

EOH

JSE

38

IT services (75%), software (15%), hardware (10%). Mostly South Africa.

Computacenter

CCC

LSE

4,175

Technology sourcing (77%), Prof Services (9%), Managed Services (14%). Europe (55%), North America (41%), Other (4%).

Softcat

SCT

LSE

4,004

UK-based IT and infrastructure provider: hybrid infra, digital workspace, cybersecurity

Bytes

BYIT

LSE

1,550

UK-based software (95%), hardware (2%) and services (3%) provider

Redcentric

RCN

AIM

255

UK-based managed service provider: network, cloud and collaboration

Innofactor

IFA1V

HEL

52

Digital transformation software and services, Microsoft-focused. Nordics-focused

Altron Security

CyberArk

CYBR

NASDAQ

11,181

PAM software

DocuSign

DOCU

NASDAQ

11,961

E-signing software

DropBox

DBX

NASDAQ

8,362

Data storage and security

Okta

OKTA

NASDAQ

17,324

IAM software

OneSpan

OSPN

NASDAQ

443

MFA and e-signing software

Penneo

PENNEO

CPH

39

Danish e-signing software

Wallix

ALLIX

EPA

59

PAM software

Exclusive Networks

EXN

EPA

2,183

Cybersecurity consulting and managed services

NCC

NCC

LSE

492

Cybersecurity consulting and managed services

Altron Arrow

Arrow

ARW

NYSE

6,965

Electronics distributor

Avnet

AVT

NASDAQ

4,451

Electronics distributor

RS Group

ECM

LSE

4,348

Specialist electronics distributor

ScanSource

SCSC

NASDAQ

1,082

Hybrid technology distributor

Westco International

WCC

NYSE

8,947

Supply chain, electrical and distribution services

Source: Edison Investment Research, LSEG (as at 2 April)

In the table below, we have assigned multiples to each division based on its performance versus its peer group. In our SOTP calculation, we have averaged the valuations across FY24 and FY25 and across the three multiples. This results in a per-share valuation of ZAR21.0, 84% above the current share price. In our view, evidence of margin progression towards the group’s medium-term targets should reduce the discount to fair value. We have not included any value for discontinued operations. Businesses held for sale had a net book value of ZAR935m at the end of H124. If sold for this amount, the proceeds would be worth ZAR2.5 per share.

Exhibit 20: Peer group performance

Revenue growth (%)

EBITDA margin (%)

EBIT margin (%)

EV/Sales (x)

EV/EBITDA (x)

EV/EBIT (x)

Peer group average

LY

CY

NY

LY

CY

NY

LY

CY

NY

CY

NY

CY

NY

CY

NY

Netstar

11.7

38.6

12.2

21.3

23.9

27.0

11.0

14.9

19.5

2.3

2.1

9.9

8.1

17.8

10.3

Altron FinTech

36.4

18.2

14.0

26.4

27.3

28.3

16.7

18.2

19.7

1.8

1.6

7.5

6.0

20.2

12.5

Altron HealthTech

11.7

(0.3)

9.0

19.2

22.2

23.3

9.0

15.0

16.6

2.2

2.0

12.7

8.6

13.4

11.7

Altron Digital Business

1.2

7.4

8.4

14.3

14.6

15.7

10.8

11.7

12.9

1.9

1.8

10.7

9.3

14.1

11.1

Altron Security

19.3

1.7

13.2

12.4

16.2

20.1

3.9

11.1

16.4

3.7

3.2

13.8

12.0

17.2

14.7

Altron Arrow

5.4

(4.9)

4.1

7.5

6.7

7.1

6.7

5.7

6.1

0.6

0.6

8.4

7.6

9.8

8.7

Divisional performance

Netstar

11.3

14.6

12.5

33.8

37.3

41.0

10.3

10.0

12.8

2.3

2.1

9.9

8.1

17.8

10.3

Altron FinTech

22.2

3.4

1.9

26.0

27.4

27.4

22.3

23.6

23.2

1.3

1.2

5.7

4.5

10.0

9.0

Altron HealthTech

8.4

6.5

8.0

29.4

28.5

28.5

27.4

26.9

27.0

2.2

2.0

12.7

8.6

13.4

11.7

Altron Digital Business

12.3

(13.9)

(3.9)

3.9

5.4

5.9

1.8

4.1

4.6

0.8

0.8

10.7

9.3

14.1

11.1

Altron Security

113.7

3.4

9.0

23.9

22.6

24.5

17.0

16.0

18.0

3.7

3.2

13.8

12.0

17.2

14.7

Altron Arrow

33.9

13.6

(5.9)

7.7

9.2

9.0

7.4

8.9

8.7

0.7

0.7

8.4

7.6

9.8

8.7

Source: Edison Investment Research, LSEG (as at 2 April)

Exhibit 21: Sum-of-the-parts valuation

ZARm

Sales-based

EBITDA-based

EBIT-based

FY24e

FY25e

FY24e

FY25e

FY24e

FY25e

Netstar

4,847

4,996

7,882

8,006

3,775

3,176

Altron FinTech

1,423

1,281

1,671

1,357

2,552

2,294

Altron HealthTech

830

815

1,350

982

1,341

1,267

Altron Digital Business

2,916

2,802

2,084

1,920

2,128

1,773

Altron Security

1,657

1,579

1,414

1,451

1,240

1,298

Altron Arrow

285

258

297

247

340

276

Other

N/A

N/A

(770)

(1,000)

(1,085)

(1,253)

Total enterprise value

11,959

11,731

13,928

12,965

10,291

8,830

Enterprise value – average

11,617

Net debt at end FY24e, continuing operations

282

Equity value

11,335

Holding/South Africa discount

30%

Net equity value

7,935

No. shares (m)

378.7

Per share value (ZAR)

21.0

Upside/(downside)

84%

Source: Edison Investment Research

We have also performed a reverse discounted cash flow analysis, using a WACC of 14% and a long-term growth rate of 3%. Using our forecasts to FY26, we estimate that the current share price is factoring in revenue growth of 3.2% pa FY27–33 and EBITDA margin expansion of 1.25pp over the same period from the 21.5% we are forecasting in FY26. In our view, this appears conservative considering that Altron is operating in structural growth markets and is focused on optimising profitability.

Exhibit 22: Financial summary

Year end 28 February

ZARm

2019

2020

2021

2022

2023

2024e

2025e

2026e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

15,723.0

7,383.0

7,505.0

7,930.0

8,445.0

8,337.1

8,508.3

9,191.5

Costs

(14,116.0)

(6,283.0)

(6,472.0)

(6,790.0)

(7,194.0)

(6,849.0)

(6,819.0)

(7,219.0)

EBITDA

 

 

1,607.0

1,100.0

1,033.0

1,140.0

1,251.0

1,488.1

1,689.3

1,972.5

Normalised operating profit

 

 

1,041.0

456.0

371.0

518.0

621.0

726.8

824.6

1,017.2

Amortisation of acquired intangibles

0.0

0.0

0.0

(20.0)

(22.0)

(22.0)

(22.0)

(22.0)

Exceptionals/capital items

(26.0)

1.0

(23.0)

(213.0)

(59.0)

(59.0)

(15.0)

(15.0)

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

1,015.0

457.0

348.0

285.0

540.0

645.8

787.6

980.2

Net Interest

(176.0)

(255.0)

(179.0)

(146.0)

(142.0)

(155.0)

(172.0)

(176.0)

Joint ventures & associates (post tax)

(1.0)

(30.0)

(41.0)

3.0

3.0

3.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

864.0

171.0

151.0

375.0

482.0

574.8

652.6

841.2

Profit Before Tax (reported)

 

 

838.0

172.0

128.0

142.0

401.0

493.8

615.6

804.2

Reported tax

(158.0)

(50.0)

(34.0)

(63.0)

(105.0)

(132.0)

(166.2)

(217.1)

Profit After Tax (norm)

701.1

121.3

110.9

208.6

355.8

418.1

476.4

614.0

Profit After Tax (reported)

680.0

122.0

94.0

79.0

296.0

361.8

449.4

587.0

Minority interests

(39.0)

20.0

12.0

(9.0)

(17.0)

(24.5)

(22.8)

(23.5)

Discontinued operations

70.0

506.0

12,048.0

(174.0)

(283.0)

(500.0)

(84.0)

(84.0)

Net income (normalised)

662.1

141.3

122.9

199.6

338.8

393.6

453.6

590.5

Net income (reported)

711.0

648.0

12,154.0

(104.0)

(4.0)

(162.7)

342.6

479.5

Basic ave. number of shares outstanding (m)

371.0

371.2

371.6

371.9

377.3

378.5

378.7

378.7

EPS - diluted normalised (ZAR)

 

 

1.77

0.38

0.33

0.53

0.88

1.02

1.18

1.53

EPS - basic reported (ZAR)

 

 

1.92

1.75

32.70

(0.28)

(0.01)

(0.43)

0.90

1.27

EPS headline basic (ZAR)

 

 

1.91

1.73

1.35

0.37

0.29

(0.20)

0.95

1.31

Dividend (ZAR)

0.44

0.55

1.44

0.30

0.35

0.49

0.57

0.74

Revenue growth (%)

-53.0%

1.7%

5.7%

6.5%

-1.3%

2.1%

8.0%

EBITDA Margin (%)

10.2%

14.9%

13.8%

14.4%

14.8%

17.8%

19.9%

21.5%

Normalised Operating Margin

6.6%

6.2%

4.9%

6.5%

7.4%

8.7%

9.7%

11.1%

BALANCE SHEET

Fixed Assets

 

 

4,171.0

4,550.0

3,793.0

3,965.0

4,013.0

4,152.2

4,288.4

4,392.7

Intangible Assets

2,048.0

2,159.0

1,623.0

1,918.0

2,105.0

2,173.6

2,241.8

2,285.4

Tangible Assets

1,109.0

1,655.0

1,719.0

1,476.0

1,346.0

1,444.7

1,512.7

1,573.3

Investments & other

1,014.0