FY26 EBITDA +10%, continuing HEPS +34%

Altron reported EBITDA growth of 10% in FY26, despite revenue growth of only 1%. Within IT Services, after recent restructuring ADB moved back to profitability in H226 and for the year as a whole, and ADS expanded operating margins despite a small revenue decline. Within Platforms, Netstar and Altron FinTech both beat our operating profit forecasts (by 6.7% and 3.6% respectively). Overall, this resulted in continuing HEPS growth of 34%, 3% ahead of our forecast. We upgrade our FY27 forecasts to reflect better-than-expected performance in FY26, with operating profit 7% higher and HEPS 9% higher.

Growth investment focused on Platforms

The Platforms businesses are the key engines of growth and profits for Altron, with a divisional medium-term operating margin target of at least 26% (flat versus FY26) and high levels of annuity revenues. These businesses are expected to support and benefit from the evolution of South Africa’s digital economy. Management expects to target future investment at these businesses, whether organically or through targeted M&A.

Valuation: Platforms provide upside potential

Prior to results, the share price was already up 19% year-to-date, and it gained another 20% post results, we believe due to the turnaround in ADB, the continued strong performance of the Platform division and the special dividend. Using a sum-of-the-parts valuation on our revised forecasts, rolled forward by one year, and after a 30% holding company/South Africa discount, we arrive at a valuation of ZAR33.2 per share (up from ZAR25.9), 17% above the current share price. In our view, evidence of continued progress towards medium-term operating margin targets, including sustained recovery in ADB revenue and margins, would be the key driver of share price upside. The company will provide more detail on the next phase of growth at its capital markets day on 9 June.

Medium-term strategy update

Werner Kapp took on the CEO role in October 2022, and in May 2023 he announced the current group strategy (Exhibit 1). The company has completed the second phase of the strategy and is now in the transformative growth phase. Over the first two phases, the company has sold non-core businesses, combined three IT services business into one (ADB), undertaken a restructuring of ADB to counter market weakness, invested in the Platform businesses (particularly Netstar) to support organic growth and improved the operational performance of Netstar and ADS. From FY23 to FY26, operating profit before capital items has grown at a CAGR of 34% with margin expansion of 7.4pp to 12.6%.

For the third phase of the strategy, with the Platform businesses making up 46% of group revenue and 95% of group operating profit, the company is focusing investment on the organic growth of the Platform businesses, while leveraging group data and AI for additional growth opportunities. In a net cash position at year-end, the company is well within its debt covenants and has headroom to borrow up to ZAR3.5bn from the current level of ZAR1.0bn, providing flexibility to take advantage of any growth opportunities that might present themselves.

Capital allocation priorities are:

• Organic growth, with a focus on the highest return opportunities. Nearly 90% of FY26 capex was for the Platform businesses.
• Shareholder returns, which includes a dividend policy of paying out at least 50% of HEPS from continuing operations. This year it also included a special dividend.
• M&A: targeted growth opportunities within the Platform businesses, executed with financial discipline. The company considered a handful of targets over the last year, but none met the group’s requirements.

Review of FY26 results

Altron provided a substantial trading update at the end of February, at which point we upgraded our forecasts. The company generated minimal revenue growth in FY26, as the decline in ADB was more than offset by growth in the Platform businesses. EBITDA before capital items was 10% higher year-on-year and in line with our forecast, with a margin of 20.8% up from 19.0% in FY25. Operating profit before capital items increased 25.3% y-o-y with margin expansion of 2.5pp to 12.6%. Two items were included in FY26 operating profit: the depreciation policy change for Netstar increased operating profit by ZAR136m and the one-off pension fund expense reduced it by ZAR74m, with an adjusted operating profit of ZAR1.15bn (11.9% margin).

With net finance costs coming in slightly below our forecasts, the company generated PBT and net income 3% ahead of our forecast. This translated to similar upside for headline EPS from continuing operations, which grew 34% y-o-y. The company proposed a final dividend of ZAR0.72, which combined with the interim dividend of ZAR0.48 makes a total dividend of ZAR1.20 for FY26, up 33% y-o-y. Closing the year with net cash of ZAR190m, the company decided to return some excess cash to shareholders in the form of a ZAR1.20 special dividend.

The following exhibits summarise performance at a divisional level.

Platform businesses show exceptional performance

The combined Platform businesses grew revenue 11.7% y-o-y, EBITDA 20.8% and operating profit 45.0%.

Netstar: South Africa the engine of growth

The business generated revenue growth of 9% y-o-y (H1: +8.2%, H2: +9.8%), helped by 9% growth in subscribers over the year to 2.207m subscribers. Consumer subscribers grew 8% and enterprise subscribers 19%, highlighting the good progress the business is making in building its fleet operations. Excluding original equipment manufacturer partnerships, churn has moderated to 16% from 19% last year. Contract fulfilment and pre-fitment conversion rates above 90% and 60% respectively are both in line with targets.

The Australian business continues to drag on results, but has managed to return to a subscriber base of c 70,000. The South African business alone grew revenue 11% and EBITDA 17%, and the EBITDA margin was 49%, showing how profitable the business can be. EBITDA for the business globally was up 16% and operating profit was up 78% (or 24% excluding the benefit of the change in depreciation policy). The operating margin expanded 7.1pp to 18.3%, or 1.5pp excluding the policy change. Annuity revenue made up 92% of total revenue, up from 91% in FY25.

FinTech: Supporting the informal economy

The FinTech business continued its exceptional performance, with revenue up 19.5% y-o-y. This resulted in EBITDA growth of 30.6%, operating profit growth of 32.6% and operating margin expansion of 3.6pp to 36.6%. The Payment and Collection Solutions business continued to be the main driver of growth, growing 22% y-o-y to make up 75% of revenue. The number of customers for this business grew 34% y-o-y to 6k. The volume and value of debit orders processed increased 34% and 29% respectively. Integrated Transaction Solutions grew revenue 21%, making up 12% of revenue, with a 29% increase in value processed despite flat volumes. The number of devices rented increased 150% to 32k and the number sold increased 7% to 14k. Card Personalisation and Issuance (8% of total revenue) grew revenue 9%, with a 16% increase in devices sold and a 2% increase in devices maintained. The smallest line of business, Credit Management Solutions (5% of revenue), grew revenue by 4%, with a 4% decline in the value of loans processed but a 13% increase in the number of credit enquiries. Annuity revenues now make up 88% of total revenue, up from 85% in FY25 and 70% in FY23.

Healthtech: Modest growth, strong profitability

The business saw modest revenue growth of 1.5% y-o-y (H1: 0%, H2: +3.1%); growth in sales to the private practice network (2,078 net new practices) was largely offset by lower project revenues. Management intervention resulted in H2 EBITDA above H1 and FY26 EBITDA up 22.1% y-o-y. This resulted in operating profit growth of 19.2% and operating margin expansion of 5.3pp to 35.5%. As we have previously written, costs incurred in developing the oncology platform were expensed in FY24 and FY25 and the development work was completed in FY25, helping to boost margins in FY26.

IT Services: Moving in the right direction

The division saw a 5.5% revenue decline, a 16.9% decline in EBITDA and a 15.2% decline in operating profit.

ADB: Back in the black

Revenue declined 8.0% for the year, with H126 down 9.8% and H226 down 6.2%. We note that in absolute terms, H2 revenue was higher than in H1. After a major restructuring to reduce headcount to better match demand and to embed a new sales operating model, ADB moved from an EBITDA loss of ZAR32m in H126 to a profit of ZAR58m in H226 (3.8% margin). For the full year, ADB generated a small operating profit of ZAR7m (H1: -ZAR42m, H2: ZAR49m). Management noted that annuity contracts were stabilised and renewed (annuity revenues made up 51% of revenue).

Altron Security: Focused on annuity revenues

Revenue was up 3.5%, with platform growth partially offset by lower IT services. Annuity revenue increased 4pp to 83% of total, marking a deliberate shift from professional services. EBITDA declined 7.0% while operating profit was up 4.7% due to lower amortisation charges from previous acquisitions. The business sees opportunities to serve the citizen identity market across Africa.

ADS: Impressive turnaround

ADS management has executed a comprehensive turnaround of the business, reshaping it to meet changing customer buying patterns and increased demand for more cost-effective and digitally-enabled solutions. While revenue declined 2.3%, EBITDA was up 46.4% and operating profit up 60.7%, with operating margin expansion of 2.8pp to 7.1%. Management believes that the current level of profitability is sustainable, helped by new product initiatives and a transition to managed and support services.

Distribution: Cycle turning back up

Altron Arrow saw a 13.2% revenue decline in FY26, split as -23.4% y-o-y in H126 and flat y-o-y in H226, with H2 up half-on-half. The company believes it is likely that the bottom of the cycle has been reached so we should expect to see demand improve through FY27. Despite the revenue decline, the business maintained profitability: EBITDA declined 52.2% to a margin of 5.7% and operating profit declined 53.7% to a margin of 5.3%.

Outlook and changes to forecasts

Management characterised the South African enterprise market as remaining a persistent headwind and does not expect it to change materially in the near term. Medium-term guidance (over three to five years) is for the Platform division to maintain an operating margin of at least 26% and for the IT Services division to grow its operating margin to at least 7%.

We have made the following changes to our FY27 forecasts, and we introduce forecasts for FY28.

• IT Services: we have upgraded our ADB and ADS operating profit forecasts due to better-than-expected performance in H226. We forecast an IT Services operating margin of 5.7% in FY27 and 5.9% in FY28.
• Platforms: we have upgraded our FY27 operating profit forecasts by 6.1% for Netstar and 3.7% for FinTech, again reflecting stronger-than-expected performance in H226. We cautiously forecast a Platforms operating margin of 25.2% in FY27 and 24.9% in FY28.
• HEPS upgrade: the overall 6.6% increase in our FY27 operating profit forecast results in an 8.9% upgrade to basic HEPS. We have factored in a tax rate of 25% in FY27 (unchanged), increasing to 27% in FY28.
• Net debt factors in special dividend: net debt increases compared to our previous forecast, reflecting the expected ZAR460m payout for the special dividend.