Workforce management group Adcorp has increased revenues for the year ended February 28, 2014, by an impressive 37%, generating R11.8-billion for the period, as its South Africa-based blue-collar operations continued to perform “particularly well", despite sweeping labour ructions in the industrial sectors.

Similarly, normalised earnings before interest, tax, depreciation and amortisation (Ebitda) of R544.4-million was 29% ahead of the prior year’s figure, with normalised earnings a share of 384.3c up 13% on the 2013 fiscal period.

CEO Richard Pike said at the group’s results presentation, in Johannesburg, on Thursday that the blue-collar operations continued to perform, with an “exceptional” performance from the Staff-U-Need division.

While Adcorp’s Capital Outsourcing Group and Capacity businesses performed in line with expectations, there were “mixed fortunes”, as both businesses lost volume as a result of clients moving away from manual labour towards automation and mechanisation.

Pike noted, however, that the group was able to more than recover these lost volumes elsewhere by way of market share gains.

“This move to automation and mechanisation is reflective of employers responding to a turbulent labour market characterised by militant strike action in pursuit of above-inflationary wage demands, the threat of new, cumbersome labour legislation and economic uncertainty in a relatively lackluster economy,” he commented.

The white-collar contracting and permanent recruitment businesses were generally flat year-on-year, while business-process outsourcing businesses reflected an overall year-on-year decline in profits, which was largely as a result of the pricing pressure in the business of Funerary Management Services.

This decline was partially offset by the solid performance of the financial services business, which offered financial and wellness products and services to contract workers.

Meanwhile, training was adversely affected by a dramatic decline in the volume of learnerships registered owing to administrative challenges experienced by the responsible sector education and training authority.

GLOBAL OPERATIONS

Adcorp’s African operations, which focused predominantly on mining, oil, gas, exploration and related infrastructure development, achieved “exceptional” growth in profitability, to the extent of now being a material contributor to overall group profit.

The January 2013 acquisition of Australian information technology (IT) contracting business, Paxus, had bedded down well and performed in line with expectations in a relatively flat employment market.

Recent blue-collar acquisition, Labour Solutions Australia (LSA), had also settled into the group well, although it had only been included in the group’s financial results since December 3, 2013.

LSA’s particular focus was on the buoyant Australian agricultural sector, which should stand it in good stead for the future.

Elaborating on the LSA acquisition, Pike said, the profit before tax from LSA included in group net profit before tax for the year was R11.7-million after taking account of noncash flow charges and acquisition-related transaction costs.

“Had the business combination been effective from March 1, 2013, the revenue of the group would have been R12.2-billion and net profit after tax would have totalled R187-million,” he remarked.

Meanwhle, Indian associate IT solutions business, Nihilent, in which the group currently owned a 35% stake through subsidiary, Paracon, had an “outstanding” year according to Pike, also making a meaningful contribution to overall profitability.

ACQUISITIONS & UNDERTAKINGS

Elaborating on other developments over the period under review, Adcorp stated on Thursday that it had successfully implemented a significant upgrade of its Microsoft Dynamics AX enterprise resource planning system.

This followed the outsourcing of the shared service centre to India-based Genpact during the 2013 financial year.

Both these initiatives, Pike explained, were aimed at improving the cost competitiveness of the group, ensuring optimised, standardised, automated and cost-competitive transactional processing across all business lines as well as enhancing controls and governance standards.

“These initiatives had each been major undertakings in their own right. The focus has been on limiting implementation risk as well as on ensuring that they are correctly bedded down and integrated within the business.

“While not yet delivering the cost advantage we seek, with some fine-tuning and as these new practices and procedures become fully embedded in the organisation, meaningful benefits should be realised,” he noted.

During the year, the group also implemented a new broad-based black economic-empowerment (BBBEE) deal, ensuring compliance with the Department of Trade and Industry’s revised BBBEE Codes of Good Practice.

FINANCIAL OVERVIEW

Despite a considerable growth in yearly revenue, headline earnings of 188.6c a share for the year were 20% lower than the 236.7c a share for the comparative period.

“As disclosed in the interim results, as a consequence of the 2013 BBBEE deal being finalised and implemented with effect from August 27, 2013, International Financial Reporting Standards (IFRS) require that R87-million be expensed as a one-off, noncash flow, share-based payment charge to profits,” Pike explained.

“Given the above accounting treatment and other IFRS noncash flow charges to profit and loss, the group has consistently disclosed that its primary measure of performance is normalised earnings.”

Normalised earnings a share of 384.3c for the year were 13% ahead of the 341.1c a share for the comparative period, as a result of increased contributions from the blue- and white-collar businesses as well as the first full-year inclusion of Paxus and the three-month inclusion of LSA.

Gross profit margins were lower than the prior year, owing mainly to changes in the business mix.

As a direct consequence of such mix changes, Adcor stated that normalised Ebitda margins decreased marginally to 4.6%, while the group’s normalised Ebitda margin, exclusive of the Australian contribution, was 5.1%.

Operating cost control remained robust, as evidenced by an improvement in the expense ratio to 14.3%.

Cash generated from operations before working capital increased 32%, mainly owing to the higher level of profitability and other noncash flow adjustments.

Pike explained that, while the group’s cash position would support a cash dividend, the group was in a growth cycle and, as such, believed it appropriate to retain cash resources so as to take advantage of opportunities.

“Accordingly, the board has opted to issue a scrip distribution that allows for an incremental increase in capital. This scrip distribution provides shareholders with the flexibility to opt for a cash dividend alternative,” he noted.

OUTLOOK

Pike said the outlook for growth in employment in South Africa and Australia remained relatively lackluster, while the rest of Africa and Asia held far more promise with regard to general employment prospects.

“These macro trends aside, the group is well positioned strategically and should benefit from industry-specific and micro trends. Many large employers have tended to engage with fewer staffing providers, opting for a more strategic approach to their resourcing requirements.

“Typically, this has favoured the master service provider model with regard to the sourcing of contract staff and the recruitment process outsourcing model, with regard to the sourcing of permanent staff,” he remarked.

The Adcorp head added that these resourcing models required a far higher degree of sophistication, innovation, financial stability, technical capability, geographic reach and, in the South African context, “acceptable” BBBEEE credentials on the part of staffing providers than in the past.

“This has tended to favour the larger, more sophisticated providers, such as Adcorp, and has led to a trend of consolidation in the industry with resultant market share gains for the group. This trend is expected to continue for the foreseeable future and also offers opportunities to acquire [high]-quality assets at realistic prices,” said Pike.

Ha added that, “for quite some time”, the group’s South African staffing operations had been the subject of “much” speculation regarding proposed changes to labour legislation aimed at restricting the use of contract workers.

It now appeared, however, that legislative certainty may finally be a reality, in terms of the promulgation of the new Labour Relations Act (LRA), which Pike believed would generally be positive for the business, although potentially negative for employment prospects in South Africa.

“With youth unemployment in South Africa being a major focus for government, the recently introduced Employment Tax Incentive will also benefit the group, as long as the scheme remains in place.

“Prospective legislative certainty in relation to the new LRA and the potential for further optimisation of back-office operations, bode well for the future prospects of the Adcorp group,” Pike concluded.