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Adcorp weathers a difficult storm

Normalised earnings per share of 179.4 cents were 6% down on the prior year’s figure whilst headline earnings per share of 124.6 cents were down 17%.

The Group’s half year cash performance was once again been extremely positive. In this regard, the Group’s cash conversion ratio was a creditable 102%, mainly the result of significantly improved debtors’ collections.

This trading period marked the introduction of long awaited, sweeping changes to South African labour legislation. Of relevance, these new laws impacted volumes negatively in Adcorp’s core South African market whereby a significant number of contract staff were either taken on as permanent employees of the client or simply had their contracts of employment terminated.

Adcorp CEO, Richard Pike said that, “substantially different interpretations of the new labour laws initially led to a high degree of uncertainty in the market resulting in a knee jerk reaction from a number of clients”.

“In a very recent development, a judgement in the Labour Court has now provided clarity with regard to the employment status of contract workers which has been an extremely important and much needed stabilising factor in the market”, said Pike.

In terms of this judgement, the Temporary Employment Service Provider (TES) is viewed as a concurrent employer with its client for the purposes of the LRA after an initial three month contract period in respect of contract workers earning below a predetermined earnings threshold.

“Importantly, this judgement is totally in accordance with Adcorp’s original interpretation of these laws”, says Pike.

“Subsequent to this judgement, volumes have definitely stabilised albeit at a level approximately 20% lower than prior to the introduction of these revised labour laws”, maintains Pike.

In reaction to these lower volumes, the gross profit impact of which literally flows directly through to the bottom line, management has initiated a number of decisive actions to minimise the profit impact of these volume losses which is reflected in these results.

This has involved major restructuring, significant cost cutting, intensive consultation with clients as well as offering employers alternative outsourced labour solutions.
Pike says that, “these initiatives have significantly limited the bottom line impact of this major loss in gross profits and have resulted in a far better picture than would have been the case had these bold steps not been embarked upon.

“Also, the Group’s decision in 2011 to internationalise the business and to explore new geographies has been the right call and has also helped soften the blow to the South African business”.

Recently, the Group acquired the Kelly Group. The integration of these operations is now complete.

The Group’s Australian operations have been bolstered by the recent acquisition of Dare in May 2015.

“These operations are performing largely in line with management expectations and have settled into the Group well”, says Pike.

“The Group’s African operations which focus predominantly in the areas of mining, oil, gas, exploration and related infrastructure development, have been negatively affected by low commodity prices. Resultant lower volumes have, however, been substantially offset by currency translation gains”, maintains Pike.

Adcorp owns a 35% stake in Indian associate IT solutions business, Nihilent. The business has indicated its intention to seek an Initial Public Offer (IPO) on the National Stock Exchange of India which is planned for the second half of next year.

As previously reported, the Group has established a physical presence in Singapore which now serves as the hub for the Group’s international expansion.

Pike says that, “whilst not yet conclusive, much progress has been made in terms of raising capital in the Singapore entity necessary to fund the Group’s international growth strategy with a view to potentially listing the Group’s international portfolio assets in three to four years’ time”.

“This strategy should advantage Adcorp’s existing shareholders as it has the potential to unlock meaningful value from the Group’s non-South African assets which currently attract a relatively low market rating compared to their significantly higher rated international peer group, possibly the result of the rating’s drag associated with uncertainty created by recent changes to labour legislation in South Africa”, he maintains.

This strategy is in line with the Group’s intended objective of becoming a player of consequence, focused on emerging markets and the Southern Hemisphere and, in particular, Africa, Asia, Australia and the Middle East.

“In South Africa, a downturn in the commodities cycle, electricity supply constraints, onerous immigration and visa requirements as well as restrictive new labour laws all contribute to an extremely challenging employment environment.

“Against this background, stability seems to be creeping back into the TES market and, all things considered, the Group has weathered an extremely difficult storm reasonably well”, says Pike.

“Whilst trading conditions in the core South African market are expected to remain challenging for some time, the strategy to diversify internationally has certainly paid off as has the Group’s decisive cost, efficiency and market response to the reality of lower volumes in the South African TES business”, he continues.

“Despite these headwinds, South Africa remains a key and important market for the Group given the scale advantage it provides, the exportable industry knowledge and competitive know-how generated in this market, the strong position the Group commands in South Africa and the many market opportunities that still exist despite an overall sluggish employment market.

“The recent favourable Labour Court ruling with regard to the interpretation of the LRA has also brought much needed stability to the South African market.
“The Group’s international strategy holds much promise. Significant progress has been made in the establishment and resourcing of this strategy which has the potential to unlock meaningful value for Adcorp’s shareholders in future”, he concludes.

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