Atlas Development Services and Support Ltd – Kenya (NSE: ADSS), released their interim results for the period ended 31st December 2014 on 28th April 2015
Recommendation: HOLD – Fair Value Est. KES 11.13 (Upward revaluation from KES 10.50, Upside 6%)
Extensive declines in Pre-Tax and After-Tax Earnings; 305% and 310%, respectively:
Following the much announced search for possible acquisition targets, Atlas Development Services and Support Ltd exercised the option to acquire newly merged Ardan Logistics Kenya (ALK) and Ardan Risk & Support Services- on October 2014. Despite the continuous endorsement from Atlas CEO Carl Esprey, terming it ‘the first of component of our buy-and-build strategy’, the timing of such an acquisition remains questionable. Depressed crude oil prices has resulted in consequential scale backs in expenditure and a decrease in near term activity amongst oil exploration firms. This caused a slowing demand for the company which reported a half-year decline in pre-tax and after-tax profit by 305% and 310%, respectively; as operating expenses increased by 60% and the share option charge stood at US$2.3 million.
Aggregated underlying results of ALK and Ardan Risk & Support Services are an impressive 74% increase in revenue to US$40 million and 230% increase in profit after tax to US$4.8 million, which were however, unable to offset the dreary result of their new parent company.
Further bleak news as key financial ratios unfavourably depict Atlas equity:
Successful listing on the Growth Enterprise Market Segments (GEMS) of the Nairobi Stock Exchange (NSE) saw the first company to be AIM/GEMS cross listed raise US$5 million through a private placement to Kenyan investors. This assisted the company in reporting a US$12.9m cash flow at the end of the period and US$3.1m revenue after reporting no revenue the year before.
However key financial ratios illustrate a different situation, as EPS drops further to -1.8c, from -0.5c in FY13. The return on equity remains low at 10%, showing the company’s decreasing ability to generate profits as costs offset the first revenue produced by Atlas. Such results have seen the stock price sustain a downward trend, since 5th January 2015, with a new low of KES 10.50 on the day (28/04/15). Investors’ anticipation in the stock remains high, as a high P/B- of 94.6, further supports the notion that the company’s equity may be overvalued, however the company maintains a strong expected growth rate.
Outlook: Since listing in London in June 2013, ADSS has enjoyed organic growth, through business development; higher participation in energy infrastructure, engineering and facilities management. With large expansion in net cash, the company is poised to continue growth through corporate acquisitions under its ‘buy-and-build’ strategy. Thus emphasising a positive outlook for the logistics and engineering services firm.
Furthermore, Atlas secured a support services deal in West Africa- providing civil engineering supervisory and advanced life support- bringing their total presence to ‘six high priority’ countries; Djibouti, Ethiopia, Kenya, Mozambique and Tanzania. Continued business is backed by advances in drilling geothermal wells in Kenya, which sees the company diversify from an oil and gas sector slowed by plummeting oil prices and the introduction of capital gains tax.
Atlas CEO Carl Esprey remains positive that following the acquisition of the Ardan business, “the company is now strategically positioned to take advantage of new large-scale contracts to provide complementary offerings across new industry sectors and additional geographies.” Despite the fact it may take another year of adjustments as both companies integrate, the acquisition leverages Atlas starting position, evident through acquired contracts in Mozambique and Tanzania. We therefore remain positive that the company will benefit from increased diversification and tenders out, which have the potential to transform their long term visible revenues.