I think Adept Technologies (LSE: ADT) is one of the best small-cap growth shares for me to buy now.
The company describes itself as one of the UK’s “leading” independent providers of managed services for IT, connectivity, unified communications solutions, and cloud services. And the directors have been pursuing a growth agenda based on both organic progress and acquisitions.
Why I’m considering this small-cap growth share
Today’s full-year results report shows what the directors describe as “a resilient financial performance under highly challenging trading conditions.” And the company claims to have made “considerable progress” in its strategic ambitions, despite the disruption caused by the pandemic.
In the 12 months to 31 March, revenue declined by just over 6%. And adjusted diluted earnings per share slipped 20%. But cash flow held essentially flat. And the firm’s cash balance increased by almost 12% to just over £13m.
On top of that encouraging cash performance, net debt declined from almost £28m the prior year to just under £26m. When it came to dealing with real pound notes, Adept Technology did well during the year.
Just over 55% of overall revenue came from the public and healthcare sectors. And that figure grew from just under 45% the prior year. Those sectors tend to generate stable demand. So I see the firm’s advance as attractive. Meanwhile, revenue from cloud-based services increased by 9% to just over £25m, making it around 43% of total revenue.
I reckon Adept Technology is doing a good job migrating to business areas that are relevant now. Revenue from traditional telephony, for example, came in at just 19% of the total, down from 21% the year before. The situation makes me think of an old business aphorism: adapt or die.
A positive outlook
During the year, the company arranged an enlarged banking facility worth £50m “to support investment in growth.” And in April, the long-running acquisition programme continued with the purchase of a company called Datrix. The directors describe the new business as being focused on enterprise networks and security. And that, they reckon, enhances Adept Technology’s core capabilities and “strengthens its presence in the NHS vertical market.”
Looking ahead, “strong” operational momentum from the fourth quarter has continued into the new trading year. And chief executive Phil Race is “confident” the opportunities for the business are robust. He reckons the technology market is “vibrant” and demand for ICT services is at an “all-time high and likely to remain so.”
Meanwhile, with the share price weak today, it’s sitting near-288p, as I write. And at that level, the forward-looking earnings multiple for the trading year to March 2022 is around 10. I reckon the valuation’s fair.
However, there are risks for shareholders. One is the potential for the company to ramp up debt if it becomes carried away with its acquisition programme. Another is the increasing reliance on the public and health sectors. If the company falls out of favour with a big public-sector customer, revenues, earnings and the share price could all crash together.
Nevertheless, I’m tempted to add the small-cap growth share to my long-term diversified portfolio for its potential to expand. I’d aim to hold for at least five years as the story unfolds.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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