Allied Electronics | Shifting into growth mode

Altron's FY'19 results evidenced the completion of its turnaround strategy. Non-core asset disposal strengthened the balance sheet with net debt to EBITDA improving to 0.7x (FY'16: 4x). We expect future growth from continued sales optimisation followed by targeted business development with bolt-on acquisitions. Management has executed well, with Altron one year ahead of its strategy of doubling its FY'17 EBITDA of ZAR950m in five years, with a FY'19 EBITDA of ZAR1.6bn, increasing 68% over the past two years. Organic EBITDA growth accelerated 500bps to 18% in FY'19 and contributes 75% of total EBITDA growth. We expect Altron to focus on cross-selling to existing customers where service penetration is low, which should maintain organic growth and expand margins. Altron is positioned to gain Microsoft market share in South Africa as competitors like EOH, struggle to maintain clients due to governance concerns.

Free cashflow increased 804% y/y and net debt/EBITDA is below management's target of 1x. Thus, we believe Altron has flexibility to fund acquisitions and regional expansion which should support double-digit growth in EBITDA, whilst maintaining its dividend pay-out ratio.