About HiTech Group
The HiTech Group is Australia’s leading specialised ICT contracting, consulting and recruitment organisation. Our personnel division provides staffing solution in the areas of ICT, Finance, Admin & HR, Sales and Marketing. HiTech provides services to Australian and international organisations and has more than 27 years experience in the industry (founded in 1997). Our clients include Federal & State Government departments (https://hitechaust.com/about)
Record 1H24 Results
On the 19th February HiTech Group announced a record half year result (see 1HFY24 Results Announcement below). Here’s the highlights:
➢ Gross profit $6.08m up 37% on pcp
➢ EBITDA of $4.14m up 27% on pcp
➢ Net profit before tax $4.15m up 30% on pcp
➢ Net profit after tax $2.66m up 18% on pcp
➢ Interim dividend of 5.0 cents per share
This is quite an achievement when you consider that other labour hire/contractor type businesses, (eg. PeopleIn - PPE), have reported labour hire and consulting services revenue in the lucrative (high margin) Information, Communication and Tech (ICT) sector falling significantly in the first half of FY24. HiTech appears to have a more resilient business model than its peers operating in this sector. The business might have some similarities to the consulting component of Technology One or Data#3.
HiTech management have noted that “Despite facing challenges in the first half of FY24, we confronted them with renewed focus and determination. Demand for top-tier ICT talent and services in the Government sector persists, despite recent changes in government.”
Optimistic Outlook for FY2024
Despite a challenging 1H24, Management seemed to be optimistic about the full year, saying:
“HiTech is well positioned to capture market demand for ICT talent and services with a strong balance sheet and long-term supplier agreements in place.
The Australian Government has targeted a reduction in ICT contracting in some agencies. We have seen a reduction in contracting agreements leading into the end of the calendar year, however, there are several Government agencies still looking to bolster their talent pool, especially in the cyber security and digital infrastructure space which should counter the other agencies’ reduction.
Early signs of continued demand in the federal government sector for specialist IT talent are encouraging. HiTech remains fully prepared to take advantage of the demand for skilled IT talent as and when the opportunities present themselves.
HiTech has several active client mandates for our services and continues to see various tender pipelines for new business in both the federal and state government sectors where some ICT programs of work remain vital.”
High Return on Equity
HiTech Group has a very high ROE (71.5% for FY23) and it has been consistently improving every year for eight years now. Management did not provide guidance, however were optimistic about 2H24. If we assume NPAT will be similar in the second half, we might expect full year earnings for FY24 to be approx $5.3 million ($5.86 million for FY23). With shareholder equity of $8.16 million that would put FY24 ROE at 65%.
Good Margins
Gross Margin 19%, Net Profit Margin 8.65% (1H24).
Double Digit Earnings and Dividend Growth
Earnings have grown at over 10% per year for 8 years while it has paid out 70% of its earnings as fully franked dividends. The current yield is 4.8% fully franked (6.9% including franking credits). With continued strong earnings and a very strong balance sheet the dividends look sustainable into the future.
Excellent Balance Sheet
HiTech has been debt free for over 10 years and it currently holds over $10 million in cash. That means it’s holding 11.5% of its market cap of $87 million in cash, and more than its total shareholder equity of $8.2 million. That’s an incredibly solid balance sheet. It sounds a bit too lazy actually, and I wonder what plans management have for this much cash. Perhaps they are waiting for an acquisition opportunity?
Management
(Source, Simply Wall Street)
The CEO, Mr. Elias Hazouri, B.Sc., MBA (55 yrs) has been the Chief Executive Officer of HiTech Group Australia Ltd. since August 2016. Mr. Hazouri serves as the Chief Information Officer and General Manager of HiTech Group Australia Ltd. and has been its Company Secretary since February 13, 2015. Elias Hazlouri owns 20.9% of the business.
Mr. Hazouri has many years’ experience in IT and banking. His knowledge of HiTech's business is extensive. Throughout his career, he has been integral to the development of many IT systems and IT support departments.
He has held roles ranging from programmer to technology support head. He is a key resource and knowledge base to HiTech account managers and is jointly responsible for generating new business by way of tender. He has advised on business strategy, both from a financial and operational perspective, since the inception of HiTech in 1993. He has been Director of HiTech Group Australia Limited Since July 19, 2013.
He served as Director of HiTech from 1993 to March 2000. Mr. Hazouri holds B Sc, MBA.
Ownership and Liquidity
HiTech shares are tightly held and relatively illiquid (a true lobster pot). It’s taken me a while to accumulate just a small holding IRL. You could get seriously burnt if you needed to get out in a hurry.
The Hazouri family owns nearly 68% of the business and the top 21 shareholders hold nearly 81% of the shares in the businesses. That might explain things. On some trading days there are no shares changing hands at all. Actually, with such concentrated ownership you’d have to wonder why they bothered listing in the first place?
Things I don’t like
I think HiTech could do a better job of its capital management. The share count has increased from 31 million (2015) to 42.2 million (2023) over 9 years. As a result the book value hasn’t changed in 8 years (19 cps).
Perhaps management should be using some of their spare cash to buy back shares. With such a high ROE (+70%) and with shares trading at a reasonable price, I think shareholders would benefit from a lower share count, increased book value, and less lazy cash sitting on the balance sheet.
Valuation
HiTech trades on a PE multiple of 16 times FY23 earnings of 13cps. I expect FY24 earnings to be flat to slightly lower given some slowing in the economy (approx 12.6cps). That would put HiTech on a forward PE of 16.4 x estimated FY24 earnings. This seems reasonable for a business investing c. 20% of their earnings back into growth at +60% return on equity.
Using McNiven’s Formula and assuming future ROE of 65%, Equity of $0.19 per share, 20% of earnings reinvested, fully franked dividends (4.8% or 6.8% gross), and requiring an annual return of 11%, I get a valuation of $2.14 per share. It’s currently trading @ $2.06 per share, not a huge discount, but it looks like a quality business.
Disc: Very small holding IRL at this stage (0.4%)
Share price flat for 3 years. PE multiple of 15x
➢ Gross profit $6.08m up 37% on pcp
➢ EBITDA of $4.14m up 27% on pcp
➢ Net profit before tax $4.15m up 30% on pcp
➢ Net profit after tax $2.66m up 18% on pcp
➢ Interim dividend of 5.0 cents per share
INTERIM DIVIDEND
We are pleased to declare an interim fully franked dividend of 5 cents per share.
“The performance of the HiTech Group is exceptionally satisfying. Our first-half FY24 results set a new record, underscoring the relevance and effectiveness of our service and value creation model. Achieving record profits involved prompt measures to reduce operational costs in areas with unattractive margins. We are now strongly positioned to enhance shareholder returns and fortify our cash reserves.
Our unwavering determination to achieve record growth in operating profits, positions us well to continue to supply a critical and essential service to the Australian community.
Despite facing challenges in the first half of FY24, we confronted them with renewed focus and determination. Demand for top-tier ICT talent and services in the Government sector persists, despite recent changes in government.
I extend my gratitude to our valued clients, candidates, contractors, and our highly dedicated and skilled staff for contributing to another successful half-year record.” CEO, Elias Hazouri said.
Outlook for FY2024
HiTech is well positioned to capture market demand for ICT talent and services with a strong balance sheet and long-term supplier agreements in place. The Australian Government has targeted a reduction in ICT contracting in some agencies. We have seen a reduction in contracting agreements leading into the end of the calendar year, however, there are several Government agencies still looking to bolster their talent pool, especially in the cyber security and digital infrastructure space which should counter the other agencies’ reduction.
Early signs of continued demand in the federal government sector for specialist IT talent are encouraging. HiTech remains fully prepared to take advantage of the demand for skilled IT talent as and when the opportunities present themselves.
HiTech has several active client mandates for our services and continues to see various tender pipelines for new business in both the federal and state government sectors where some ICT programs of work remain vital.
With more than 55 years combined expertise in the ICT Talent and Services market, there is no more experienced and financially secure Australian organisation in our sector or board suitably positioned to maximise shareholder return and navigate economic headwinds as they are encountered.
-ENDS-