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%)

ASX 1H24 Results Announcement

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-

Might be why they did so well last few years if true - Coalition government spent $20.8b on ‘shadow’ public service (afr.com) wonder if it'll continue.

"The former Coalition government spent close to $21 billion on external labour hires in the public service, an audit has shown.

The Australian Public Service Audit of Employment found the service was 37 per cent larger than originally thought, with an additional 53,900 full-time equivalent workers employed.

Those workers were external labour hires, mostly in the form of contractors and consultants.

The audit showed that workforce cost the government $20.8 billion, with about 43 per cent of total spending on external labour relating to ICT (Information and communication technologies) and digital solutions."

HY Summary details are below

 Revenue of $40.71m up 37% on 1HFY22 ($29.82m) 

 Gross profit $4.94m up 21% on pcp

 EBITDA of $3.23m up 10% on pcp

 Net profit before tax $3.17m up 10% on pcp

 Net profit after tax $2.25m up 14% on pcp  Interim dividend of 5.0 cents per share

As noted, it is the 8th consecutive period of increase in revenue, EBITDA and profit.

But I have sold today, happy to make next to no capital gain but between 5-8% dividend yield over a number of years.

They have flagged:

"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."

I have decided to sit on the sidelines and see if this is true.

The SP rarely varies much and could probably re-enter at much the same price as I sold out today, should in six months I prove to have been chicken-little.



Year in year out been a great business - nice yield and reasonably priced, bullet proof balance sheet. Powered thru CoVID. Watch out for how much profit goes to managment/dilution but it’s the price you pay sometimes for a good business.

HIT reported yet another record result - their 8th consecutive year of double digit growth.

Headline figures are:

• Operating revenue is $63,096,126, an increase of 49.7% over the previous corresponding period (pcp) (FY21: $42,168,504).
• Gross Profit is $9,304,117, an increase of 31.8% over pcp (FY21: $7,059,491).
• NPAT is $4,403,625, an increase of 21.1% over pcp (FY21: $3,636,602).
• EBITDA is $6,757,822, an increase of 29.6% over pcp (FY21: $5,214,886).
• The directors have declared a fully franked dividend of 6 cents per share to be paid on 16 September 2022 to shareholders registered on close of business on 2 September 2022.

Full result here

As per my previous straws, one of my concerns was the liberal use of options to the Hazouri brothers who are founders and controlling shareholders with 65% of the registry.

Pleasingly EPS also tracked up from 9.32 to 10.73

The share price is up ~8% at 2.12 which equates to a FF yield of 5.2%

They have not provided guidance but sounded optimistic about the coming FY.

HiTech Group Australia Limited ASX:HIT

• Founded in 1993, listed on the ASX in 2000 at $0.70
• MC $83m
• What they do: Supplies permanent/contract staff from their pool of specialised ICT/finance/office support professionals. Majority of their revenue in FY21 was from contracts with the Federal Government (93% of revenue), with the remaining coming from State Government and private sector contracts.
• HiBase (their database) contains 380,000 candidates if a client needs a job to be filled (contract/project basis or permanent). They help clients find the right talent for highly specialised jobs - eg cybersecurity, cloud computing etc. HiBase

What I like:

• Proven execution strategy in winning contracts with blue chip clients like the Fed and state governments. I believe all of their growth has been organic. The thing with supplying talent for government agencies is that it takes time to form this trust, and I believe this has helped the company win contracts so far.
• They are operating in a niche space, and the ongoing digital migration is a massive tailwind for them. More budget for their clients = more spend with HIT. I also suspect management has not taken any risk in expanding into collateral spaces for the sake of it, they have stuck to what they know they do best. Also the Great Resignation / shortage of IT talent may also a tailwind for HIT.
• Still founder led - The Hazouri brothers own a combined ~65% of the outstanding shares. Ray Hazouri is the Chairman, and Elias Haziouri is the CEO.
• Steady rising revenue in last 5 years, ample cash reserves + no LT debt, consistent share count.
• Dividends growing last 5 years. Decent fully franked 5% yield based on today's price ($2.13)

What I am keeping my eye on:

• Illiquid register
• Board is controlled by the Hazouri brothers - buying into this company also means putting full faith in the management//founders to deliver shareholder returns
• This is a mature company, there is no real advantage in scaling (operating costs rising steadily with growing revenue).

Its a family firm, with the 2 0f the 3 Hazouri brothers running the business as Executive Chairman and Executive director. The third brother Sam is on the board. There is high inside ownership: fully 70% of the  company is owned by these three.

While this aligns interests with shareholders, I wonder whether this introduces risks of nefarious activities that a wider spread of executives might prevent.

An example of this might be issuing options, or paying themselves too handsomely:

And indeed nearly a million options were exercised at a price of 0.58c by one director and there are another 3million outstanding with an exercise price of 0.75. This (combined) represents 10% of the float. The annual report states: "Options issued to directors are approved by shareholders at annual general meetings." Clearly, with the Hazouris owning 70% of shares, they can approve whatever they want.

This concern is partly allayed by the fact there has been a consistent increase in EPS and no further granting of options for the last 3 years or so. But when those 3 million options land, EPS will no doubt take a hit.

Secondly they do pay themsleves well: $576k and $275k.

The combination of these two findings has been a red flag too big for me to ignore. I owned back at ~85c a share when it yielded 10%, but sold due to these concerns.

Since then, I have watched the dividends slowly increase and the SP more than double with record result after record result. So, whilst these fundamental issues have not resolved, the rewards to shareholders have not been impacted over the last 4 years that i have been watching.

HiTech delivers Record Results:

Improves revenue by 19% and NPAT by 17%

Fully franked 4 cents per share dividend plus Fully franked Special dividend of 1.5 cents per share

For the first half financial year ending 31 December 2020, the consolidated entity’s results are:

~ Revenue of $18.84m up 19% of 1HFY20 ($15.79m) ? Gross profit $3.26m up 11% on pcp

~ EBITDA of $2.15m up 9% on pcp

~ Net profit before tax $2.11m up 8% on pcp ? Net profit after tax $1.65m up 17% on pcp

Disc: I have held in the past, shame I didn't keep some