INDEPENDENT RESEARCH Software and IT Services 21st September 2017 Adoption of a multi-dimensional prospective beta Software and IT Services
ALTEN BUY vs. NEUTRAL FV EUR85 vs.74 Over the years, IT players have substantially reduced their earnings Last Price EUR72,82 Market Cap. EUR2,457m volatility: 1) maintenance on their installed bases and the emergence of ALTRAN TECHNOLOGIES BUY FV EUR19 vs. 17 Last Price EUR15,335 Market Cap. EUR2,696m the cloud have boosted recurring software sales; 2) IT services
ATOS BUY vs. NEUTRAL FV EUR153 vs. 133 companies have curbed their dependency on cycles via industrialisation. Last Price EUR130,45 Market Cap. EUR13,724m In view of this, a more precise DCF valuation method seems necessary AXWAY SOFTWARE SELL FV EUR21 vs. 23 and for this reason, we have improved our current method by adopting Last Price EUR22,27 Market Cap. EUR463m multi-dimensional prospective betas. CAPGEMINI BUY FV EUR113 vs.105 Last Price EUR100 Market Cap. EUR16,915m A purely quantitative "flat rate" beta has its limits. In a DCF model, CAST NEUTRAL FV EUR3.6 vs.3,4 Last Price EUR3,54 Market Cap. EUR57m the beta reflects a company’s specific risk relative to the market as a whole.
DASSAULT SYSTEMES NEUTRAL vs. SELL FV EUR86 vs. 65 The methodology we had used to date for the IT sector is based on a Last Price EUR85,54 Market Cap. EUR22,171m quantitative "flat rate" beta which did not reflect qualitative factors INDRA SISTEMAS BUY FV EUR16 (leadership, ability to beat expectations, acquisitions, economic Last Price EUR13,52 Market Cap. EUR2,388m momentum, etc.). In some cases, this resulted in structural gaps between SAGE GROUP BUY vs. NEUTRAL FV 830 vs. 720p Last Price 713,5p Market Cap. GBP7,712m the valuation based on our DCF model and the valuation that investors
SAP BUY FV EUR115 vs. 108 were willing to grant on a lasting basis. Last Price EUR91,84 Market Cap. EUR112,826m
SOFTWARE AG BUY FV EUR45 Last Price EUR40,695 Market Cap. EUR3,109m We are updating our methodology by adopting a multi-dimensional
SOPRA STERIA GROUP BUY FV EUR178 vs. 165 prospective beta. Our new beta calculation method is based on two Last Price EUR156,6 Market Cap. EUR3,216m equally-weighted key factors: a "fundamental" factor (based on six criteria: SWORD GROUP BUY vs. NEUTRAL FV EUR40 vs. 33 liquidity, financial strength, sales recurrence, leadership, potential for Last Price EUR32,55 Market Cap. EUR311m surprises, and acquisition history) and a "momentum" factor (based on TEMENOS GROUP NEUTRAL FV CHF100 vs. 90 Last Price CHF98,4 Market Cap. CHF6,972m two criteria: global economic growth and earnings momentum).
Data and Prices as at closed of 20th September Five recommendation upgrades. This new methodology has resulted in 21/09/17 a reduction in our betas, which now range from 0.88 to 1.47 (versus 1.04 115 to 2.25 previously). This in turn has prompted a general adjustment to our 110 DCF-derived Fair Values and five recommendation upgrades: Dassault 105 Systèmes (Neutral vs. Sell), Atos (Buy vs. Neutral), Sage (Buy vs. Neutral), 100 Alten (Buy vs. Neutral) and Sword (Buy vs. Neutral). Altran, Capgemini, 95 Indra, SAP, Software AG and Sopra Steria round out our list of favourite 90 stocks.
Source Thomson Reuters STOXX EUROPE TM S/W & COMP SVS E STOXX EUROPE 600 Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Dorian Terral Frédéric Yoboué
r r Software and IT Services
Table of contents
1. Limits of the flat rate beta ...... 3 1.1. Methodology used until now ...... 3 1.2. Limitations of the "flat rate" beta approach ...... 4 2. Our new beta methodology ...... 7 2.1. Multi-dimensional prospective beta: key principles ...... 7 2.2. The "fundamental" rating ...... 8 2.3. "Momentum" rating ...... 11 2.4. Final beta calculation ...... 13 3. Application of our new betas ...... 14 3.1. Putting our new betas into perspective ...... 14 3.2. Changes to our recommendations and FVs ...... 15 AltenFair Value EUR85 vs. EUR74 BUY vs. NEUTRAL ...... 17 Catalyst of research tax credit ...... 17 Altran Technologies Fair Value EUR19 vs. EUR17 BUY ...... 21 Step by step towards the 13% margin target ...... 21 Atos Fair Value EUR153 vs. EUR133 BUY vs. NEUTRAL ...... 25 Pending other structuring acquisitions ...... 25 Axway Software Fair Value EUR21 vs. EUR23 SELL ...... 29 Transformation has a price ...... 29 Capgemini Fair Value EUR113 vs. EUR105 BUY ...... 33 Productivity machine on the move ...... 33 Cast Fair Value EUR3,6 vs. EUR3,4 NEUTRAL...... 37 At the heart of challenges for IT services companies ...... 37 Dassault Systèmes Fair Value EUR86 vs. EUR65 NEUTRAL vs. SELL ...... 41 Boeing changes the landscape ...... 41 Indra Sistemas Fair Value EUR16 BUY-Top Picks...... 45 H2 2017 far more dynamic ...... 45 Sage Group Fair Value 830p vs. 720p BUY vs. NEUTRAL ...... 49 Intacct has completed the shift to the cloud ...... 49 SAP Fair Value EUR115 vs. EUR108 BUY ...... 53 Heading for a recovery in margins ...... 53 Software AG Fair Value EUR45 BUY ...... 57 Towards accelerated growth ...... 57 Sopra Steria Group Fair Value EUR178 vs. EUR165 BUY ...... 61 A quiet transformation ...... 61 Sword Group Fair Value EUR40 vs. EUR33 BUY vs. NEUTRAL...... 65 Built to outperform ...... 65 Temenos Group Fair Value CHF100 vs. CHF90 NEUTRAL ...... 69 Awaiting further major contracts… ...... 69 Bryan Garnier stock rating system ...... 75
Software and IT Services
1. Limits of the flat rate beta 1.1. Methodology used until now Until now, we determined IT To determine the Fair Value of an IT company (software publisher or IT services company) players’ prospective betas by based on a DCF model, the tool we use to measure the company’s intrinsic risk (β) in the cost multiplying their market of capital formula (risk free rate + β * equity risk premium) is a prospective beta, rather than a capitalisation by a country risk coefficient for the historical or statistical beta. Until now, we have calculated the prospective betas of sector players country in which they are by multiplying their market capitalisation by a country risk coefficient for the country in which they listed are listed.
For the first component, we allocate a "gross" beta of 1.25 for market caps above EUR100bn (e.g. SAP), 1.5 for market caps between EUR3bn and EUR100bn (Dassault Systèmes, Capgemini, Atos, Sage, Temenos, Software AG, Sopra Steria), 1.75 for market caps between EUR1bn and EUR3bn (Altran, Alten, Indra), 2 for market caps between EUR500m and EUR1bn (Axway), 2.25 for market caps between EUR100m and EUR500m (Sword) and 2.5x for market caps below EUR100m (Cast). Over the years, many stocks have moved into a different market cap group due to their success or misfortune on the stock market, causing their valuations to surge (or plummet) and triggering a change in their stock market status. For example, Sopra Steria’s "gross" beta fell from 2.5 in 2008 to 1.5 in 2017 (reaching 2 in 2009 and 1.75 in 2014), while that of Temenos fell from 2 in 2009 to 1.5 in 2016 (reaching 1.75 at end- 2009, 2 in 2011 and 1.75 again in 2013), that of Atos fell from 1.75 in 2008 to 1.5 in 2011, and that of Axway dropped from 2.5 in 2013 to 2 in 2015;
For the second component, based on the range of 10-year bond rates in players’ respective countries, we use a country risk coefficient of 0.8 for stocks listed in Switzerland (Temenos), 0.83 for those listed in Germany (SAP, Software AG), 0.9 for those in France (Alten, Altran, Atos, Axway, Capgemini, Cast, Dassault Systèmes, Sopra Steria, Sword) and the UK (Sage), and 1.05 for those listed in Spain (Indra).
This method produces the betas shown in Fig. 1:
Fig. 1: Range of prospective "flat rate" betas used until now
Company "Gross" beta (β₀) Country risk coefficient (σ) Prospective beta (β = β₀ * σ) Alten 1.75 0.90 1.58 Altran Technologies 1.75 0.90 1.58 Atos 1.50 0.90 1.35 Axway Software 2.00 0.90 1.80 Capgemini 1.50 0.90 1.35 Cast 2.50 0.90 2.25 Dassault Systèmes 1.50 0.90 1.35 Indra Sistemas 1.75 1.05 1.84 Sage Group 1.50 0.90 1.35 SAP 1.25 0.83 1.04 Software AG 1.50 0.83 1.25 Sopra Steria Group 1.50 0.90 1.35 Sword Group 2.25 0.90 2.03 Temenos Group 1.50 0.80 1.20
Source: Bryan, Garnier & Co ests.
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We ruled out an approach We ruled out an approach based on historical or statistical betas, which relies on calculating the based on historical or historical regression of a stock’s outperformance versus a benchmark index. The historical or statistical betas, as we statistical beta is generally extracted from stock data bases such as those of Bloomberg, Thomson believed that this method reflects a stock’s historical Reuters, CapitalIQ or FactSet. We ruled out this approach, as we believe that it reflects the stock’s volatility but not the historical volatility but not the company’s fundamentals. Moreover, from a theoretical point of view, company’s fundamentals. the pertinence of this type of beta can only be verified over a long-term period. However, over such long periods, companies undergo major developments (especially in the IT technology arena) and past data cannot provide an indication of future performance, even based on volatility data limited to a one, three or five-year period.
1.2. Limitations of the "flat rate" beta approach Our "flat rate" prospective In terms of methodology, our "flat rate" prospective beta approach did not factor in: 1) the beta approach did not factor "noise" surrounding a stock’s market performance, relating to, say, a major acquisition, change in: 1) the "noise" around a of management, strategic refocusing or disruption in the business environment; or 2) "intangible" stock’s market performance; or 2) "intangible" factors. factors such as the quality and stability of a company’s management, its strategic relevance and performance, its competitive position in its industry, or the quality of the ecosystem surrounding its products.
Market capitalisation was not In addition, market capitalisation was not always representative of a stock’s liquidity. For consistently representative of instance, while there was a ratio of 1:5 between the market capitalisations of Dassault Systèmes and the stock’s liquidity. SAP, volumes over the previous six months showed that Dassault Systèmes was actually eight times less liquid than SAP. Similarly, while there was a ratio of 1:7 between the market capitalisations of Capgemini and SAP, the former was only three times less liquid than the latter.
Our range of "gross" betas Finally, we recognise that our range of "gross" betas overestimated company betas versus the overestimated companies’ market average (i.e. 1) as they reflected the stock market conditions in place 10-15 years earlier when betas versus the market investors considered it fairly risky to invest in this type of stock (crisis in the first half of the 1990s average, so, in order to readjust our valuation, we following the first Gulf war, bursting of the Internet bubble). However, following the crises of applied economic cycle-peak 2008/09 (banking) and 2011/12 (government debt), sector sales and earnings are now less sensitive to sales growth rates over the fluctuations in the environment. In addition, to adjust our DCF-based valuation for the high medium term. betas used, we applied economic cycle-peak sales growth rates over the eight-year period (currently 2020-2027) following our three-year period of specific forecasts (currently 2017-2019).
We saw the need to upgrade Two factors underlie the need to upgrade our methodology: our methodology, as software publishers now Software publishers have seen a surge in recurring sales, thanks to growth in their installed generate far higher recurring sales and IT services players bases and the associated maintenance contracts, the breakthrough of cloud subscriptions, and show higher levels of the downward trend in licence sales growth. This has also resulted in substantially higher industrialisation and margins. For instance, SAP now generates recurring sales representing 63% of total revenues offshoring. (versus 33% in 2002) and we expect its non-IFRS operating margin to reach 29.1% in 2017 (vs. 22.4% in 2002). Dassault Systèmes also has recurring sales representing 63% of turnover (vs. 42% in 2002) and we expect its non-IFRS operating margin to reach 31.2% in 2017 (vs. 28% in 2002). Finally, Temenos should see its recurring sales reach 47% of the total in 2017 (vs. 25% in 2002) and its non-IFRS operating margin should reach 30.2% in 2017 (-22.4% in 2002);
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Fig. 2: SAP: recurring revenues and operating margin growth (1996-2020e)
70%
60%
50%
40%
30%
20%
10%
0%
-10% 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018e 2020e Lfl revenue growth (%) Recurring revenues: maintenance + cloud subscriptions (% of sales) Non-IFRS operating margin (% of sales)
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 3: Temenos: recurring revenues and operating margin growth (2000-2019e)
50%
40%
30%
20%
10%
0%
-10%
-20%
-30% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018e Lfl revenue growth (%) Recurring revenues: maintenance + subscriptions (% of sales) Non-IFRS operating margin (% of sales)
Source: Company Data; Bryan, Garnier & Co ests.
IT services companies have seen a significant increase in industrialisation and the use of offshore facilities. As a result, they no longer rely exclusively on utilisation rates to achieve their earnings targets. Thanks to the optimisation of the wage pyramid, the automation of some processes and the streamlining of purchasing, tools and methods, IT services players’ margins now fare better in a crisis than they did up to the mid-2000s. This was evident in 2009/10 and 2012/131, when margins held up well overall, despite a downturn in organic sales, and explains how Capgemini now achieves a non-IFRS operating margin above 11%, a level which was beyond its reach in the 2000s. The same trend is emerging in High-tech Consulting, driven by
1 IT services players felt the negative impacts of the 2008/09 and 2011/12 crises with a one-year time lag, due to their exposure to multi-year contracts (applications and infrastructure management, BPO) and to clients’ ongoing projects being put on hold.
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the emergence of Indian players (HCL, Infosys, TCS, Aricent, etc.), which is increasing the use of industrialisation, offshoring and wage pyramid management across operations downstream of the product development process, beyond the simple management of utilisation rates and the price-to-wages ratio.
Fig. 4: Capgemini: offshore staff, and sales and op. margin growth (1989/2019e)
70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017e2019e Lfl revenue growth (%) Offshore leverage (% of total headcount) Non-IFRS operating margin (% of sales)
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 5 summarises our DCF assumptions to date for the 2020-2017 period. As explained above, to date we have extrapolated the organic growth rates for the last year of specific provisions (2019) over the 2020-2027 period. As regards the operating margin, for 2020-2027 we previously applied the profitability level that we considered reasonable for the medium term at the peak of the economic cycle under the current business model adopted by each company.
Fig. 5: Our former medium-term sales and operating margin growth assumptions
Company 2019 BG est. revenue 2020-2027 BG est. 2019 BG est. 2020-2027 BG est. growth revenue CAGR operating margin operating margin avg Alten +8.7% +9% 10.6% 12.5% Altran Technologies +7.5% +8% 12.2% 13.0% Atos +3.3% +3.5% 11.1% 12.0% Axway Software +6.3% +6% 15.6% 17.0% Capgemini +4.9% +5.5% 12.7% 13.5% Cast +15.0% +15% 0.4% 7.0% Dassault Systèmes +8.4% +9% 33.2% 35.0% Indra Sistemas +3.5% +3% 9.8% 10.5% Sage Group +9.5% +10% 28.7% 30.0% SAP +8.0% +8% 30.9% 33.0% Software AG +5.3% +6% 31.8% 35.0% Sopra Steria Group +5.3% +5.5% 9.3% 9.5% Sword Group +14.0% +14% 14.5% 15.0% Temenos Group +11.6% +12% 35.8% 38.0%
Source: Bryan, Garnier & Co ests.
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2. Our new beta methodology 2.1. Multi-dimensional prospective beta: key principles Our new beta calculation Our new beta calculation approach is based on two quantitative and qualitative factors for approach is based on a each stock we cover: "fundamental" factor and a "momentum" factor for each stock covered. A "fundamental" factor, based on the company’s financial strength, sales and earnings robustness in the event of an economic shock, competitive position, ability to manage acquisitions, potential to spring surprises versus investors’ expectations, and the stock’s liquidity;
A "momentum" factor, taking into account investor sentiment on the macroeconomic environment and earnings publications;
We now use a three-step For this purpose, we now use a three-step process: process: 1) rating of each company on a scale of 1 to Step 1: calculation of an overall rating for each company. 5; 2) sector beta calculation; For each criterion, companies are rated from 1 (lowest score) to 5 (highest score). The overall 3) company beta calculation. rating is the arithmetic average of the "fundamental" and the "momentum" rating. Our "fundamental" rating is the arithmetic average of six criteria: the stock’s liquidity, the company’s financial strength with regard to its net debt, recurrence of sales, leadership in its market, potential for earnings surprises, and acquisition history. Our "momentum" rating is the arithmetical average of two criteria: economic momentum and earnings momentum.
Step 2: choice of sector beta We have used the sector beta data published by the Damodaran Online website at New York University’s Stern School of Business2 ("NYU Stern"). The advantage of this data is that each sector beta is calculated based on a near exhaustive number of stocks listed for each industry worldwide, incorporating all levels of market capitalisation. As such, the sector beta for "Software (System & Applications)" (1.13) covers 297 listed companies, while the sector beta for "Computer Services" (0.99) covers 117 listed companies. To ensure that the beta calculations for the 14 stocks we cover are consistent, we have decided to apply a single "Software & IT Services" sector beta, which is the average of the sector betas for the "Software (System & Applications)" and "Computer Services" betas taken from Damodaran Online, i.e. 1.06.
2 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html. The method used by Damodaran Online to estimate sector betas involves: for US companies, regressing weekly returns on stocks against the S&P 500, using two years and five years of data, and, for all other companies, regressing weekly returns on stocks against the most widely followed local index in their market (CAC in France, DAX in Germany, FTSE 100 in the UK, Nikkei 225 in Japan, BSE Sensex in India, etc.) using five years of data. The final beta obtained by Damodaran for each industry is the sum of the 2- year beta regression (with a 2/3 weighting) and five-year beta regression (with a 1/3 weighting). If the five-year beta is not available, Damodaran replaces it with the figure 1.
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Step 3: calculation of the company beta To calculate each company’s To calculate the company-specific beta, we multiply each company’s sector beta by a coefficient beta, we multiply the sector corresponding to the median overall rating for our universe of stocks covered in the Software & IT beta by a coefficient Services sector divided by the company’s overall rating. corresponding to the median overall score for our universe of stocks covered in We refer to the company beta as β, the sector beta as βₐ, the company coefficient as c, the company’s the Software & IT overall rating as n, the company’s fundamentals rating as n the company’s momentum rating as n Services sector divided by and the statistical symbol for the median as Md. The calculation formulas are as follows: the company’s overall rating. ₁ ₂,
β = βₐ * c, where c = Md(n) / n, where n = n * 0.5 + n * 0.5
₁ ₂ 2.2. The "fundamental" rating The fundamental rating for The "fundamental" rating for each company is the arithmetical average of six ratings based on the each company is the following criteria: arithmetical average of six ratings based on the following criteria: liquidity, Fig. 6: "Fundamental" rating criteria financial strength, sales Liquidity Average weekly volume (EUR m) over the last 6 months recurrence, leadership, 5 500+ potential for surprises, 4 100-500 acquisition history. 3 50-100 2 10-50 1 10- Financial strength Net financial debt/EBITDA in year N (x), i.e. est. end-2017 5 -2.5- 4 -2.5/-1 3 -1/1 2 1/2.5 1 2.5+ Recurrence of sales Recurrent sales / total sales (%) 5 81-100 4 61-80 3 41-60 2 21-40 1 0-20 Leadership Position in its market 5 Uncontested no.1 in a global market 4 No.1 in a competitive market 3 One of the main players in a competitive market 2 Outsider in its market 1 Niche player or follower Potential for surprises Earnings performance over the last 2-3 years 5 Systematically above expectations 4 Frequently above expectations 3 Globally in line with expectations 2 Mixed results vs. expectations 1 Frequent disappointments vs. expectations Acquisition history Track record of acquisition synergies 5 Synergies systematically above expectations 4 Synergies sometimes above expectations 3 Synergies in line with expectations 2 Poor track record in terms of acquisitions or mixed synergies 1 No track record of acquisitions or failure to generate synergies
Source: Bryan, Garnier & Co ests.
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Our respective ratings for each company are presented in Fig. 9 below:
Liquidity. The only stock which has recorded weekly liquidity above EUR500m over the last 6 months is SAP (above EUR900m), followed at a distance by Capgemini (c. EUR250m), Atos (c. EUR170m), and Sage, Dassault Systèmes and Temenos (all around EUR100m). Two stocks show around EUR50m (Software AG and Indra) and two around EUR20m (Altran and Sopra Steria).
Fig. 7: Average weekly liquidity over six months (EURm)
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0 SAP CAP ATO SGE DSY TEMN SOW IDR ALT SOP ATE AXW SWP CAS
Source: Company Data; Bryan, Garnier & Co ests.
Financial strength. We do not believe that any of the companies covered potentially face financial difficulties for the end of 2017. Three companies’ net financial debt is likely to be high, but below 2.5x EBITDA (Indra following the acquisition of Tecnocom, Sage following the acquisition of Intacct, and Sopra Steria). Conversely, we see only one company that is likely to boast an excellent financial situation (Cast), although its NFD/EBITDA ratio should be seen in perspective in that we expect its 2017 EBITDA to be very low. Finally, two companies should show excellent financial strength at the end of 2017: Dassault Systèmes and Sword.
Fig. 8: Anticipated end-2017 NFD/EBITDA ratio
3 2,5 2,5 2 1,4 1,5 1,2 1 0,8 0,4 0,6 0,5 0,1 0,1 0 -0,5 -0,4 -0,3 -1 -0,5 -1,5 -1,3 -2 -2,5 -2,0 -3 -3,5 -4 CAS DSY SWP ATO SOW LTE AXW SAP TEMN CAP ALT SGE SOP IDR
Source: Company Data; Bryan, Garnier & Co ests.
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Recurring sales are measured as a proportion of total revenues for software publishers, maintenance, software rental and cloud subscriptions, while for IT services companies, managed services (applications or infrastructure) and BPO they are measured as a proportion of sales, applying a discount to reflect the risk (not negligible) of contracts not being renewed or being cancelled. We could have assigned Sage a rating of 5, given that the acquisition of Intacct should lift its recurrent revenues to 83% of total sales. However, we preferred to apply a discount given the erosion of maintenance contracts on its older products. We estimate that four companies have recurring revenues exceeding 60%: Sage, Atos, Dassault Systèmes and SAP. For IT consulting firms (Altran and Alten), we consider that, although, de facto, they generate highly recurrent sales with their main clients (Airbus, Renault, PSA, etc.), their recurring revenues are weak in that the projects or missions assigned to them are not by nature recurring.
Leadership. In our view, only Dassault Systèmes is the uncontested leader in its market, comfortably leading the field in PLM software (product lifecycle management) with no new entrants able to disrupt the status quo. As regards SAP, although it is the world leader in business application software and ERP, well ahead of Oracle, we have assigned it a rating of 4 because over the last 10 years, several cloud players have had a disruptive impact in its market (Salesforce, Workday, and even Oracle). Temenos is also the undisputed leader in its banking software market, but we have rated it at 4 as around 80% of its market still relates to proprietary solutions. Conversely, Sword and Cast are niche players.
Potential for surprises. We based our analysis on data for the last 10 years, assigning a high weighting to the recent past. We found that Dassault Systèmes, Atos and Temenos show the best track record in terms of exceeding consensus expectations and/or guidance and upwards revisions to guidance. We calculated that for the Q4 2009-Q2 2017 period, on average and assuming constant forex, Dassault Systèmes surpassed its quarterly guidance (mid-range) for revenues and non-IFRS operating profit by 2% and 4% respectively. As for Temenos, after a period of regular earnings disappointments, it has regularly revised its guidance upwards since Q3 2015.
Acquisition history. We see Atos as the company with the best track record in recent years, having achieved cost synergies which exceeded its initial estimates (or were generated earlier than expected) for SIS, Bull, Unify and Equens, while the integration of Xerox ITO delivered what was promised by management. We believe that SAP also delivered sound results in recent years, given the price paid for SuccessFactors, Ariba, Fieldglass and Concur (USD20bn) and the huge efforts to transform SAP’s business model that these acquisitions entailed. After three years of tentative efforts relating to this vast integration project and the accompanying culture shock (2012-2014), since 2015, SAP has established itself as one of the key players in cloud applications. At the bottom of the ladder, Cast was rated 1 given its historical absence of acquisitions. The only instances in which companies have struggled to integrate acquisitions over the last 10 years have been Altran/IndustrieHansa (2013) and Indra/Politec (2011).
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Fig. 9: Our fundamentals ratings by company, from 1 (low) to 5 (excellent)
Liquidity Financial Sales Leadership Surprise Acquisition Funda. rating (1) strength (2) recurrence (3) (4) potential (5) history (6) A=avg(1) to (6) Alten 2 3 1 3 3 2 2.33 Altran Technologies 2 3 1 3 3 2 2.33 Atos 4 3 4 3 4 5 3.83 Axway Software 1 3 3 2 1 2 2.00 Capgemini 4 3 2 3 3 3 3.00 Cast 1 5 3 1 1 1 2.00 Dassault Systèmes 4 4 4 5 4 3 4.00 Indra Sistemas 2 2 2 2 2 2 2.00 Sage Group 4 2 4 3 3 3 3.17 SAP 5 3 4 4 3 4 3.83 Software AG 2 3 3 3 3 2 2.67 Sopra Steria Group 2 2 2 2 3 2 2.17 Sword Group 1 4 3 1 3 2 2.33 Temenos Group 4 3 3 4 4 3 3.50 Median 2.50
Source: Bryan, Garnier & Co ests.
2.3. "Momentum" rating Each company’s Each company’s "momentum" rating is the average of two ratings based on the following criteria: "momentum" rating is the average of two ratings based Fig. 10: Criteria underpinning our "momentum" rating on the following criteria: global economic growth Economic momentum Global economic growth over 12 months (IMF) over 12 months, and 5 4.5%+ earnings trend. 4 3%/4.5% 3 1.5%/3% 2 0%/1.5% 1 Global recession or crisis Earnings momentum Earnings trend 5 Strong acceleration in growth 4 Moderate acceleration in growth 3 Stable growth 2 Moderate slowdown in growth 1 Clear slowdown in growth or earnings decline
Source: Bryan, Garnier & Co ests.
Our ratings for each company are presented in Fig. 12:
Economic momentum. We assign the same rating to all companies as the factor in question is global economic growth. The IMF’s current estimates for global growth of 3.5% for 2017 and 3.6% for 2018, is in keeping with the trend seen since 2011, between 3.1% and 4.2%, and corresponds to the same rating (4) as the 2003 figure. We would have assigned ratings of 3 for 2001-2002, 5 for 2000, 2004-2007 and 2010, and 1 for 2009 (-0.1%). The 2008 rating would have reflected a special situation, where, although the economy was growing (+3%) and should in theory have been rated 4, the year brought a severe economic shock, which would have prompted us to assign a rating of 1.
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Fig. 11: Global GDP growth (%) (1961-2022e)
7
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1
0
-1
-2 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021e
Source: World Bank (1961-1979); IMF (1980-2022e).
Earnings momentum. None of the companies currently warrant a rating of 5 for this criterion, as we see no strong earnings upturns. We believe that Temenos and Alten deserve a 4 rating, given the gradual acceleration in their organic sales growth. Conversely, Axway and Cast are rated 1 due to the downwards trend in their earnings and lack of short-term visibility. We have assigned a 2 rating to Indra, since, although its growth momentum has been negative since 2015, we expect it to resume organic growth in H2 2017. Finally, most of the companies that we cover are seeing relatively stable earnings growth rates.
Fig. 12: Momentum ratings by company, from 1 (low) to 5 (excellent)
Economic momentum (7) Earnings momentum (8) Momentum rating B=avg(7)to(8) Alten 4 4 4 Altran Technologies 4 3 3.5 Atos 4 3 3.5 Axway Software 4 1 2.5 Capgemini 4 3 3.5 Cast 4 1 2.5 Dassault Systèmes 4 3 3.5 Indra Sistemas 4 2 3 Sage Group 4 3 3.5 SAP 4 3 3.5 Software AG 4 3 3.5 Sopra Steria Group 4 3 3.5 Sword Group 4 3 3.5 Temenos Group 4 4 4 Median 3.5
Source: Bryan, Garnier & Co ests.
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2.4. Final beta calculation The stocks with the lowest The formula set out at the beginning of this section is applied to calculate our new company betas. A betas are Dassault Systèmes breakdown of the values obtained is provided in Fig. 13. Based on our calculations, we conclude that: and Temenos (0.88), followed closely by SAP and Atos (0.90). The stocks with the lowest betas are Dassault Systèmes and Temenos (0.88), followed closely by SAP and Atos (0.90).
The other stocks showing betas below the 1.06 sector average are Sage (1.00), Capgemini (1.02), and Alten (1.05).
Software AG is just above the sector average (1.08).
The stocks with the highest betas are Axway and Cast (1.47).
The other stocks showing betas above the sector average are Indra (1.33), Sopra Steria (1.17), Altran (1.14) and Sword (1.14).
Fig. 13: Components of our new beta calculation
Fundamental Momentum Total rating (n) Company Industry beta Company beta rating (n rating (n coefficient (c) (βₐ) (β)
Alten 2.33₁) ₂)4 3.17 0.99 1.06 1.05 Altran Technologies 2.33 3.5 2.92 1.07 1.06 1.14 Atos 3.83 3.5 3.67 0.85 1.06 0.90 Axway Software 2.00 2.5 2.25 1.39 1.06 1.47 Capgemini 3.00 3.5 3.25 0.96 1.06 1.02 Cast 2.00 2.5 2.25 1.39 1.06 1.47 Dassault Systèmes 4.00 3.5 3.75 0.83 1.06 0.88 Indra Sistemas 2.00 3 2.50 1.25 1.06 1.33 Sage Group 3.17 3.5 3.33 0.94 1.06 1.00 SAP 3.83 3.5 3.67 0.85 1.06 0.90 Software AG 2.67 3.5 3.08 1.02 1.06 1.08 Sopra Steria Group 2.17 3.5 2.83 1.10 1.06 1.17 Sword Group 2.33 3.5 2.92 1.07 1.06 1.14 Temenos Group 3.50 4 3.75 0.83 1.06 0.88 Median 2.50 3.50 3.13 1.00 1.06 1.06
Source: Bryan, Garnier & Co ests.
13
Software and IT Services
3. Application of our new betas 3.1. Putting our new betas into perspective We find that our new betas We find that our new betas are systematically lower than those we had been using previously. are systematically lower than This not only reflects the sustained momentum currently enjoyed, whereas our previous betas were those we had been using tied to far less favourable market conditions, but also the generally favourable changes in company previously. profiles.
Fig. 14: Our new multi-dimensional betas and new WACCs
Company Old BG assumptions New BG assumptions β WACC β WACC Alten 1.58 12.7% 1.05 9.0% Altran Technologies 1.58 12.1% 1.14 8.9% Atos 1.35 11.1% 0.90 7.9% Axway Software 1.80 14.2% 1.47 11.9% Capgemini 1.35 10.6% 1.02 8.4% Cast 2.25 17.4% 1.47 11.9% Dassault Systèmes 1.35 11.1% 0.88 7.8% Indra Sistemas 1.84 11.7% 1.33 9.1% Sage Group 1.35 11.1% 1.00 8.6% SAP 1.04 8.8% 0.90 7.9% Software AG 1.25 10.3% 1.08 9.2% Sopra Steria Group 1.35 9.8% 1.17 8.8% Sword Group 2.03 15.6% 1.14 9.6% Temenos Group 1.20 10.0% 0.88 7.8%
Source: Bryan, Garnier & Co ests.
As a result of our new betas As a result of our new betas and discount rates, for each company in the DCF model, we have and discount rates, for each "smoothed" our organic growth scenario for the 2020e-2027e period, using the historical average for company in the DCF model, 2015-2016 and our forecasts for 2017e-2019e. As regards our operating margin scenario for 2020e- we have "smoothed" our organic growth scenario for 2027e, we have used a rate close to that expected for 2019. the 2020e-2027e period, using the historical average Fig. 15: Our new medium-term growth and operating margin assumptions for 2015-2016 and our forecasts for 2017e-2019e. Company 2019 BG est. revenue 2020-2027 BG est. 2019 BG est. 2020-2027 BG est. growth revenue CAGR operating margin operating margin avg Alten +8.7% +7% 10.6% 10.5% Altran Technologies +7.5% +5% 12.2% 12.0% Atos +3.3% +2% 11.1% 11.0% Axway Software +6.3% +3% 15.6% 16.0% Capgemini +4.9% +3% 12.7% 12.5% Cast +15.0% +10% -1.2% 6.0% Dassault Systèmes +8.4% +7% 33.2% 33.0% Indra Sistemas +3.5% 0% 9.8% 10.0% Sage Group +9.5% +7% 28.7% 29.0% SAP +8.0% +7% 30.9% 31.0% Software AG +5.3% +3% 31.8% 33.0% Sopra Steria Group +5.3% +4% 9.3% 9.5% Sword Group +12.0% +10% 14.5% 13.5% Temenos Group +11.6% +9% 35.8% 36.0%
Source: Bryan, Garnier & Co ests.
14
Software and IT Services
3.2. Changes to our recommendations and FVs Almost all of our Fair Values Our new methodology has triggered upwards revisions to almost all of our Fair Values and and five of our five of our recommendations, as shown in Fig. 16: recommendations have been revised upwards: Alten (Buy vs. Neutral), Atos (Buy vs. Fig. 16: Our new adjusted betas and new WACCs Neutral), Dassault Systèmes Company Old BG assumptions New BG assumptions (Neutral vs. Sell), Sage (Buy Recommendation Fair Value Recommendation Fair Value vs. Neutral), and Sword (Buy Alten Neutral EUR74 ↑ Buy ↑ EUR85 vs. Neutral). Altran Technologies Buy EUR17 ↔ Buy ↑ EUR19 Atos Neutral EUR133 ↑ Buy ↑ EUR153 Axway Software Sell EUR23 ↔ Sell ↓ EUR21 Capgemini Buy EUR105 ↔ Buy ↑ EUR113 Cast Neutral EUR3.4 ↔ Neutral ↑ EUR3.6 Dassault Systèmes Sell EUR65 ↑ Neutral ↑ EUR86 Indra Sistemas Buy EUR16 ↔ Buy ↔ EUR16 Sage Group Neutral 720p ↑ Buy ↑ 830p SAP Buy EUR108 ↔ Buy ↑ EUR115 Software AG Buy EUR45 ↔ Buy ↔ EUR45 Sopra Steria Group Buy EUR165 ↔ Buy ↑EUR178 Sword Group Neutral EUR33 ↑ Buy ↑ EUR40 Temenos Group Neutral CHF90 ↔ Neutral ↑ CHF100
Source: Bryan, Garnier & Co ests.
Our five recommendation changes are:
Alten: the new beta is a better reflection of the company’s organic growth momentum – which has been accelerating since 2014 – thanks to its excellent recruitment capacity, highly stable management, the continuity and transparency of its strategy, its favourable competitive position amid the globalisation of the outsourced R&D market, and its margin growth prospects from 2018 due to the abandon of the research tax credit approval. In recognition of these qualities which limit risk on the company, and given our new Fair Value of EUR85 (vs. EUR74), we are upgrading our recommendation to Buy (vs. Neutral).
Atos: the new beta better reflects the company’s ability to deliver better-than-expected cost synergies on acquisitions and surpass consensus expectations, thanks to its strategy, which has been running smoothly since Thierry Breton became Chairman and CEO (TOP plans to improve operational efficiency) at the end of 2008. Our new Fair Value of EUR153 (vs. EUR133) does not factor in the possibility of an acceleration in organic growth or the potential that could be generated by new major acquisitions - for example to strengthen Worldline or in North America. These elements have prompted us to upgrade our recommendation to Buy (from Neutral);
Dassault Systèmes: the new beta reflects the company’s fundamentals much more efficiently than before. Since the beginning of 2008, in non-IFRS terms, the company has exceeded its mid-range quarterly guidance by 3% for sales, 9% for operating profit and EPS and 1.4 points for the operating margin. It has very stable management, enjoys the loyalty of its French institutional shareholder base, and could see an acceleration in its organic growth momentum following the contract recently signed with Boeing; etc. In this scenario, we believe that investors have already understood that, failing a sharp upturn at the end of the period, Dassault
15
Software and IT Services
Systèmes will not meet the targets of its 2014-2019 strategic plan (average sales growth of 14%, of which 9% organic, average EPS growth of 14%), and that a future 2018-2023 plan, which will deal a new set of cards, will be presented at a forthcoming Capital Markets Day which we have scheduled for mid-2018. With our new Fair Value of EUR86 (vs. EUR65), we are upgrading our recommendation to Neutral (vs. Sell).
Sage: the company should enjoy better organic growth prospects thanks to the acquisition of financial management SaaS publisher Intacct. The acquisition multiple for Intacct seems very high (9.6x 2016 sales) and the company was lossmaking prior to its acquisition and is set to dilute Sage’s operating margin for the first year (FY18), but we believe that this acquisition will complete Sage’s repositioning towards the cloud. Its range now covers the accounting/finance needs of all sizes of company, from microenterprises to large multinational SMEs. In addition, the group’s restructuring following the arrival of Stephen Kelly as CEO at the end of 2014 now seems to be complete. This, together with the synergies generated with Intacct, should finally enable the operating margin to expand from FY19, after five years of transition. Given our new Fair Value of 830p (vs. 720p), we are upgrading our recommendation to Buy (from Neutral);
Sword: the new beta is a much better reflection of the group’s double-digit organic growth (which was only interrupted over the 2009-2011 period) and profitability, together with its highly stable management and the renewed medium-term ambition portrayed in its Horizon 2020 plan, which was presented in September 2016 and targets sales of EUR300m. Given our new Fair Value of EUR40 (vs. EUR33), we are upgrading our recommendation to Buy (from Neutral).
16
INDEPENDENT RESEARCH UPDATE Alten 21st September 2017 Catalyst of research tax credit TMT Fair Value EUR85 vs. EUR74 (price EUR72.82) BUY vs. NEUTRAL
Bloomberg ATE FP We have upgraded our recommendation from Neutral to Buy and Reuters LTEN.PA increased our DCF-derived Fair Value from EUR74 to EUR85 12-month High / Low (EUR) 81.1 / 58.6 following the change to our beta, which better reflects the quality of Market capitalisation (EURm) 2,457 Enterprise Value (BG estimates EURm) 2,408 Alten's management in a beneficial backdrop. Operating margin Avg. 6m daily volume ('000 shares) 35.20 should benefit from the end to the research tax credit agreement. Free Float 81.7% 3y EPS CAGR 9.6% A constant strategy in a beneficial context. Alten does not tend to Gearing (12/16) -1% Dividend yield (12/17e) 1.37% deviate from its strategic choices, namely high-tech consulting and
engineering as a priority in work-package mode (structured projects) and YE December 12/16 12/17e 12/18e 12/19e when necessary in employee outsourcing, primarily during upstream Revenue (€m) 1,748 1,951 2,131 2,315 EBITA €m) 181.0 187.0 213.0 239.0 phases of prototypes. In a beneficial market context in the auto and Op.Margin (%) 10.3 9.6 10.0 10.3 aeronautics sectors, the ramp-up in the pace of engineer recruitment has Diluted EPS (€) 3.82 3.93 4.48 5.03 EV/Sales 1.40x 1.23x 1.08x 0.95x paved the way for better organic growth. EV/EBITDA 12.7x 12.0x 10.2x 8.7x EV/EBITA 13.6x 12.9x 10.8x 9.2x Firepower for acquisitions. With around EUR150m in credit lines, Alten P/E 19.1x 18.5x 16.3x 14.5x undertakes around EUR30m in acquisitions a year, mostly outside France ROCE 17.8 17.2 18.5 20.3 (Germany, North America, India, Italy and Benelux). In view of these operations (six have already been announced since early 2017), the targets 80.8 that management has set for end-2019 (26,000 engineers) could well be 75.8 exceeded. 70.8 65.8 Additional potential to improve margins thanks to the research tax- 60.8 credit. With project management and utilisation rates close to optimal 55.8 levels and initially dilutive acquisitions, potential to improve operating 50.8
45.8 margin over the medium term was limited to 10-11%. However, Alten's 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 ALTEN SXX EUROPE 600 abandoning of the research tax credit agreement for work outsourced to clients creates additional potential of up to two points of margin, as of 2018.
Valuation: further potential. The share is trading on 2017 and 2018 EV/EBIT multiples of respectively 12.9x and 10.8x. These may seem high but reflect the quality of the group's management, whereas our forecasts remain cautious for the research tax credit.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué
r r Alten
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 1,373 1,541 1,748 1,951 2,131 2,315 Change (%) 12.9% 12.2% 13.5% 11.6% 9.2% 8.6% lfl change (%) 2.8% 3.4% 7.3% 6.9% 8.4% 8.6% Adjusted EBITDA 142 164 193 200 226 252 Depreciation & amortisation (10.0) (11.0) (12.0) (13.0) (13.0) (13.0) Adjusted EBIT 132 152 181 187 213 239 EBIT 118 147 157 173 210 239 Change (%) 6.1% 25.1% 7.0% 9.6% 21.8% 13.5% Financial results 4.0 5.0 0.0 17.0 (1.0) 0.0 Pre-Tax profits 122 152 157 190 209 239 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (42.0) (48.0) (50.0) (55.0) (63.0) (71.0) Profits from associates 0.0 2.0 5.0 4.0 4.0 5.0 Minority interests 0.0 0.0 0.0 1.0 1.0 1.0 Net profit 79.0 106 112 138 150 170 Restated net profit 89.0 110 129 133 152 171 Change (%) 11.3% 23.6% 17.3% 3.1% 14.3% 12.5% Cash Flow Statement (EURm) Operating cash flows 91.0 110 133 142 161 180 Change in working capital (43.0) (5.0) (21.0) (10.0) (15.0) (21.0) Capex, net (7.0) (6.0) (1.0) (8.0) (8.0) (8.0) Financial investments, net 1.0 16.0 2.0 0.0 0.0 0.0 Acquisitions, net (40.0) (59.0) (87.0) (51.0) 0.0 0.0 Dividends (33.0) (33.0) (33.0) (33.0) (34.0) (34.0) Other (3.0) (3.0) 9.0 5.0 (2.0) 0.0 Net debt (26.0) (17.0) (4.0) (49.0) (152) (269) Free Cash flow 41.0 99.0 111 124 138 151 Balance Sheet (EURm) Company description Tangible fixed assets 18.0 36.0 23.0 19.0 14.0 9.0 Founded in 1988 and listed on Intangibles assets & goodwill 285 342 423 474 473 473 Investments 72.0 89.0 93.0 97.0 101 106 Euronext Paris since 1999, Alten is the Deferred tax assets 13.0 13.0 13.0 13.0 13.0 13.0 second largest Technology Consulting Current assets 531 590 682 745 808 878 player in Europe with more than Cash & equivalents 71.0 92.0 95.0 140 243 360 26,000 employees. The group's skills Total assets 990 1,163 1,329 1,488 1,652 1,838 encompass programme management, Shareholders' equity 561 650 739 844 961 1,098 Provisions 25.0 27.0 35.0 36.0 36.0 36.0 technical expertise, design, testing & Deferred tax liabilities 0.0 0.0 1.0 1.0 1.0 1.0 qualification and technical L & ST Debt 45.0 75.0 91.0 91.0 91.0 91.0 documentation, in embedded systems, Current liabilities 358 411 463 517 564 613 mechanics, and communications. In Total Liabilities 990 1,163 1,329 1,488 1,652 1,838 Capital employed 535 633 735 795 809 829 IT/Telecom/Networks, Alten specialises in network and systems Ratios Operating margin 9.60 9.90 10.30 9.60 10.00 10.30 architectures and technical Tax rate 34.40 31.60 31.80 28.90 30.10 29.70 information systems and software Net margin 5.80 6.80 6.10 6.90 6.90 7.20 engineering. Some 48% of sales are ROE (after tax) 14.10 16.30 15.20 16.40 15.60 15.50 generated in France, 10% in Germany, ROCE (after tax) 17.10 16.70 17.80 17.20 18.50 20.30 Gearing (5.00) (3.00) (1.00) (6.00) (16.00) (24.00) 9% in North America, 8% in Pay out ratio 42.20 31.60 29.90 24.50 22.50 19.80 Scandinavia, 5% in the UK, 5% in Number of shares, diluted 33.70 33.70 33.70 33.90 33.90 33.90 Spain, 4% in Italy, 4% in Belgium, and Data per Share (EUR) 3% in The Netherlands. Automotive EPS 2.37 3.16 3.34 4.08 4.44 5.05 accounts for 21% of sales, versus 19% Restated EPS 2.65 3.26 3.82 3.93 4.48 5.03 in Finance/IT, 16% in Aerospace, % change 10.9% 23.0% 17.2% 2.9% 14.0% 12.3% EPS bef. GDW 2.65 3.26 3.82 3.93 4.48 5.03 13% in Energy, 8% in Telecoms, 6% BVPS 16.65 19.29 21.93 24.90 28.35 32.39 in Multimedia, 5% in Operating cash flows 2.70 3.26 3.95 4.19 4.75 5.31 Defence/Security, and 3% in FCF 1.22 2.94 3.29 3.66 4.07 4.45 Railways/Shipbuilding. Net dividend 1.00 1.00 1.00 1.00 1.00 1.00
Source: Company Data; Bryan, Garnier & Co ests.
18
Alten
Update to our DCF model: EUR85 (vs. EUR74) We have applied our new beta of 1.55 to our DCF valuation (CAGR of 9.0%). As such, after updating our methodology, Alten’s valuation works out to EUR85.
Fig. 1: Update to our DCF valuation to EUR85 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 1 748 1 951 2 131 2 315 2 477 2 650 2 836 3 035 3 247 3 474 3 717 3 977 % chg 13,5% 11,6% 9,2% 8,6% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% Operating profit 181 187 213 239 260 278 298 319 341 365 390 418 as a % of sales 10,4% 9,6% 10,0% 10,3% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% Theoretical tax rate 31,7% 29,2% 30,0% 30,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 57 55 64 72 86 92 98 105 113 120 129 138 NOPAT 124 132 149 167 174 186 200 214 228 245 261 280 Depreciation and amortisation 12 13 13 13 12 13 14 15 16 17 19 20 as a % of sales 0,7% 0,7% 0,6% 0,6% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% Capex 14 8 8 8 12 13 14 15 16 17 19 20 as a % of sales 0,8% 0,4% 0,4% 0,3% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% WCR 219 228 244 265 297 318 340 364 390 417 446 477 as a % of sales 12,5% 11,7% 11,5% 11,4% 12,0% 12,0% 12,0% 12,0% 12,0% 12,0% 12,0% 12,0% Change in WCR 21 10 15 21 32 21 22 24 26 27 29 31 Free cash flows 101 127 139 151 142 165 178 190 202 218 232 249
Discounted free cash flows 101 124 125 124 107 114 113 111 108 107 105 103 Sum of discounted FCF 1 138 Terminal value 1 618 Enterprise value 2 756 Fair value of associates 17 Fair value of financial assets 80 Provisions 36 Fair value minority interests 0 Dilution (s/o, warrants, conv bds) 15 NPV of tax credits 13 Net debt on 31/12/2017e (EURm) -50 Equity value 2 895 Diluted nbr of shares (m) 33,9 Valuation per share (EUR) 85
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 85 8,5% 9,5% 10,5% 11,5% 12,5% 8,0% 82 91 100 109 118 8,5% 75 83 92 100 108 WACC (%) 9,0% 70 77 85 92 100 9,5% 65 72 79 86 92 10,0% 61 67 74 80 86
Source: Bryan, Garnier & Co ests.
19
Alten
Price Chart and Rating History
Alten
89.0
79.0
69.0
59.0
49.0
39.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
ALTEN Fair Value Achat Neutre Vente
Ratings Date Ratings Price 28/10/16 NEUTRAL EUR58.62 29/01/16 SELL EUR51.28
Target Price Date Target price 27/07/17 EUR74 27/04/17 EUR64 06/01/17 EUR60 28/10/16 EUR57 22/09/16 EUR54 28/07/16 EUR52 29/04/16 EUR48 05/04/16 EUR46 25/02/16 EUR47 29/01/16 EUR46 08/01/16 EUR48 30/07/15 EUR44 29/04/15 EUR42 24/03/15 EUR41 26/02/15 EUR38 30/01/15 EUR36 13/01/15 EUR35
20
INDEPENDENT RESEARCH UPDATE Altran Technologies 21st September 2017 Step by step towards the 13% margin target TMT Fair Value EUR19 vs. EUR17 (price EUR15.34) BUY
Bloomberg ALT FP We are reiterating our Buy recommendation and have lifted our DCF- Reuters ALTR.PA derived FV from EUR17 to EUR19 following the change in our beta. 12-month High / Low (EUR) 16.7 / 11.8 Altran is still on track to generate an operating margin of 13% in 2020 Market capitalisation (EURm) 2,696 Enterprise Value (BG estimates EURm) 2,976 despite the delayed start to margin improvement in Germany. Avg. 6m daily volume ('000 shares) 286.9 Free Float 86.9% Transformation progressing quickly. Since 2015, Altran has targeted 3y EPS CAGR 14.9% Gearing (12/16) 24% sales of more than EUR3bn for 2020, with EBIT margin at 13% and FCF Dividend yield (12/17e) 1.89% equivalent to 7% of sales, under the framework of the Altran 2020 Ignition plan, based on the rise in the value of services, higher offshore business, YE December 12/16 12/17e 12/18e 12/19e Revenue (€m) 2,120 2,330 2,525 2,713 operating excellence and geographical expansion. In early October 2017, EBITA €m) 221.0 253.0 290.0 330.0 Altran is set to have 19% of its employees offshore (6,000 staff) and by Op.Margin (%) 10.4 10.8 11.5 12.2 the end of the year, 10 global expertise centres should be in place. Diluted EPS (€) 0.83 0.93 1.10 1.26 EV/Sales 1.37x 1.28x 1.14x 1.01x EV/EBITDA 12.3x 10.9x 9.2x 7.8x A margin at 13% is not out of reach. We estimate that Altran needs to EV/EBITA 13.1x 11.8x 9.9x 8.3x P/E 18.5x 16.5x 13.9x 12.2x win at least 2.2 points of margin over three years to reach 13%. Admittedly ROCE 15.4 15.8 17.6 19.8 Germany, which was supposed to restore profitability in 2017 (around 3%), is now only set to break even due to the changing auto market and
17.0 the structuring investments required to gain market share. However, 16.0 management is forecasting a margin of 4-5% in 2018 and is maintaining its 15.0 10% target further out. Finally, streamlining of the US/offshore 14.0 organisation should pay off as of 2018. 13.0
12.0 Altran has just set up a five-year multi-currency 11.0 Further acquisitions.
10.0 credit line of EUR500m in order to pursue its acquisitions policy 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 ALTRAN TECHNOLOGIES SXX EUROPE 600 comfortably. Even if the maximum leverage authorised is 2.5-3x EBITDA, management intends to remain at 1-1.5x.
Attractive valuation. The share is trading on 2017e and 2018e EV/EBIT multiples of 11.8x and 9.9x, or an average discount of 10% relative to Alten.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué
r r
Altran Technologies
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 1,756 1,945 2,120 2,330 2,525 2,713 Change (%) 7.6% 10.8% 9.0% 9.9% 8.4% 7.5% lfl change (%) 3.7% 4.1% 5.9% 5.1% 7.4% 7.5% Adjusted EBITDA 183 208 236 273 311 351 Depreciation & amortisation (18.0) (22.0) (15.0) (20.0) (21.0) (21.0) Adjusted EBIT 165 186 221 253 290 330 EBIT 132 155 190 228 266 305 Change (%) 25.6% 17.4% 22.8% 20.0% 16.3% 14.7% Financial results (6.0) (11.0) (15.0) (19.0) (9.0) (7.0) Pre-Tax profits 126 144 175 209 257 298 Exceptionals 0.0 0.0 0.0 1.0 0.0 0.0 Tax (44.0) (43.0) (52.0) (65.0) (82.0) (95.0) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 Net profit 83.0 100 122 146 175 203 Restated net profit 106 123 146 163 194 222 Change (%) 15.2% 16.0% 18.7% 11.6% 19.0% 14.4% Cash Flow Statement (EURm) Operating cash flows 118 150 170 173 204 233 Change in working capital 17.0 (36.0) (63.0) 9.0 (8.0) (9.0) Capex, net (28.0) (33.0) (37.0) (50.0) (40.0) (41.0) Financial investments, net (1.0) (2.0) (9.0) (4.0) 0.0 0.0 Acquisitions, net (99.0) (168) (136) (78.0) 0.0 0.0 Dividends (19.0) (26.0) (33.0) (42.0) (51.0) (60.0) Other 140 200 67.0 (77.0) 1.0 1.0 Net debt 42.0 143 210 280 174 49.0 Free Cash flow 107 81.0 70.0 132 156 183 Balance Sheet (EURm) Company description Tangible fixed assets 53.0 65.0 74.0 105 126 146 Founded in 1982, and listed on Intangibles assets & goodwill 641 821 887 959 951 943 Investments 43.0 44.0 91.0 96.0 96.0 96.0 Euronext Paris since 1987, Altran Deferred tax assets 103 107 92.0 92.0 92.0 92.0 Technologies is the European leader Current assets 507 597 632 679 738 796 in High-tech Consulting & Cash & equivalents 445 525 478 478 584 709 Engineering. With a headcount of Total assets 1,792 2,158 2,255 2,408 2,586 2,781 more than 31,000, the group covers Shareholders' equity 711 794 862 879 993 1,126 Provisions 75.0 101 101 113 125 139 many areas (product development, Deferred tax liabilities 17.0 25.0 17.0 17.0 17.0 17.0 intelligent systems, PLM, information L & ST Debt 487 668 688 758 758 758 systems) in sectors such as Aerospace, Current liabilities 503 569 587 642 693 742 Defence & Rail (23% of sales), Total Liabilities 1,792 2,158 2,255 2,408 2,586 2,781 Capital employed 753 937 1,072 1,159 1,167 1,175 Energy, Industry & Life Sciences
(26%), Automotive, Infrastructure & Ratios Operating margin 9.40 9.60 10.40 10.80 11.50 12.20 Transportation (22%), Telecom & Tax rate 34.90 29.90 29.70 31.10 31.90 31.90 Media (17%), and Financial Services & Net margin 4.70 5.20 5.80 6.20 6.90 7.50 Government (12%). France represents ROE (after tax) 11.70 12.60 14.20 16.60 17.60 18.00 41% of sales, vs. 10% in Germany, ROCE (after tax) 15.80 15.00 15.40 15.80 17.60 19.80 Gearing 6.00 18.00 24.00 32.00 18.00 4.00 10% in Italy, 10% in Spain and Pay out ratio 31.90 33.30 34.30 34.90 34.00 33.90 Portugal, 9% in the UK, 7% in Number of shares, diluted 176 176 176 176 176 177 Benelux, 5% in North America, and Data per Share (EUR) 8% in other countries (Scandinavia, EPS 0.47 0.57 0.70 0.83 1.00 1.15 Switzerland, China, India). Restated EPS 0.60 0.70 0.83 0.93 1.10 1.26 % change 15.4% 16.7% 18.6% 12.0% 18.3% 14.5% EPS bef. GDW 0.60 0.70 0.83 0.93 1.10 1.26 BVPS 4.04 4.52 4.90 5.00 5.65 6.38 Operating cash flows 0.67 0.85 0.97 0.98 1.16 1.32 FCF 0.61 0.46 0.40 0.75 0.89 1.04 Net dividend 0.15 0.19 0.24 0.29 0.34 0.39
Source: Company Data; Bryan, Garnier & Co ests.
22
Altran Technologies
Update to our DCF model: EUR19 (vs. EUR17) We have applied our new beta of 1.14 to our DCF valuation (CAGR of 8.9%). As such, after updating our methodology, Altran's valuation works out to EUR19.
Fig. 1: Update to our DCF valuation to EUR19 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 2 120 2 330 2 525 2 713 2 849 2 991 3 141 3 298 3 463 3 636 3 818 4 009 % chg 9,0% 9,9% 8,4% 7,5% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% Operating profit 221 253 290 330 342 359 377 396 416 436 458 481 as a % of sales 10,4% 10,9% 11,5% 12,2% 12,0% 12,0% 12,0% 12,0% 12,0% 12,0% 12,0% 12,0% Theoretical tax rate 30,0% 31,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% Theoretical tax 66 78 93 106 109 115 121 127 133 140 147 154 NOPAT 155 175 197 224 233 244 256 269 283 296 311 327 Depreciation 20 20 21 21 43 45 47 49 52 55 57 60 as a % of sales 0,9% 0,9% 0,8% 0,8% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% Capex 47 50 40 41 43 45 47 49 52 55 57 60 as a % of sales 2,2% 2,1% 1,6% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% WCR 46 36 45 54 114 120 126 132 139 145 153 160 as a % of sales 2,2% 1,5% 1,8% 2,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% Change in WCR 63 -9 8 9 60 6 6 6 7 6 8 7 Free cash flows 65 154 170 195 173 238 250 263 276 290 303 320
Discounted free cash flows 65 151 153 161 131 166 160 154 149 143 138 134 Sum of discounted FCF 1 506 Terminal value 2 132 Enterprise value 3 638 Fair value of associates 0 Fair value of financial assets 95 Provisions 113 Fair value minority interests 1 Dilution (s/o, warrants, conv bds) 8 NPV of tax credits 92 Net debt on 31/12/2017e 280 Equity value 3 439 Diluted nbr of shares (m) 176,5 Valuation per share (EUR) 19
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 19,0 10,0% 11,0% 12,0% 13,0% 14,0% 8,0% 19 21 23 25 27 8,5% 18 19 21 23 24 WACC (%) 8,9% 16 18 19 21 23 9,5% 15 16 18 19 20 10,0% 14 15 16 18 19
Source: Bryan, Garnier & Co ests
23
Altran Technologies
Price Chart and Rating History
Altran Technologies 18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
ALTRAN TECHNOLOGIES Fair Value Achat Neutre Vente
Ratings
Date Ratings Price 29/07/16 BUY EUR12.85
05/04/16 NEUTRAL EUR12.275
Target Price
Date Target price 28/04/17 EUR17
10/03/17 EUR16
09/09/16 EUR15
29/07/16 EUR14 09/10/15 EUR13
31/07/15 EUR12
04/05/15 EUR11 24/03/15 EUR10
13/03/15 EUR9.6
16/02/15 EUR9.1
02/02/15 EUR9
13/01/15 EUR8.9
.
24
INDEPENDENT RESEARCH UPDATE Atos
21st September 2017 Pending other structuring acquisitions TMT Fair Value EUR153 vs. EUR133 (price EUR130.45) BUY vs. NEUTRAL
Bloomberg ATO FP We have upgraded our recommendation from Neutral to Buy and lifted Reuters ATOS.PA our DCF-derived Fair Value from EUR133 to EUR153 following the 12-month High / Low (EUR) 131.7 / 92.0 change to our beta. Beyond the group's stated aim to strengthen Market capitalisation (EURm) 13,724 Enterprise Value (BG estimates EURm) 12,805 positions in the US and at Worldline via acquisitions, we consider that Avg. 6m daily volume ('000 shares) 263.4 Atos should continue to benefit from the positive effects of the Free Float 85.9% transformation of its offers on growth and margins. 3y EPS CAGR 10.1% Gearing (12/16) -10% Dividend yield (12/17e) 1.38% Constantly improving growth. Atos has ramped up its organic growth (BG est. +2.4% for 2017, vs. +1.8% in 2016 and +0.4% in 2015) thanks YE December 12/16 12/17e 12/18e 12/19e Revenue (€m) 11,718 12,778 13,048 13,482 to the recovery in the Business & Platform Solutions business (consulting EBITA €m) 1,104 1,274 1,384 1,487 & systems integration) and robust growth in Big Data & Cybersecurity. Its Op.Margin (%) 9.4 10.0 10.6 11.0 aim to generate organic growth of 2-3% over 2017-19 is based on a target Diluted EPS (€) 7.06 7.87 8.86 9.43 EV/Sales 1.13x 1.00x 0.93x 0.85x of 40% of sales from digital offers (cloud, SAP HANA, digital workplace, EV/EBITDA 9.1x 7.5x 6.7x 5.9x IoT/analytics), vs. 13% in 2016, and boosting growth at Worldline. EV/EBITA 12.0x 10.1x 8.8x 7.7x P/E 18.5x 16.6x 14.7x 13.8x ROCE 21.9 25.2 27.3 29.5 Confirmed expertise in post-acquisition synergies. Since the arrival of Thierry Breton as CEO at end-2008, Atos has demonstrated its ability to
130.7 generate synergies in line with estimates or higher than expected (SIS, Bull,
120.7 Xerox ITO, Unify, Equens etc.). Whereas management remains very active
110.7 in the search for targets (especially for Worldline and in IT services in
100.7 North America), we consider that Atos should remain strict in terms of 90.7 financial discipline. 80.7
70.7 A successful industrialisation. The various programmes undertaken at 60.7 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 ATOS SXX EUROPE 600 the same time and rolled out on a group scale to industrialise and automate its service (artificial intelligence, RISE, plant automation in India, while limiting restructuring costs to 1% of sales) should help the group reach the 11% operating margin target for 2019.
Attractively valued. 2017e and 2018e EV/EBIT multiples of 10.1x and 8.8x remain attractive relative to the average of European IT services players.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué
r r Atos
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 9,051 10,686 11,718 12,778 13,048 13,482 Change (%) 5.1% 18.1% 9.7% 9.0% 2.1% 3.3% lfl change (%) -1.1% 0.4% 1.8% 2.4% 2.9% 3.3% Adjusted EBITDA 1,012 1,334 1,461 1,710 1,820 1,924 Depreciation & amortisation (288) (417) (357) (436) (437) (437) Adjusted EBIT 725 917 1,104 1,274 1,384 1,487 EBIT 440 589 813 869 1,002 1,116 Change (%) 5.7% 33.8% 38.0% 6.9% 15.3% 11.4% Financial results (52.0) (45.0) (49.0) (55.0) (31.0) (25.0) Pre-Tax profits 388 544 764 814 971 1,091 Exceptionals 0.0 0.0 12.0 0.0 0.0 0.0 Tax (104) (110) (145) (151) (175) (196) Profits from associates (2.0) 3.0 1.0 2.0 2.0 2.0 Minority interests 17.0 31.0 53.0 49.0 57.0 73.0 Net profit 265 406 579 615 741 824 Restated net profit 460 635 747 836 945 1,019 Change (%) 5.7% 38.0% 17.6% 11.9% 13.0% 7.8% Cash Flow Statement (EURm) Operating cash flows 549 751 1,030 1,176 1,298 1,387 Change in working capital 105 49.0 (38.0) 27.0 (23.0) 16.0 Capex, net (345) (403) (391) (475) (480) (480) Financial investments, net (1.0) 0.0 40.0 12.0 0.0 0.0 Acquisitions, net (253) (798) (694) (152) 0.0 0.0 Dividends (40.0) (32.0) (50.0) (171) (189) (210) Other 162 706 244 359 142 140 Net debt (989) (593) (481) (919) (1,546) (2,278) Free Cash flow 309 397 601 728 795 923 Balance Sheet (EURm) Company description Tangible fixed assets 694 819 741 756 778 799 Founded in 1997 following the merger Intangibles assets & goodwill 3,275 4,038 5,108 5,272 5,137 5,002 Investments 231 261 1,240 223 225 227 between Axime (1991) and Sligos Deferred tax assets 420 442 412 412 412 412 (1972), Atos has become the second Current assets 2,800 3,174 3,729 4,080 4,200 4,339 largest IT Services company in Cash & equivalents 1,620 1,947 2,122 2,560 3,187 3,919 Europe, employing nearly 100,000 Total assets 9,039 10,681 13,352 13,304 13,940 14,700 people today. The group generates Shareholders' equity 3,402 4,097 4,835 5,354 5,962 6,649 Provisions 1,616 1,408 2,570 1,626 1,556 1,476 56% of its revenues in Managed Deferred tax liabilities 66.0 70.0 101 101 101 101 Services, 27% in Consulting & L & ST Debt 631 1,354 1,641 1,641 1,641 1,641 Systems Integration, 6% in Big Data Current liabilities 3,323 3,752 4,205 4,583 4,680 4,834 & Cybersecurity, and 11% in Total Liabilities 9,039 10,681 13,352 13,304 13,940 14,700 Capital employed 2,413 3,504 4,354 4,435 4,416 4,371 Transactional Services (Worldline). At the geographic level, excluding Ratios Operating margin 8.00 8.60 9.40 10.00 10.60 11.00 Worldline, North America accounts Tax rate 26.80 20.20 19.00 18.60 18.00 18.00 for 20% of sales, followed by Net margin 3.10 4.00 5.20 5.20 6.10 6.60 Germany (19%), the UK (17%), ROE (after tax) 7.80 9.90 12.00 11.50 12.40 12.40 France (16%), and Benelux & Nordic ROCE (after tax) 25.40 22.90 21.90 25.20 27.30 29.50 Gearing (29.00) (14.00) (10.00) (17.00) (26.00) (34.00) countries (9%). Pay out ratio 30.40 28.00 28.90 30.80 28.40 28.10 Industry/Retail/Transport are the Number of shares, diluted 104 105 106 106 107 108 largest contributors to revenues Data per Share (EUR) (35%), followed by EPS 2.63 3.93 5.53 5.84 7.05 7.83 Government/Healthcare (28%), Restated EPS 4.43 6.07 7.06 7.87 8.86 9.43 Telecom/Media/Utilities (20%), and % change 3.7% 37.0% 16.3% 11.5% 12.6% 6.4% EPS bef. GDW 4.43 6.07 7.06 7.87 8.86 9.43 Financial Services (17%). BVPS 32.77 39.17 45.70 50.37 55.88 61.51 Operating cash flows 5.29 7.18 9.74 11.06 12.16 12.83 FCF 2.98 3.80 5.68 6.85 7.45 8.54 Net dividend 0.80 1.10 1.60 1.80 2.00 2.20
Source: Company Data; Bryan, Garnier & Co ests.
26
Atos
Update to our DCF model: EUR153 (vs. EUR133) We have applied our new beta of 0.90 to our DCF (WACC of 7.9%). After applying our methodology Atos' valuation works out at EUR153.
Fig. 1: Update to our DCF valuation to EUR153 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 11 718 12 778 13 048 13 482 13 752 14 027 14 308 14 594 14 886 15 184 15 488 15 798 % chg 9,7% 9,0% 2,1% 3,3% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% Operating profit 1 104 1 274 1 384 1 487 1 513 1 543 1 574 1 605 1 637 1 670 1 704 1 738 as a % of sales 9,4% 10,0% 10,6% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% Theoretical tax rate 19,0% 18,6% 18,0% 18,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 210 237 249 268 499 509 519 530 540 551 562 574 NOPAT 894 1037 1135 1219 1014 1034 1055 1075 1097 1119 1142 1164 Depreciation 399 459 457 457 481 491 501 511 521 531 542 553 as a % of sales 3,4% 3,6% 3,5% 3,4% 3,5% 3,5% 3,5% 3,5% 3,5% 3,5% 3,5% 3,5% Capex 421 480 480 480 481 491 501 511 521 531 542 553 as a % of sales 3,6% 3,8% 3,7% 3,6% 3,5% 3,5% 3,5% 3,5% 3,5% 3,5% 3,5% 3,5% WCR -476 -503 -479 -495 -413 -421 -429 -438 -447 -456 -465 -474 as a % of sales -4,1% -3,9% -3,7% -3,7% -3,0% -3,0% -3,0% -3,0% -3,0% -3,0% -3,0% -3,0% Change in WCR 38 -27 23 -16 82 -8 -8 -9 -9 -9 -9 -9 Free cash flows 834 1 043 1 089 1 212 932 1 042 1 063 1 084 1 106 1 128 1 151 1 173
Discounted free cash flows 834 1 024 990 1 021 728 755 713 674 637 602 570 538 Sum of discounted FCF 7 714 Terminal value 10 155 Enterprise value 17 869 Fair value of associates 2 Fair value of financial assets 222 Provisions 1 626 Fair value minority interests 1 512 Dilution (s/o, warrants, conv bds) 305 NPV of tax credits 412 Net debt on 31/12/2017e -919 Equity value 16 591
Diluted nbr of shares (m) 108,1 Valuation per share (EUR) 153
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 153 10,0% 10,5% 11,0% 11,5% 12,0% 7,0% 170 177 185 192 200 7,5% 152 159 166 173 180 WACC (%) 7,9% 141 147 153 160 166 8,5% 127 132 138 143 149 9,0% 117 122 127 132 137
Source: Bryan, Garnier & Co ests.
27
Atos
Price Chart and Rating History
Atos
121.9
101.9
81.9
61.9
41.9
21.9 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
ATOS Fair Value Achat Neutre Vente
Ratings Date Ratings Price 27/07/17 NEUTRAL EUR129.1 13/12/13 BUY EUR62.03
Target Price Date Target price 27/07/17 EUR133 25/04/17 EUR126 06/01/17 EUR118 09/12/16 EUR115 09/11/16 EUR114 21/10/16 EUR104 13/09/16 EUR102 27/07/16 EUR93 04/07/16 EUR92 22/04/16 EUR93 05/04/16 EUR90 08/01/16 EUR93 14/12/15 EUR94 07/09/15 EUR85 19/06/15 EUR86 24/03/15 EUR83 19/02/15 EUR77 10/02/15 EUR78 10/11/14 EUR74
28
INDEPENDENT RESEARCH UPDATE Axway Software 21st September 2017 Transformation has a price TMT Fair Value EUR21 vs. EUR23 (price EUR22.27) SELL
Bloomberg AXW FP We are reiterating our Sell recommendation and reducing our Fair Reuters AXW PA Value from EUR23 to EUR21 following the change to our beta. 12-month High / Low (EUR) 33.3 / 22.3 Following the group's profit warning on 18th July 2017, we consider that Market capitalisation (EURm) 463 Enterprise Value (BG estimates EURm) 466 management will firstly need to establish new targets before reassuring Avg. 6m daily volume ('000 shares) 11.30 investors on the group's ability to transform itself. Free Float 30.2% 3y EPS CAGR -2.0% Gearing (12/16) -3% A painful transformation. The profit warning issued in July 2017 Dividend yield (12/17e) 1.80% overturned the target for 2017 non-IFRS operating margin of more than 16.9% and undermined the aim to double sales in 2018. This underscored YE December 12/16 12/17e 12/18e 12/19e Revenue (EURm) 301.08 306.71 319.21 339.47 Axway's difficulties in implementing its own digital transformation at the EBITA EURm) 50.8 41.2 45.7 52.8 same times as making structuring acquisitions (Syncplicity, Appcelerator) Op.Margin (%) 16.9 13.4 14.3 15.6 and rolling out a sales model based on solutions. Diluted EPS (EUR) 2.15 1.65 1.79 2.03 EV/Sales 1.50x 1.52x 1.37x 1.18x EV/EBITDA 8.0x 10.4x 8.9x 7.1x No pain no gain. We remain convinced that the main reason for these EV/EBITA 8.9x 11.3x 9.6x 7.6x P/E 10.4x 13.5x 12.4x 11.0x mishaps is that management was distracted by its transforming projects. ROCE 13.0 9.2 10.0 11.6 These changes seem vital for Axway's competitiveness in its market of information flow governance software (file transfer, B2B exchanges, API 35.0 management). However, we not expect these efforts to pay off before end- 33.0
31.0 2017 or 2018, once a plan B has been established.
29.0
27.0
25.0 Prospective increase in free float. We still believe that Caravelle, which 23.0 owns 12% of Axway's capital, will sell off its stake at some point in time. 21.0 With free float of 42%, Axway could attract more international investors. 19.0 Meanwhile, Sopra Steria and Sopra GMT have stakes of 33% and 21% 17.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 AXWAY SOFTWARE SXX EUROPE 600 respectively.
Valuation with no catalysts. The share is trading on 2017e and 2018e EV/EBIT multiples of 11.3x and 9.6x respectively. Although these look low from a 2019 perspective, the lack of short-term catalysts is likely to prevent a rebound in the share price for the moment.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
Axway Software
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 262 285 301 307 319 339 Change (%) 10.1% 8.8% 5.8% 1.9% 4.1% 6.3% lfl change (%) 3.6% 0.0% 4.4% -0.4% 5.2% 6.3% Adjusted EBITDA 43.7 50.7 56.3 44.6 49.1 56.2 Depreciation & amortisation (4.0) (6.2) (5.5) (3.4) (3.4) (3.4) Adjusted EBIT 39.7 44.5 50.8 41.2 45.7 52.8 EBIT 31.3 27.4 35.1 27.2 34.5 41.6 Change (%) 15.1% -12.3% 28.0% -22.3% 26.6% 20.7% Financial results (0.92) (1.7) 0.14 0.19 0.48 1.5 Pre-Tax profits 30.3 25.8 35.2 27.4 35.0 43.1 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (3.6) 2.1 (3.7) (4.8) (7.2) (9.8) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.20 0.00 0.0 0.0 0.0 0.0 Net profit 26.5 27.9 31.5 22.7 27.8 33.3 Restated net profit 34.2 42.6 45.7 35.2 38.2 43.7 Change (%) -22.1% 24.6% 7.3% -23.0% 8.5% 14.5% Cash Flow Statement (EURm) Operating cash flows 36.4 36.3 44.3 35.3 41.3 46.8 Change in working capital 11.0 13.3 (5.9) 8.2 3.3 4.4 Capex, net (4.7) (4.7) (10.1) (7.0) (7.0) (7.0) Financial investments, net (0.04) (0.39) (1.3) 0.0 0.0 0.0 Acquisitions, net (49.7) (0.13) (45.9) (50.0) 0.0 0.0 Dividends (8.2) (8.2) (8.3) (8.5) (8.3) (9.4) Other 9.4 (39.9) 31.7 3.9 (0.10) 0.10 Net debt 3.1 (35.7) (12.6) 2.7 (26.4) (61.3) Free Cash flow 42.7 44.9 28.3 36.5 37.5 44.2 Balance Sheet (EURm) Company description Tangible fixed assets 6.9 7.8 14.5 18.3 22.1 25.8 Founded in 2001, and listed on Intangibles assets & goodwill 282 293 339 378 368 358 Investments 1.4 1.8 3.2 3.2 3.2 3.2 Euronext Paris since 2011, Axway Deferred tax assets 40.7 45.2 46.3 46.3 46.3 46.3 Software is one of the global leaders in Current assets 103 96.4 103 97.7 100.0 104 software publishing for governing the Cash & equivalents 44.6 44.7 51.7 51.7 80.8 116 flow of data. Its product offering Total assets 479 489 558 596 621 654 covers two segments: 1) Integration Shareholders' equity 299 341 375 392 411 435 Provisions 6.6 6.5 10.6 13.6 13.6 13.6 Foundation, which encompasses Deferred tax liabilities 9.5 7.1 1.00 1.00 1.00 1.00 managed file transfer (MFT), L & ST Debt 47.7 9.0 39.1 54.5 54.5 54.5 enterprise application integration Current liabilities 116 125 132 135 140 149 (EAI), enterprise services bus (ESB), Total Liabilities 479 489 558 596 621 654 Capital employed 302 305 362 395 385 374 business process management (BPM),
B2B data exchange, and the Ratios Operating margin 15.17 15.63 16.86 13.45 14.31 15.55 integration of application Tax rate 12.02 (8.16) 10.63 17.42 20.56 22.72 programming interfaces (API) for Net margin 10.12 9.79 10.46 7.39 8.70 9.81 mobile and the Internet of Things; 2) ROE (after tax) 8.87 8.18 8.40 5.78 6.75 7.65 Ecosystem Engagement, which ROCE (after tax) 11.92 15.31 12.99 9.24 10.01 11.57 Gearing 1.05 (10.48) (3.36) 0.70 (6.41) (14.09) encompasses API management and Pay out ratio 30.98 29.83 26.43 36.72 33.69 31.23 development, identity federation and Number of shares, diluted 20.57 21.09 21.23 21.28 21.32 21.57 validation, mobile app development, Data per Share (EUR) and operational intelligence. By EPS 1.29 1.34 1.51 1.09 1.34 1.60 geography, 41% of revenues are Restated EPS 1.66 2.02 2.15 1.65 1.79 2.03 generated in America, 31% in France, % change -22.5% 21.5% 6.6% -23.2% 8.3% 13.1% EPS bef. GDW 1.66 2.02 2.15 1.65 1.79 2.03 23% in the Rest of Europe, and 5% in BVPS 14.51 16.15 17.66 18.42 19.30 20.18 Asia-Pacific. By Industry, 42% of Operating cash flows 1.77 1.72 2.09 1.66 1.94 2.17 revenues are generated in Financial FCF 2.07 2.13 1.33 1.71 1.76 2.05 services, 21% in the Supply chain, Net dividend 0.40 0.40 0.40 0.40 0.45 0.50
13% with Government, and 7% in Healthcare. Source: Company Data; Bryan, Garnier & Co ests.
30
Axway Software
Update to our DCF model: EUR21 (vs. EUR23) We have applied our new beta of 1.47 to our DCF valuation (WACC of 11.9%). After updating our new methodology, Axway's valuation works out to EUR21.
Fig. 1: Update to our DCF valuation to EUR21 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 301 307 319 339 350 360 371 382 394 405 418 430 % chg 5,8% 1,9% 4,1% 6,3% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% Operating profit 51 41 46 53 56 58 59 61 63 65 67 69 as a % of sales 16,9% 13,4% 14,3% 15,6% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0% Theoretical tax rate 10,6% 17,4% 20,6% 22,7% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 5 7 9 12 18 19 20 20 21 21 22 23 NOPAT 45 34 36 41 37 39 40 41 42 43 45 46 Depreciation 6 3 3 3 3 4 4 4 4 4 4 4 as a % of sales 1,8% 1,1% 1,1% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% Capex 10 7 7 7 3 4 4 4 4 4 4 4 as a % of sales 3,4% 2,3% 2,2% 2,1% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% WCR -29 -37 -40 -45 -35 -36 -37 -38 -39 -41 -42 -43 as a % of sales -9,6% -12,1% -12,6% -13,2% -10,0% -10,0% -10,0% -10,0% -10,0% -10,0% -10,0% -10,0% Change in WCR 6 -8 -3 -4 10 -1 -1 -1 -1 -1 -1 -1 Free cash flows 35 39 36 42 28 40 41 42 43 45 46 47
Discounted free cash flows 35 38 31 32 19 25 23 21 19 18 16 15 Sum of discounted FCF 242 Terminal value 164 Enterprise value 406 Fair value of associates 0 Fair value of financial assets 3 Provisions 14 Fair value minority interests 0 NPV of tax credits 46 Dilution (s/o, warrants, conv bds) 12 Net debt on 31/12/2017e 3 Equity value 451
Diluted nbr of shares (m) 21,6 Valuation per share (EUR) 21
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 21 14,0% 15,0% 16,0% 17,0% 18,0% 11,0% 21 22 23 24 25 11,5% 20 21 22 23 24 WACC (%) 11,9% 19 20 21 22 23 12,5% 18 19 20 21 21 13,0% 17 18 19 20 21
Source: Bryan, Garnier & Co ests.
31
Axway Software
Price Chart and Rating History
Axway Software
36.2
31.2
26.2
21.2
16.2 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
AXWAY SOFTWARE Fair Value Achat Neutre Vente
Ratings Date Ratings Price 19/07/17 SELL EUR29.7 19/07/17 SELL EUR29.7 27/04/17 NEUTRAL EUR32.7 28/07/16 BUY EUR23.26 25/02/16 NEUTRAL EUR22.29
Target Price Date Target price 28/07/17 EUR23 28/07/17 EUR23 19/07/17 EUR25 24/02/17 EUR32 06/01/17 EUR33 28/10/16 EUR31 28/07/16 EUR28 05/04/16 EUR20 25/02/16 EUR24 25/02/16 EUR24 28/10/15 EUR30 30/07/15 EUR25 24/03/15 EUR20 26/02/15 EUR19 13/01/15 EUR17
32
INDEPENDENT RESEARCH UPDATE Capgemini 21st September 2017 Productivity machine on the move TMT Fair Value EUR113 vs. EUR105 (price EUR100.00) BUY
Bloomberg CAP FP We are reiterating our Buy recommendation and have lifted our DCF- Reuters CAPP.PA derived Fair Value from EUR105 to EUR113 following the change to 12-month High / Low (EUR) 102.0 / 71.6 our beta. Whereas organic growth is gradually returning to its normal Market capitalisation (EURm) 16,915 Enterprise Value (BG estimates EURm) 17,964 average level of 4%, we estimate that the industrialisation of services is Avg. 6m daily volume ('000 shares) 551.8 putting Capgemini on the right track to reach its operating margin Free Float 93.8% target of 12.5-13% for the medium term. 3y EPS CAGR 5.9% Gearing (12/16) 19% Dividend yield (12/17e) 1.65% Headwinds easing. The headwinds that have taken a toll on Capgemini's growth since mid-2016 (Brazil, energy in North America, end of Aspire YE December 12/16 12/17e 12/18e 12/19e Revenue (EURm) 12,539 12,702 12,994 13,627 contract in July 2017) are currently easing off and should enable the group EBITA EURm) 1,440 1,503 1,603 1,736 to restore normal average growth of 4% in 2018. In our view, the medium- Op.Margin (%) 11.5 11.8 12.3 12.7 term organic growth target of 5-7% should be feasible once the transition Diluted EPS (EUR) 5.73 6.22 6.47 6.80 EV/Sales 1.46x 1.41x 1.33x 1.22x of clients to digital and cloud is sufficiently well advanced. EV/EBITDA 10.7x 10.1x 9.2x 8.2x EV/EBITA 12.7x 12.0x 10.8x 9.6x P/E 17.4x 16.1x 15.5x 14.7x Robust industrialisation. The acquisition of Igate in 2015 for USD4.5bn ROCE 15.4 13.5 14.5 15.7 was a major step towards generating an operating margin of 12.5-13% over the medium term, in line with the top western IT services groups. The
102.9 industrialisation of services (automation and robotisation, offshore, wage
97.9 pyramid management) should enable Capgemini to offer the negative 92.9 effect of wage rises in India and pressure on prices during contract 87.9 renewals.
82.9
77.9 The means to make acquisitions but not at any price. With net debt 72.9 set to be virtually at zero by end-2018, we estimate that CapGemini has 67.9 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 CAPGEMINI SXX EUROPE 600 the means behind its acquisition aims. However, the failed attempt to acquire the North-American activities of Ciber and other missed opportunities shows that the group remains attached to paying its targets on reasonable multiples.
Valuation: US and Indian peers as a reference. We consider that the 2017e and 2018e EV/EBIT multiples (12,0x and 10.8x, respectively) are still attractive relative to US and Indian references.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r Capgemini
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 10,573 11,915 12,539 12,702 12,994 13,627 Change (%) 4.8% 12.7% 5.2% 1.3% 2.3% 4.9% lfl change (%) 3.4% 1.0% 2.7% 2.6% 4.0% 4.9% Adjusted EBITDA 1,224 1,532 1,715 1,783 1,888 2,026 Depreciation & amortisation (254) (270) (275) (280) (285) (290) Adjusted EBIT 970 1,262 1,440 1,503 1,603 1,736 EBIT 853 1,022 1,148 1,199 1,382 1,515 Change (%) 18.5% 19.8% 12.3% 4.4% 15.2% 9.7% Financial results (70.0) (118) (146) (77.0) (107) (101) Pre-Tax profits 783 904 1,002 1,122 1,275 1,414 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (210) 203 (94.0) (314) (357) (424) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests (7.0) (17.0) (13.0) (5.0) 1.0 5.0 Net profit 580 1,124 921 813 917 985 Restated net profit 674 849 981 1,060 1,105 1,173 Change (%) 22.2% 26.0% 15.6% 8.0% 4.2% 6.2% Cash Flow Statement (EURm) Operating cash flows 947 1,164 1,282 1,296 1,351 1,428 Change in working capital (133) (160) 37.0 (21.2) 0.69 (29.2) Capex, net (144) (179) (176) (244) (256) (267) Financial investments, net (12.0) (2.0) (36.0) (99.0) 0.0 0.0 Acquisitions, net 3.0 (3,392) (23.0) (171) 0.0 0.0 Dividends (174) (198) (229) (262) (279) (296) Other (27.0) 2,087 (618) (11.6) 33.5 41.6 Net debt (1,215) 1,747 1,376 1,049 379 (320) Free Cash flow 670 825 1,143 1,030 1,096 1,133 Balance Sheet (EURm) Company description Tangible fixed assets 515 763 754 685 623 567 Founded in 1967, and listed on Intangibles assets & goodwill 3,942 7,903 7,989 8,125 8,088 8,050 Investments 260 454 374 468 469 474 Euronext Paris since 1985, Capgemini is Deferred tax assets 1,065 1,412 1,473 1,383 1,282 1,170 the largest Europe-based IT Services Current assets 3,446 3,633 3,833 3,883 3,972 4,166 company, employing more than 190,000 Cash & equivalents 2,231 2,066 2,036 2,363 3,033 3,732 people. The group generates 60% of Total assets 11,459 16,231 16,459 16,906 17,468 18,159 revenues in application services, 21% in Shareholders' equity 5,083 6,913 7,285 7,634 8,055 8,532 Provisions 1,366 1,334 1,504 1,574 1,624 1,674 managed services and BPO, 15% in Deferred tax liabilities 158 221 227 227 227 227 technology and engineering services, L & ST Debt 1,016 3,813 3,412 3,412 3,412 3,412 and 4% in consulting Services. North Current liabilities 3,836 3,950 4,031 4,060 4,149 4,314 America accounts for 30% of sales, Total Liabilities 11,459 16,231 16,459 16,906 17,468 18,159 Capital employed 3,868 8,660 8,661 8,683 8,434 8,212 France 20%, the UK 16%, the rest of Europe 26%, and Asia-Pacific & Latin Ratios Operating margin 9.17 10.59 11.48 11.83 12.33 12.74 America 8%. Financial services are the Tax rate 26.82 (22.46) 9.38 28.00 28.00 30.00 largest contributors to sales (26%), Net margin 5.49 9.43 7.35 6.40 7.05 7.23 followed by Manufacturing (19%), ROE (after tax) 11.41 16.26 12.64 10.65 11.38 11.54 Government (17%), Consumer ROCE (after tax) 19.23 17.16 15.42 13.50 14.47 15.65 Gearing (23.90) 25.27 18.89 13.74 4.70 (3.75) products/Retail/Distribution/Transpor Pay out ratio 33.45 20.45 28.55 33.95 31.92 31.41 (16%), Energy/Utilities/Chemicals Number of shares, diluted 166 175 173 173 173 174 (11%), and Data per Share (EUR) Telecom/Media/Entertainment (7%). EPS 3.59 6.60 5.43 4.86 5.48 5.89 Restated EPS 4.12 4.90 5.73 6.22 6.47 6.80 % change 19.3% 19.1% 16.9% 8.4% 4.1% 5.1% EPS bef. GDW 4.12 4.90 5.73 6.22 6.47 6.80 BVPS 30.71 39.50 42.09 44.25 46.65 48.94 Operating cash flows 5.72 6.65 7.41 7.51 7.83 8.19 FCF 4.05 4.71 6.60 5.97 6.35 6.50 Net dividend 1.20 1.35 1.55 1.65 1.75 1.85
Source: Company Data; Bryan, Garnier & Co ests.
34 Capgemini
Update to our DCF valuation: EUR113 (vs. EUR105) We have applied our new beta of 1.02 to our DCF (WACC of 8.4%). As such, after updating our methodology, our valuation of Capgemini works out to EUR113.
Fig. 1: Update to our DCF valuation to EUR113 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 12 539 12 702 12 994 13 627 14 036 14 457 14 890 15 337 15 797 16 271 16 759 17 262 % chg 5,2% 1,3% 2,3% 4,9% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% Adjusted EBIT 1 440 1 503 1 603 1 736 1 754 1 807 1 861 1 917 1 975 2 034 2 095 2 158 as a % of sales 11,5% 11,8% 12,3% 12,7% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% Theoretical tax rate 9,4% 28,0% 28,0% 30,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 135 421 449 521 579 596 614 633 652 671 691 712 NOPAT 1305 1082 1154 1215 1175 1211 1247 1284 1323 1363 1404 1446 Depreciation 275 280 285 290 281 289 298 307 316 325 335 345 as a % of sales 2,2% 2,2% 2,2% 2,1% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% Capex 197 251 256 267 281 289 298 307 316 325 335 345 as a % of sales 1,6% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% WCR -198 -177 -177 -148 -140 -145 -149 -153 -158 -163 -168 -173 as a % of sales -1,6% -1,4% -1,4% -1,1% -1,0% -1,0% -1,0% -1,0% -1,0% -1,0% -1,0% -1,0% Change in WCR -37 21 -1 29 8 -4 -4 -4 -5 -5 -5 -5 Free cash flows 1 420 1 090 1 184 1 209 1 168 1 215 1 251 1 289 1 328 1 367 1 408 1 451 Discounted free cash flows 1 420 1 068 1 070 1 009 899 863 820 780 741 704 669 636
Sum of discounted FCF 8 624 Terminal value 11 039 Enterprise value 19 662 Fair value of associates -5 Fair value of financial assets 473 Provisions 1 504 Fair value minority interests 13 Dilution (s/o, warrants, conv bds) 489 NPV of tax credits 1 383 Net debt on 31/12/2017e 1 049 Equity value 19 436 Diluted nbr of shares (m) 171,9
Valuation per share (EUR) 113
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 113 10,5% 11,5% 12,5% 13,5% 14,5% 7,5% 114 123 133 142 151 8,0% 104 112 121 129 137 WACC (%) 8,4% 98 105 113 121 128 9,0% 89 96 102 109 116 9,5% 83 89 95 102 108
Source: Bryan, Garnier & Co ests.
35
Capgemini
Price Chart and Rating History
Capgemini 105.0 100.0
95.0
90.0
85.0
80.0
75.0
70.0
65.0
60.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
CAPGEMINI Fair Value Achat Neutre Vente
Ratings Date Ratings Price 20/07/07 BUY EUR55.95
Target Price Date Target price 28/07/17 EUR105 27/04/17 EUR100 29/11/16 EUR95 27/10/16 EUR93 17/08/16 EUR94 28/07/16 EUR93 28/07/16 EUR93 04/07/16 EUR95 02/06/16 EUR97 28/04/16 EUR96 05/04/16 EUR90 19/02/16 EUR93 05/01/16 EUR96 30/10/15 EUR97 16/09/15 EUR96 02/07/15 EUR98 29/05/15 EUR90 28/04/15 EUR89 24/03/15 EUR84 20/02/15 EUR76 13/01/15 EUR70
36
INDEPENDENT RESEARCH UPDATE Cast 21st September 2017 At the heart of challenges for IT services companies TMT Fair Value EUR3.6 vs. EUR3.4 (price EUR3.54) NEUTRAL
Bloomberg CAS.PA We reiterate our Neutral recommendation and raise our DCF-derived Reuters CAS FP Fair Value from EUR3.4 to EUR3.6 following the change in our beta. 12-month High / Low (EUR) 3.9 / 3.2 Market capitalisation (EURm) 57 Although recent sales have been affected by delays in major deals, we Enterprise Value (BG estimates EURm) 45 consider that Cast's positioning with IT services companies gives the Avg. 6m daily volume ('000 shares) 8.40 share the status of an opportunity stock. Free Float 32.0% 3y EPS CAGR -55.4% Gearing (12/16) -65% Sacrificing margins to maximise growth. 2016 sales were stable given Dividend yield (12/17e) NM the delays in four major transactions with two of them having again been delayed to H1 2017. Management remains convinced that Cast will deliver YE December 12/16 12/17e 12/18e 12/19e Revenue (EURm) 36.44 41.15 46.39 53.35 double-digit sales growth over 2017-2019 since the sales portfolio is EBITA EURm) -1.1 -0.9 -1.7 -0.6 gaining momentum in licences over EUR1m. As such, sales and marketing Op.Margin (%) -3.0 -2.1 -3.7 -1.2 spend has been strengthened, and is set to dent margins in our view. Diluted EPS (EUR) -0.11 -0.01 -0.05 -0.01 EV/Sales 1.37x 1.08x 0.94x 0.77x EV/EBITDA NS NS NS 257.8x Medium-term targets remain ambitious. Management has reiterated its EV/EBITA NS NS NS NS P/E NS NS NS NS target for EUR60m in sales in 2020, driven by four factors: 1) geographical ROCE -47.5 7.9 28.7 7.3 expansion (US, UK, Germany, India, China), 2) sales development through partners (IT services companies, consulting companies), 3) 4.3 emerging products like the entry-range SaaS solution, Cast Highlight, 4) 4.1 the acquisition of technological bricks or complementary products. 3.9
3.7 Relations are improving between 3.5 Medium-term speculative appeal. management and DevFactory (Joe Liemandt), which has a 20.9% stake in 3.3 the group, since Cast has understood the vision of its long-term investors. 3.1 The two representatives are convinced that the valuation is very low due 2.9 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 CAST SXX EUROPE 600 to recent transactions in the industry.
Above all an opportunity stock. Higher EV/sales multiples could be justified by the fact that 20-25% of Cast's sales stem from IT services companies that rely on Cast for their own application services activities (IBM, Capgemini, Cognizant, Atos, HCL, CGI, Accenture, Sopra Steria, Wipro, Infosys).
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
Cast
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 33.2 36.3 36.4 41.2 46.4 53.4 Change (%) 12.2% 9.6% 0.3% 12.9% 12.7% 15.0% lfl change (%) 12.2% -1.6% 0.4% 16.0% 15.5% 15.0% Adjusted EBITDA 5.0 1.3 (0.52) (0.16) (0.93) 0.16 Depreciation & amortisation (2.9) (0.46) (0.58) (0.70) (0.80) (0.80) Adjusted EBIT 2.0 0.86 (1.1) (0.86) (1.7) (0.64) EBIT 2.0 0.76 (1.1) (0.88) (1.7) (0.66) Change (%) 8 809% -61.5% -248% -% -% -% Financial results 0.18 0.13 0.12 0.20 0.30 0.40 Pre-Tax profits 2.1 0.88 (1.00) (0.68) (1.4) (0.26) Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (0.45) (0.84) (0.68) 0.58 0.65 0.09 Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 Net profit 1.7 0.05 (1.7) (0.10) (0.80) (0.17) Restated net profit 1.8 0.07 (1.7) (0.08) (0.77) (0.15) Change (%) 769% -95.9% -2 362% -95.4% 901% -80.9% Cash Flow Statement (EURm) Operating cash flows 4.5 1.4 (0.40) 0.60 0.00 0.63 Change in working capital 1.8 (0.52) (4.6) 5.2 1.7 2.2 Capex, net (1.2) (0.46) (0.50) (0.60) (0.60) (0.65) Financial investments, net 0.0 0.0 0.0 0.0 0.0 0.0 Acquisitions, net 0.0 0.0 0.0 0.0 0.0 0.0 Dividends 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.52 0.21 (0.22) 0.0 0.0 0.0 Net debt (9.5) (13.0) (7.5) (12.7) (13.8) (16.0) Free Cash flow 5.1 0.41 (5.5) 5.2 1.1 2.2 Balance Sheet (EURm) Company description Tangible fixed assets 0.41 0.53 0.65 0.59 0.43 0.29 Founded in 1990 and listed on Intangibles assets & goodwill 0.50 0.42 0.29 0.26 0.22 0.20 Investments 0.35 0.35 0.38 0.38 0.38 0.38 Euronext Paris since 1999, Cast is the Deferred tax assets 1.5 1.8 1.7 1.7 1.7 1.7 pioneer and global leader in software Current assets 17.2 15.7 19.3 16.3 17.1 18.2 quality analysis and measurement. Its Cash & equivalents 10.8 14.5 8.7 14.0 15.1 17.2 products, which are part of the Total assets 30.8 33.4 31.1 33.2 34.9 38.0 delivery and maintenance processes of Shareholders' equity 10.0 13.1 11.4 11.3 10.5 10.3 Provisions 0.86 0.83 1.1 1.1 1.1 1.1 the world's largest IT Services Deferred tax liabilities 0.0 0.0 0.0 0.0 0.0 0.0 companies, bring objective visibility L & ST Debt 1.3 1.5 1.3 1.3 1.3 1.3 for measuring performance and Current liabilities 18.7 17.9 17.3 19.5 22.0 25.3 managing IT development, Total Liabilities 30.8 33.4 31.1 33.2 34.9 38.0 Capital employed 0.48 0.09 3.9 (1.4) (3.3) (5.6) maintenance et sourcing activities efficiently. More than 250 large Ratios Operating margin 6.13 2.36 (3.02) (2.10) (3.72) (1.20) companies in Europe, America and Tax rate 21.09 94.57 (68.27) 85.00 45.00 33.00 India trust Cast for preventing risks Net margin 5.10 0.13 (4.61) (0.25) (1.71) (0.32) and service outages while reducing IT ROE (after tax) 16.98 0.37 (14.74) (0.91) (7.57) (1.67) development costs. ROCE (after tax) 340 140 (47.45) 7.86 28.69 7.34 Gearing (95.23) (99.28) (65.47) (112) (131) (154) Pay out ratio 0.0 0.0 NM NM NM NM Number of shares, diluted 15.25 15.21 15.29 15.36 15.36 15.36 Data per Share (EUR) EPS 0.14 0.00 (0.11) (0.01) (0.05) (0.01) Restated EPS 0.12 0.00 (0.11) (0.01) (0.05) (0.01) % change 765% -95.9% -2 349% -95.4% 901% -80.9% EPS bef. GDW 0.12 0.00 (0.11) (0.01) (0.05) (0.01) BVPS 0.65 0.86 0.75 0.74 0.68 0.67 Operating cash flows 0.30 0.09 (0.03) 0.04 0.00 0.04 FCF 0.34 0.03 (0.36) 0.34 0.07 0.14 Net dividend 0.0 0.0 0.0 0.0 0.0 0.0
Source: Company Data; Bryan, Garnier & Co ests.
38
Cast
Update to our DCF model: EUR3.6 (vs. EUR3.4) We have applied our new beta of 1.47 to our DCF valuation (WACC of 11.9%). As such, after updating our methodology, the valuation of Cast works out to EUR3.6.
Fig. 1: Update to our DCF valuation to EUR3.6 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 36 41 46 53 59 65 71 78 86 95 104 114 % chg 0,3% 12,9% 12,7% 15,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% Operating profit -1 -1 -2 -1 4 4 4 5 5 6 6 7 as a % of sales -3,0% -2,1% -3,7% -1,2% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% Theoretical tax rate 0,0% 0,0% 0,0% 0,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 0 0 0 0 1 1 1 2 2 2 2 2 NOPAT -1 -1 -2 -1 2 3 3 3 3 4 4 5 Depreciation 1 1 1 1 1 1 1 1 1 1 2 2 as a % of sales 1,6% 1,7% 1,7% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% Capex 1 1 1 1 1 1 1 1 1 1 2 2 as a % of sales 1,4% 1,5% 1,3% 1,2% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% WCR 2 -3 -5 -7 -8 -8 -9 -10 -11 -12 -14 -15 as a % of sales 5,5% -7,8% -10,6% -13,3% -13,0% -13,0% -13,0% -13,0% -13,0% -13,0% -13,0% -13,0% Change in WCR 5 -5 -2 -2 -1 -1 -1 -1 -1 -1 -1 -1 Free cash flows -6 4 0 2 3 3 4 4 4 5 5 6
Discounted free cash flows -6 4 0 1 2 2 2 2 2 2 2 2 Sum of discounted FCF 20 Terminal value 21 Enterprise value 40 Fair value of associates 0 Fair value of financial assets 0 Provisions 1 Fair value minority interests 0 NPV of tax credits 2 Dilution (s/o, warrants, conv bds) 1 Net debt on 31/12/2017e -13 Equity value 55
Diluted nbr of shares (m) 15,4 Valuation per share (EUR) 3,6
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 3,6 2,0% 4,0% 6,0% 8,0% 10,0% 11,0% 3,1 3,5 3,9 4,3 4,7 11,5% 3,0 3,4 3,7 4,1 4,5 WACC (%) 11,9% 2,9 3,3 3,6 3,9 4,3 12,5% 2,8 3,1 3,4 3,7 4,0 13,0% 2,7 3,0 3,3 3,6 3,9
Source: Bryan, Garnier & Co ests.
39
Cast
.Price Chart and Rating History
Cast 4.0 3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
3.1
3.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
CAST Fair Value Achat Neutre Vente
Ratings
Date Ratings Price 05/04/16 NEUTRAL EUR3.57
29/04/15 BUY EUR3.4
Target Price
Date Target price 28/07/17 EUR3.4
03/11/16 EUR3.3
05/04/16 EUR3.6
02/02/16 EUR3.9 08/01/16 EUR4.4
03/11/15 EUR4.7
29/04/15 EUR4.9
40
INDEPENDENT RESEARCH UPDATE Dassault Systèmes 21st September 2017 Boeing changes the landscape TMT Fair Value EUR86 vs. EUR65 (price EUR85.54) NEUTRAL vs. SELL
Bloomberg DSY FP We have upgraded our recommendation from Sell to Neutral as well as Reuters DAST.PA our DCF-derived Fair Value from EUR65 to EUR86 following the 12-month High / Low (EUR) 85.9 / 68.3 change to our beta. We recognise that it is difficult to rid ourselves of Market capitalisation (EURm) 22,171 Enterprise Value (BG estimates EURm) 20,029 Dassault Systemes' history in terms of exceeding expectations, and that Avg. 6m daily volume ('000 shares) 277.2 Boeing should step up growth. Free Float 50.5% 3y EPS CAGR 7.5% Gearing (12/16) -38% Track record speaks for itself. Dassault Systèmes continues to benefit Dividend yield (12/17e) 0.66% from a convincing history in terms of exceeding expectations. Since early 2008, the software publisher has exceeded the mid-range of its quarterly YE December 12/16 12/17e 12/18e 12/19e Revenue (€m) 3,056 3,218 3,376 3,658 forecasts in non-IFRS terms by an average of 3% for sales, 9% for EBITA €m) 947.7 1,002 1,084 1,213 operating profit and EPS and 1.4 points for EBIT margin. On a constant- Op.Margin (%) 31.0 31.2 32.1 33.2 currency basis, since Q4 2009, the group has exceeded its forecasts by 2% Diluted EPS (€) 2.71 2.83 3.03 3.37 EV/Sales 6.77x 6.22x 5.76x 5.13x for sales, 4% for operating profit and 0.8 points for operating margin. EV/EBITDA 20.7x 19.0x 17.1x 14.8x EV/EBITA 21.8x 20.0x 18.0x 15.5x P/E 31.6x 30.2x 28.2x 25.4x Forthcoming strategic plan in the firing line. The 2014-2019 strategic ROCE 30.8 34.2 40.0 50.2 plan targeted average sales growth of 14% over 2014-2019 (9% excluding acquisitions) and EPS growth of 15% a year to reach EUR3.50 in 2019. In 89.8 the current scope, our scenario points to 10% annual growth in sales (o/w 84.8 7% organic) and 13% for EPS given the long sales cycles on the 79.8 3DExperience platform. We estimate that investors are now looking at the
74.8 next plan (2018-2023?), which could be unveiled in mid-2018.
69.8
64.8 Potential with Boeing and snowball effect? The recent announcement of the extension of the Boeing contract to the 3DExperience platform 59.8 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 DASSAULT SYSTEMES SXX EUROPE 600 should help Dassault Systèmes accelerate its growth over the medium term, bearing in mind that the effect will be incremental (software rental). This should prompt Boeing outsourcers and suppliers to do the same and could even interest rivals.
Demanding valuation set to remain high. The share is trading on 2017e and 2018e EV/EBIT multiples of 20.0x and 18.0x, or a 5-10% premium versus the European software average.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué
r r
Dassault Systèmes
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 2,294 2,839 3,056 3,218 3,376 3,658 Change (%) 11.0% 23.8% 7.6% 5.3% 4.9% 8.4% lfl change (%) 5.0% 7.0% 6.0% 6.0% 7.4% 8.4% Adjusted EBITDA 677 897 998 1,055 1,137 1,267 Depreciation & amortisation (43.0) (51.8) (50.6) (52.6) (53.0) (54.0) Adjusted EBIT 634 845 948 1,002 1,084 1,213 EBIT 431 633 672 732 819 948 Change (%) -14.4% 47.0% 6.1% 8.9% 11.9% 15.8% Financial results 14.9 (0.12) (10.5) 10.0 15.0 20.0 Pre-Tax profits 446 633 661 742 834 968 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (153) (227) (209) (249) (275) (310) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 1.2 3.8 5.0 5.5 6.0 6.5 Net profit 291 402 447 488 553 652 Restated net profit 489 620 708 747 808 907 Change (%) -0.7% 26.9% 14.2% 5.5% 8.2% 12.3% Cash Flow Statement (EURm) Operating cash flows 480 609 698 780 842 942 Change in working capital 19.3 23.8 (76.2) 42.5 17.6 56.2 Capex, net (45.4) (43.6) (56.7) (70.0) (48.0) (50.0) Financial investments, net (0.36) 5.8 19.6 10.0 0.0 0.0 Acquisitions, net (953) (20.2) (263) (22.1) 0.0 0.0 Dividends (35.8) (98.4) (102) (51.3) (146) (166) Other 15.1 692 36.5 (163) (89.5) (100) Net debt (816) (1,351) (1,493) (2,142) (2,717) (3,399) Free Cash flow 454 590 565 752 811 949 Balance Sheet (EURm) Company description Tangible fixed assets 137 135 135 171 185 200 Founded in 1981, and listed on Intangibles assets & goodwill 2,703 2,687 2,927 2,769 2,590 2,410 Investments 69.5 132 175 170 176 183 Euronext Paris since 1996, Dassault Deferred tax assets 79.6 115 136 136 136 136 Systèmes is the global leader in Current assets 804 890 1,078 1,135 1,181 1,269 Product Lifecycle Management (PLM) Cash & equivalents 1,175 2,351 2,493 3,142 3,717 4,399 software, with its 3DExperience Total assets 4,968 6,311 6,943 7,523 7,985 8,597 platform. Its product offering includes Shareholders' equity 2,960 3,488 3,883 4,353 4,746 5,208 Provisions 208 202 238 249 254 259 3D design (Catia, 36% of software Deferred tax liabilities 219 214 259 259 259 259 sales), collaborative product data L & ST Debt 360 1000 1000 1000 1000 1000 management (Enovia, 12%), 3D Current liabilities 1,222 1,408 1,563 1,663 1,727 1,871 mechanical design for the mid-market Total Liabilities 4,968 6,311 6,943 7,523 7,985 8,597 Capital employed 2,144 2,136 2,390 2,211 2,028 1,809 (SolidWorks, 23%), simulation
(Simulia), manufacturing operations Ratios Operating margin 27.62 29.77 31.01 31.15 32.09 33.15 management (Delmia), biomaterials Tax rate 34.39 35.88 31.64 33.50 33.00 32.00 and drug design (Biovia), earth Net margin 12.69 14.16 14.64 15.16 16.36 17.81 modelling (Geovia), content search ROE (after tax) 9.84 11.53 11.52 11.21 11.64 12.51 (Exalead)... The group generates 42% ROCE (after tax) 22.57 28.93 30.80 34.21 40.05 50.21 Gearing (27.56) (38.74) (38.45) (49.20) (57.26) (65.27) of software revenues in Europe, 30% Pay out ratio 37.76 29.99 30.60 30.00 30.00 30.00 in the Americas, and 28% in Asia- Number of shares, diluted 261 261 261 263 266 269 Pacific. 'New' Industries account for Data per Share (EUR) 31% of sales (CPG & Retail, Life EPS 1.14 1.57 1.73 1.88 2.13 2.51 Sciences, Energy, High-tech, Restated EPS 1.87 2.37 2.71 2.83 3.03 3.37 Construction), as well as Transport % change -3.3% 26.8% 14.2% 4.7% 6.9% 11.0% EPS bef. GDW 1.87 2.37 2.71 2.83 3.03 3.37 (31%), followed by Industrial BVPS 11.33 13.34 14.86 16.53 17.81 19.33 Equipment (16%), Aerospace & Operating cash flows 1.84 2.33 2.67 2.96 3.16 3.50 Defence (13%), and Business Services FCF 1.74 2.26 2.16 2.86 3.04 3.52 (9%). Net dividend 0.43 0.47 0.53 0.56 0.64 0.75
Source: Company Data; Bryan, Garnier & Co ests.
42
Dassault Systèmes
Update to our DCF model: EUR86 (vs. EUR65) We have applied our new beta of 0.88 to our DCF (WACC of 7.8%). As such, after the update to our methodology, the valuation of Dassault Systèmes works out to EUR86.
Fig. 1: Update to our DCF valuation to EUR86 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 3 056 3 218 3 376 3 658 3 915 4 189 4 482 4 795 5 131 5 490 5 875 6 286 % chg 7,6% 5,3% 4,9% 8,4% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% Operating profit 948 1 002 1 084 1 213 1 292 1 382 1 479 1 583 1 693 1 812 1 939 2 074 as a % of sales 31,0% 31,2% 32,1% 33,2% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax rate 31,6% 33,5% 33,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% 32,0% Theoretical tax 300 336 358 388 413 442 473 506 542 580 620 664 NOPAT 648 667 726 825 878 940 1 006 1 076 1 151 1 232 1 318 1 411 Depreciation 51 53 53 54 59 63 67 72 77 82 88 94 as a % of sales 1,7% 1,6% 1,6% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% Capex 57 70 48 50 59 63 67 72 77 82 88 94 as a % of sales 1,9% 2,2% 1,4% 1,4% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% WCR -486 -528 -546 -602 -626 -670 -717 -767 -821 -878 -940 -1 006 as a % of sales -16% -16% -16% -16% -16% -16% -16% -16% -16% -16% -16% -16% Change in WCR 76 -42 -18 -56 -24 -44 -47 -50 -54 -57 -61 -66 Free cash flows 566 692 749 885 903 984 1 053 1 126 1 205 1 290 1 380 1 476
Discounted free cash flows 566 679 682 748 708 716 711 706 701 696 691 686 Sum of discounted FCF 7 038 Terminal value 13 293 Enterprise value 20 331 Fair value of associates 6 Fair value of financial assets 165 Provisions 249 Fair value minority interests 23 Dilution (s/o, warrants, conv bds) 637 NPV of tax credits 136 Net debt on 31/12/2017e -2 142 Equity value 23 145
Diluted nbr of shares (m) 269,4 Valuation per share (EUR) 86
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis –EBIT margin and WACC (EUR)
EBIT margin (%) 86 29,0% 31,0% 33,0% 35,0% 37,0% 7,0% 90 95 99 104 109 7,5% 82 86 90 94 98 WACC (%) 7,8% 78 82 86 90 93 8,5% 69 73 76 79 83 9,0% 65 68 71 74 77
Source: Bryan, Garnier & Co ests.
43
Dassault Systèmes
Price Chart and Rating History
Dassault Systèmes 95.0
90.0
85.0
80.0
75.0
70.0
65.0
60.0
55.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
DASSAULT SYSTEMES Fair Value Achat Neutre Vente
Ratings Date Ratings Price 30/06/15 SELL EUR68.2
Target Price Date Target price 26/07/17 EUR65 03/02/17 EUR64 06/01/17 EUR66 04/07/16 EUR64 13/06/16 EUR63 22/04/16 EUR62 05/02/16 EUR63 08/01/16 EUR65 04/12/15 EUR66 23/10/15 EUR60 24/07/15 EUR61 30/06/15 EUR60 24/03/15 EUR63 12/03/15 EUR59 06/02/15 EUR56
44
INDEPENDENT RESEARCH UPDATE Indra Sistemas 21st September 2017 H2 2017 far more dynamic TMT Fair Value EUR16 (price EUR13.52) BUY-Top Picks
Bloomberg IDR SM We are reiterating our Buy recommendation and our Fair Value based Reuters IDR.MC on a DCF of EUR16 following the change to our beta. In our view, the 12-month High / Low (EUR) 13.9 / 9.5 share's re-rating is far from over: 1) Indra's recovery has just crossed a Market capitalisation (EURm) 2,388 Enterprise Value (BG estimates EURm) 3,045 first milestone, 2) Tecnocom provides double-digit enhancement to Avg. 6m daily volume ('000 shares) 670.7 EPS. Free Float 70.8% 3y EPS CAGR 40.4% The first stage of the recovery is complete. Since the arrival of Gearing (12/16) 138% Dividend yield (12/17e) 2.59% Fernando Abril-Martorell as CEO, Indra's recovery has kicked in with the
group generating an operating margin of 6% in 2016 vs. 1.6% in 2015 and YE December 12/16 12/17e 12/18e 12/19e a clear improvement in free cash flow. Within the space of 21 months and Revenue (€m) 2,709 3,052 3,239 3,352 EBITA €m) 162.0 223.0 289.0 329.0 despite the acquisition of Tecnocom in April 2017, the group reduced its Op.Margin (%) 6.0 7.3 8.9 9.8 financial leverage to 2.9x EBITDA at end-June 2017 vs. 6.6x at end- Diluted EPS (€) 0.39 0.68 0.92 1.08 EV/Sales 1.07x 1.00x 0.89x 0.80x September 2015 especially thanks to a plunge in WCR. EV/EBITDA 12.6x 10.1x 7.7x 6.5x EV/EBITA 18.0x 13.7x 10.0x 8.2x The acquisition of Tecnocom should be extremely earnings P/E 34.7x 19.9x 14.7x 12.5x enhancing. The acquisition underway of Tecnocom should primarily be ROCE 10.1 14.7 19.0 21.9 seen as a means for Indra to undertake significant economies of scale in its IT business, to reconquer a clear leadership position in IT services in 14.2 Spain and restore "respectable" margins in its IT business (60% of sales). 13.2 We estimate that if Indra unlocks the EUR30.5m in cost synergies 12.2 promised by mid-2019, the operation should enhance 2018 and 2019 EPS 11.2 by respectively 11% and 12%.
10.2
9.2 Confidence in sales recovery. Whereas management is set to announce
8.2 a new strategic plan by end-2017, we consider that the organic decline seen 21/03/16 21/06/16 21/09/16 21/12/16 21/03/17 21/06/17 21/09/17 INDRA SISTEMAS SXX EUROPE 600 in H1 2017 (-4%) is not representative of what we expect over the full year (+1%) given the catalysts likely in H2: significant electoral contracts (Argentina, Angola etc.) renewed growth in the transport and traffic division, end to the negative base effect caused by the halt to a BPO contract with Vodafone in July 2016.
An attractive valuation. With a CAGR in our EPS estimate of 40% over 2016-2019e, the share is trading on 2017e and 2018e EV/EBIT multiples of 13.7x and 10.0x.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
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Indra Sistemas
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 2,938 2,850 2,709 3,052 3,239 3,352 Change (%) 0.8% -3.0% -4.9% 12.6% 6.1% 3.5% lfl change (%) 3.5% -2.0% -2.8% 1.1% 2.8% 3.5% Adjusted EBITDA 266 107 231 301 373 414 Depreciation & amortisation (67.0) (62.0) (68.0) (78.0) (84.0) (85.0) Adjusted EBIT 199 46.0 162 223 289 329 EBIT (42.0) (641) 162 192 258 328 Change (%) -121% -% -% 18.9% 34.3% 27.2% Financial results (51.0) (64.0) (39.0) (53.0) (48.0) (43.0) Pre-Tax profits (93.0) (705) 123 139 210 285 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax 7.0 64.0 (54.0) (29.0) (50.0) (68.0) Profits from associates (3.0) 0.0 2.0 1.0 1.0 1.0 Minority interests 2.0 (1.0) 0.0 0.0 1.0 1.0 Net profit (92.0) (641) 70.0 110 160 216 Restated net profit 107 (73.0) 75.0 138 188 221 Change (%) -17.7% -168% -203% 84.0% 36.2% 17.6% Cash Flow Statement (EURm) Operating cash flows 15.0 (158) 146 179 245 308 Change in working capital 125 182 66.0 (51.0) 20.0 21.0 Capex, net (70.0) (43.0) (28.0) (45.0) (47.0) (47.0) Financial investments, net (8.0) 4.0 (6.0) 0.0 0.0 0.0 Acquisitions, net 0.0 0.0 0.0 (342) 0.0 0.0 Dividends (56.0) (1.0) (1.0) 0.0 (62.0) (79.0) Other (68.0) 65.0 1.0 9.0 (1.0) (6.0) Net debt 663 699 523 657 501 304 Free Cash flow 70.0 (19.0) 184 83.0 218 282 Balance Sheet (EURm) Company description Tangible fixed assets 127 137 103 81.0 58.0 34.0 Founded in 1992 and listed on the Intangibles assets & goodwill 873 760 757 1,087 1,072 1,057 Investments 97.0 125 300 301 301 302 Madrid Stock Exchange since 1999, Deferred tax assets 193 200 178 178 178 178 Indra is a Spanish Technology and IT Current assets 1,897 1,502 1,319 1,575 1,663 1,705 Services group, employing more than Cash & equivalents 294 342 674 674 691 750 35,000 people. The group generates Total assets 3,481 3,064 3,332 3,896 3,964 4,026 2/3 of its revenue in Solutions Shareholders' equity 954 308 378 603 702 839 Provisions 40.0 103 99.0 99.0 99.0 99.0 (Consulting, Systems Integration, Deferred tax liabilities 2.0 3.0 12.0 12.0 12.0 12.0 Simulation and Defence Electronic L & ST Debt 957 1,041 1,197 1,331 1,192 1,054 Equipment) and 1/3 in Services Current liabilities 1,529 1,609 1,646 1,851 1,958 2,022 (Application and Infrastructure Total Liabilities 3,481 3,064 3,332 3,896 3,964 4,026 Capital employed 1,617 1,007 901 1,260 1,203 1,143 Management, BPO). By region, Spain represents an 43% of sales, America Ratios Operating margin 6.80 1.60 6.00 7.30 8.90 9.80 24%, the Rest of Europe 19%, and Tax rate 7.50 9.10 43.90 20.90 23.80 23.90 Asia, Middle East & Africa 14%. By Net margin (3.10) (22.50) 2.60 3.60 4.90 6.40 Industry, Transport & Traffic (23%) is ROE (after tax) (9.60) (208) 18.50 18.20 22.80 25.70 the largest contributor to sales, ROCE (after tax) 12.90 (11.70) 10.10 14.70 19.00 21.90 Gearing 69.00 227 138 109 71.00 36.00 followed by Security & Defence Pay out ratio NM NM 0.0 56.50 50.00 44.70 (22%), Financial Services (18%), Number of shares, diluted 182 182 192 204 204 204 Energy & Industry (15%), Public Data per Share (EUR) Administration & Healthcare (15%), EPS (0.56) (3.91) 0.43 0.62 0.90 1.23 and Telecom & Media (8%). Restated EPS 0.59 (0.40) 0.39 0.68 0.92 1.08 % change -18.1% -% -% 74.4% 35.3% 17.4% EPS bef. GDW 0.59 (0.40) 0.39 0.68 0.92 1.08 BVPS 5.25 1.70 1.97 2.95 3.44 4.11 Operating cash flows 0.08 (0.87) 0.76 0.88 1.20 1.51 FCF 0.39 (0.10) 0.96 0.41 1.07 1.38 Net dividend 0.0 0.0 0.0 0.35 0.45 0.55
Source: Company Data; Bryan, Garnier & Co ests.
46
Indra Sistemas
Update to our DCF model: EUR16 We have applied our new beta of 1.33 to our DCF valuation (CAGR of 9.1%). As such, after updating our methodology, our valuation of Indra works out to EUR16.
Fig. 1: Update to our DCF valuation to EUR16 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 2 709 3 052 3 239 3 352 3 352 3 352 3 352 3 352 3 352 3 352 3 352 3 352 % chg -4,9% 12,6% 6,1% 3,5% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% Adjusted EBIT 162 223 289 329 335 335 335 335 335 335 335 335 as a % of sales 6,0% 7,3% 8,9% 9,8% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% Theoretical tax rate 43,8% 21,0% 24,0% 24,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% Theoretical tax 71 47 69 79 90 90 90 90 90 90 90 90 NOPAT 91 176 220 250 245 245 245 245 245 245 245 245 Depreciation 68 78 84 85 54 54 54 54 54 54 54 54 as a % of sales 2,5% 2,6% 2,6% 2,5% 1,6% 1,6% 1,6% 1,6% 1,6% 1,6% 1,6% 1,6% Capex 19 28 28 28 54 54 54 54 54 54 54 54 as a % of sales 0,7% 0,9% 0,9% 0,8% 1,6% 1,6% 1,6% 1,6% 1,6% 1,6% 1,6% 1,6% WCR -327 -276 -295 -317 -268 -268 -268 -268 -268 -268 -268 -268 as a % of sales -12% -9% -9% -9% -8% -8% -8% -8% -8% -8% -8% -8% Change in WCR -66 51 -20 -21 49 0 0 0 0 0 0 0 Free cash flows 206 175 296 328 196 245 245 245 245 245 245 245
Discounted free cash flows 206 171 265 270 148 169 155 142 130 119 109 100 Sum of discounted FCF 1 678 Terminal value 1 554 Enterprise value 3 232 Fair value of associates 11 Fair value of financial assets 290 Provisions 99 Fair value minority interests 13 Dilution (s/o, warrants, conv bds) 405 NPV of tax credits 178 Net debt on 31/12/2017e 657 Equity value 3 347
Diluted nbr of shares (m) 204,2 Valuation per share (EUR) 16
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 16 8,0% 9,0% 10,0% 11,0% 12,0% 8,0% 16 18 19 21 22 8,5% 15 16 18 19 21 WACC (%) 9,1% 14 15 16 18 19 9,5% 13 14 16 17 18 10,0% 13 14 15 16 17
Source: Bryan, Garnier & Co ests.
47
Indra Sistemas
Price Chart and Rating History
Indra Sistemas
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0 21/03/16 21/06/16 21/09/16 21/12/16 21/03/17 21/06/17 21/09/17
INDRA SISTEMAS Fair Value Achat Neutre Vente
Ratings Date Ratings Price 30/11/16 BUY EUR9.69 05/04/16 NEUTRAL EUR9.986 01/03/16 BUY EUR8.44 03/02/09 SELL EUR15.65
Target Price Date Target price 19/04/17 EUR16 05/04/17 EUR15 24/02/17 EUR13 29/09/16 EUR12 01/08/16 EUR11 05/04/16 EUR10 01/03/16 EUR11 06/11/15 EUR9.8 31/07/15 EUR9.2 09/07/15 EUR10 12/05/15 EUR9.2 24/03/15 EUR8.9 02/03/15 EUR8.3 13/01/15 EUR8.6
48
INDEPENDENT RESEARCH UPDATE Sage Group 21st September 2017 Intacct has completed the shift to the cloud TMT Fair Value 830p vs. 720p (price 713.50p) BUY vs. NEUTRAL
Bloomberg SGE L We are upgrading our recommendation to Buy from Neutral and Reuters SGE.LN raising our DCF-derived Fair Value from 720p to 830p following the 12-month High / Low (p) 756.0 / 599.0 change in our beta. The Intacct acquisition was based on demanding Market capitalisation (GBPm) 7,712 Enterprise Value (BG estimates GBPm) 8,321 multiples and the deal is set to dilute the company’s margins initially. Avg. 6m daily volume ('000 shares) 2 978 However, it bolsters Sage’s defensive model, boosts organic growth by Free Float 99.4% around 1 point and enables Sage to complete its shift to the cloud. 3y EPS CAGR 10.6% Gearing (09/16) 30% Dividend yield (09/17e) 2.14% Reinforcing its defensive model. Sage has made solid progress in strengthening its defensive model: 1) 77% of sales are recurrent thanks to YE September 09/16 09/17e 09/18e 09/19e Revenue (£m) 1,569 1,728 1,928 2,111 a surge in software subscriptions to the detriment of the traditional EBITA £m) 437.9 478.2 535.5 606.1 licence/maintenance model; 2) the cloud activity begun five years ago has Op.Margin (%) 27.9 27.7 27.8 28.7 enjoyed major breakthroughs thanks to the rising success of Sage One and Diluted EPS (p) 28.34 31.35 34.11 38.39 EV/Sales 5.11x 4.81x 4.20x 3.70x Sage Live solutions and cloud versions Sage 50, 200 and X3; 3) non- EV/EBITDA 17.2x 16.4x 14.3x 12.2x strategic businesses have been sold off (Sage Payment Solutions, etc.). EV/EBITA 18.3x 17.4x 15.1x 12.9x P/E 25.2x 22.8x 20.9x 18.6x ROCE 26.9 21.2 23.3 27.1 Intacct acquisition: accelerated switch to the cloud. The recent acquisition of Intacct for USD850m may seem costly (2017e EV/sales
775.7 multiple of 9.6x), as the company was lossmaking and the deal will dilute margins at least during the first year of integration. However, we argue that 725.7 the deal will: 1) boost sales growth to at least 10% in the medium term; 2) 675.7 ensure that over 80% of Sage’s revenues are recurring; 3) fill the gap in the
625.7 company’s accounting and financial management software in the cloud.
575.7 Medium-term targets: completion of the transition. Management 525.7 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 SAGE GROUP SXX EUROPE 600 believes that, following a transition period during which EBIT margin will be stable at around 27%, Sage will be in a position to generate higher margins, approaching 30% in the medium term.
Modestly valued relative to anticipated growth. Trading on 2017e and 2018e EV/EBIT multiples of 17.4x and 15.1x, the stock is modestly valued, relative to 2016-2019e EPS growth of 11% per year.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
Sage Group
Simplified Profit & Loss Account (GBPm) 2014 2015 2016 2017e 2018e 2019e Revenues 1,307 1,436 1,569 1,728 1,928 2,111 Change (%) -5.0% 9.8% 9.3% 10.1% 11.6% 9.5% lfl change (%) 4.9% 6.0% 6.1% 6.6% 8.5% 9.5% Adjusted EBITDA 387 418 468 508 567 638 Depreciation & amortisation (22.5) (29.1) (30.0) (30.0) (31.0) (32.0) Adjusted EBIT 364 389 438 478 536 606 EBIT 298 297 300 513 510 580 Change (%) 65.3% -0.4% 1.1% 70.9% -0.7% 13.9% Financial results (20.9) (21.4) (24.9) (0.59) (21.7) (18.7) Pre-Tax profits 278 276 276 513 488 562 Exceptionals 0.0 0.0 0.0 22.0 0.0 0.0 Tax (89.8) (81.5) (66.9) (91.4) (127) (152) Profits from associates 0.0 0.0 (1.0) 10.0 0.0 0.0 Minority interests 0.90 0.0 0.0 0.0 0.0 0.0 Net profit 187 194 208 431 361 410 Restated net profit 253 287 319 355 388 437 Change (%) 1.9% 13.2% 11.4% 11.2% 9.3% 12.6% Cash Flow Statement (GBPm) Operating cash flows 333 307 251 297 376 466 Change in working capital (79.3) 7.5 33.6 36.7 50.9 49.4 Capex, net (26.9) (20.3) (31.1) (37.0) (39.0) (40.0) Financial investments, net 2.1 2.2 (7.6) 2.0 0.0 0.0 Acquisitions, net (64.5) (47.3) (6.4) (515) 16.0 0.0 Dividends (126) (134) (145) (158) (171) (185) Other 110 16.1 (98.8) 77.8 (6.6) (7.5) Net debt 457 342 313 609 383 100.0 Free Cash flow 227 295 254 297 388 475 Balance Sheet (GBPm) Company description Tangible fixed assets 127 123 123 117 112 107 Founded in 1981 and listed on the Intangibles assets & goodwill 1,531 1,552 1,768 2,275 2,241 2,223 Investments 0.0 0.0 12.7 10.7 10.7 10.7 London Stock Exchange since 1989, Deferred tax assets 21.9 34.2 58.4 48.4 48.4 48.4 Sage Group is a leading business Current assets 324 323 430 486 552 610 management software for small and Cash & equivalents 145 263 265 265 491 774 mid-sized enterprises (SMEs): Total assets 2,148 2,295 2,656 3,202 3,455 3,773 accounting, payroll, HR, treasury, Shareholders' equity 784 862 1,053 1,215 1,351 1,562 Provisions 13.6 39.0 92.3 87.3 87.3 87.3 payments... These offers are available Deferred tax liabilities 19.1 7.3 13.2 13.2 13.2 13.2 in the cloud or on-premise. By L & ST Debt 601 605 578 874 874 874 geography, Europe represents 55% of Current liabilities 730 781 920 1,013 1,130 1,238 sales (UK & Ireland, France, Total Liabilities 2,148 2,295 2,656 3,202 3,455 3,773 Capital employed 1,241 1,204 1,367 1,824 1,734 1,662 Germany, Spain & Portugal,
Switzerland, Poland), followed by Ratios Operating margin 27.87 27.10 27.91 27.67 27.78 28.71 North America (29%: USA, Canada), Tax rate 32.36 29.55 24.28 17.84 26.00 27.00 and the rest of the world (16%: South Net margin 14.29 13.54 13.23 24.95 18.73 19.42 Africa, Australia, Brazil, Malaysia...). ROE (after tax) 23.83 22.54 19.71 35.51 26.73 26.25 ROCE (after tax) 21.68 25.15 26.85 21.20 23.26 27.07 Gearing 58.26 39.62 29.74 50.15 28.34 6.40 Pay out ratio 72.40 75.40 76.25 39.64 51.13 48.64 Number of shares, diluted 1,119 1,120 1,126 1,132 1,138 1,138 Data per Share (p) EPS 16.74 17.37 18.56 38.55 32.28 36.64 Restated EPS 22.63 25.58 28.34 31.35 34.11 38.39 % change 1.8% 13.1% 10.8% 10.6% 8.8% 12.6% EPS bef. GDW 22.63 25.58 28.34 31.35 34.11 38.39 BVPS 70.06 76.94 93.51 107 119 137 Operating cash flows 29.75 27.43 22.29 26.21 33.04 40.93 FCF 20.26 26.28 22.51 26.19 34.09 41.75 Net dividend 12.12 13.10 14.15 15.28 16.50 17.82
Source: Company Data; Bryan, Garnier & Co ests.
50
Sage Group
Update to our DCF model: 830p (vs. 720p) We have applied our new 1.00 beta to our DCF model (8.6% WACC). After updating our methodology, we obtain a valuation of 830p for Sage.
Fig. 1: Our updated DCF valuation: 830p in GBPm (FYE 30/09) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 1 569 1 728 1 928 2 111 2 259 2 417 2 586 2 767 2 961 3 168 3 390 3 627 % chg 9,3% 10,1% 11,6% 9,5% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% Adjusted EBIT 438 478 536 606 655 701 750 803 859 919 983 1 052 as a % of sales 27,9% 27,7% 27,8% 28,7% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% Theoretical tax rate 24,3% 18,6% 26,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% Theoretical tax 106 89 139 164 177 189 203 217 232 248 265 284 NOPAT 332 389 396 442 478 512 548 586 627 671 718 768 Depreciation 30 30 31 32 34 36 39 42 44 48 51 54 as a % of sales 1,9% 1,7% 1,6% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% Capex 31 37 39 40 34 36 39 42 44 48 51 54 as a % of sales 2,0% 2,1% 2,0% 1,9% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% 1,5% WCR -490 -527 -578 -627 -678 -725 -776 -830 -888 -951 -1017 -1088 as a % of sales -31% -30% -30% -30% -30% -30% -30% -30% -30% -30% -30% -30% Change in WCR -34 -37 -51 -49 -50 -47 -51 -54 -58 -62 -67 -71 Free cash flows 364 419 439 484 529 559 598 640 685 733 784 839
Discounted free cash flows 364 419 404 410 413 402 396 390 384 379 373 368 Sum of discounted FCF 3 971 Terminal value 6 028 Enterprise value 9 999 Fair value of associates 9 Fair value of financial assets 2 Provisions 87 Fair value minority interests 0 Fair value of deferred tax assets 48 Dilution (s/o, warrants, conv bds) 77 Net debt on 30/09/2017e 609 Equity value 9 439
Diluted no. of shares (m) 1 137,8 Valuation per share (p) 830
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (p)
EBIT margin (%) 830 25,0% 27,0% 29,0% 31,0% 33,0% 7,5% 909 970 1032 1093 1154 8,0% 820 875 929 984 1039 WACC (%) 8,6% 733 782 830 879 928 9,0% 683 728 773 819 864 9,5% 630 671 713 754 795
Source: Bryan, Garnier & Co ests.
51
Sage Group
Price Chart and Rating History
Sage Group 800.0
750.0
700.0
650.0
600.0
550.0
500.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
SAGE GROUP Fair Value Achat Neutre Vente
Ratings Date Ratings Price 01/12/16 NEUTRAL 657.5p 05/04/16 SELL 629.5p
Target Price Date Target price 26/07/17 720p 05/04/17 680p 06/03/17 660p 27/01/17 640p 06/01/17 650p 01/12/16 645p 12/10/16 690p 27/07/16 600p 04/07/16 575p 06/05/16 555p 05/04/16 550p 28/01/16 570p 08/01/16 550p 13/11/15 540p 25/06/15 520p 18/05/15 540p 24/03/15 475p 29/01/15 450p 13/01/15 420p
52
INDEPENDENT RESEARCH UPDATE SAP 21st September 2017 Heading for a recovery in margins TMT Fair Value EUR115 vs. EUR108 (price EUR91.84) BUY
Bloomberg SAP GR We are reiterating our Buy recommendation and have raised our DCF- Reuters SAPG.DE derived Fair Value from EUR108 to EUR115 following the change to 12-month High / Low (EUR) 96.1 / 75.8 our beta. Whereas the ramp-up in recurring sales is improving the risk Market capitalisation (EURm) 112,826 Enterprise Value (BG estimates EURm) 113,809 profile, we remain convinced that SAP can reach, if not exceed, its 2020 Avg. 6m daily volume ('000 shares) 2 000 targets and that EBIT margin will operate a sharp rebound in 2018. Free Float 78.8% 3y EPS CAGR 8.2% Gearing (12/16) 13% Positive change in stockmarket status confirmed. As we set out in Dividend yield (12/17e) 1.42% June in our report "With Leonardo, growth has its joker", SAP has been on a positive stockmarket trend for more than a year: 1) the targets of the YE December 12/16 12/17e 12/18e 12/19e Revenue (€m) 22,062 23,568 24,757 26,737 2020 plan as defined in 2015 have been met, 2) SAP is now perceived as a EBITA €m) 6,629 6,866 7,466 8,275 cloud publisher (around 17% of sales in 2017, 29% in 2020e), 3) the risk Op.Margin (%) 30.0 29.1 30.2 30.9 profile has improved massively with recurring sales of 61% in 2016 vs. Diluted EPS (€) 4.01 4.25 4.63 5.09 EV/Sales 5.27x 4.83x 4.49x 4.03x 52% in 2012 (estimated 70% in 2020). EV/EBITDA 16.1x 15.1x 13.5x 11.8x EV/EBITA 17.5x 16.6x 14.9x 13.0x P/E 22.9x 21.6x 19.8x 18.0x Recovery in operating margin in sight. Q2 2017 non-IFRS operating ROCE 17.9 19.2 20.6 22.6 margin was lower than expected due to increased investment spending in order to ensure migration of cloud customers to the HANA database by 100.9 the end of 2017. This should enable a jump in operating margin in 2018 95.9 after four years of erosion. 90.9
85.9 80.9 Potential welcome news for 2020. Whereas renewed growth in operating 75.9 margin seems feasible for 2018, we consider that SAP could benefit from 70.9 welcome news concerning four factors by 2020: 1) resistance in licence 65.9 sales, 2) ongoing growth in the cloud, 3) the potential of Leonardo, 4) the 60.9 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 SAP (XET) SXX EUROPE 600 extent of margin improvement. Our scenario points to a margin of 32% in 2020, ahead of the current consensus (31.4%).
Still attractively valued. The share is trading on 2017e and 2018e EV/EBIT multiples of 16.6x and 14.9x, pointing to discounts of 10-15% and 10-20% relative to the average of European and US publishers, whereas its cloud profile is becoming increasingly obvious.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
SAP
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 17,560 20,798 22,062 23,568 24,757 26,737 Change (%) 4.4% 18.4% 6.1% 6.8% 5.0% 8.0% lfl change (%) 4.0% 5.5% 6.9% 8.2% 7.8% 8.0% Adjusted EBITDA 6,063 6,884 7,217 7,556 8,246 9,155 Depreciation & amortisation (448) (551) (588) (690) (780) (880) Adjusted EBIT 5,615 6,333 6,629 6,866 7,466 8,275 EBIT 4,332 4,251 5,122 4,949 5,788 6,597 Change (%) -3.3% -1.9% 20.5% -3.4% 16.9% 14.0% Financial results 24.0 (262) (272) (32.5) (4.2) 3.9 Pre-Tax profits 4,356 3,989 4,850 4,917 5,783 6,600 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (1,080) (929) (1,230) (1,278) (1,504) (1,749) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 (8.0) (13.0) (10.0) (5.0) (5.0) Net profit 3,276 3,068 3,633 3,648 4,285 4,856 Restated net profit 4,380 4,837 4,930 5,226 5,685 6,251 Change (%) 4.8% 10.4% 1.9% 6.0% 8.8% 10.0% Cash Flow Statement (EURm) Operating cash flows 3,540 3,836 4,657 5,906 6,460 7,126 Change in working capital 34.0 (197) (29.0) 65.0 51.3 85.4 Capex, net (691) (569) (938) (1,254) (1,300) (1,200) Financial investments, net (58.0) 10.0 (753) 488 0.0 0.0 Acquisitions, net (6,465) 227 (106) (22.0) 0.0 0.0 Dividends (1,194) (1,316) (1,378) (1,522) (1,597) (1,720) Other 5,383 (1,970) (1,190) (676) (892) (1,086) Net debt 7,536 5,752 3,468 983 (1,739) (4,944) Free Cash flow 2,883 3,070 3,690 4,717 5,211 6,011 Balance Sheet (EURm) Company description Tangible fixed assets 2,102 2,195 2,580 3,144 3,764 4,384 Founded in 1972 and listed on the Intangibles assets & goodwill 25,439 26,969 27,097 26,506 25,898 25,290 Investments 1,020 1,336 1,358 870 870 870 Frankfurt Stock Exchange since 1988, Deferred tax assets 378 438 591 591 591 591 SAP is the largest global business Current assets 5,429 6,683 7,902 8,441 8,867 9,576 application software vendor, with Cash & equivalents 4,006 3,770 4,826 6,811 9,033 11,738 more than 350,000 customers. Its Total assets 38,374 41,391 44,354 46,363 49,023 52,449 product offering, which is available Shareholders' equity 19,594 23,300 26,382 28,046 30,729 33,860 Provisions 299 479 400 641 641 641 both on-premise and in public or Deferred tax liabilities 386 436 424 424 424 424 private clouds, covers all the needs for L & ST Debt 11,542 9,522 8,294 7,794 7,294 6,794 business management in all industries: Current liabilities 6,553 7,654 8,854 9,458 9,936 10,730 accounting/finance, manufacturing, Total Liabilities 38,374 41,391 44,354 46,363 49,023 52,449 Capital employed 27,130 29,052 29,850 29,029 28,990 28,917 logistics, sales, service, human resources, procurement, travel and Ratios Operating margin 31.98 30.45 30.05 29.13 30.16 30.95 expenses, external staff... This is Tax rate 24.79 23.29 25.36 26.00 26.00 26.50 complemented by a platform which Net margin 18.66 14.75 16.47 15.48 17.31 18.16 encompasses a database management ROE (after tax) 16.72 13.17 13.77 13.01 13.94 14.34 system, analytical tools, and ROCE (after tax) 16.73 18.46 17.91 19.23 20.56 22.57 Gearing 38.46 24.69 13.15 3.51 (5.66) (14.60) integration tools). Its HANA database Pay out ratio 41.25 46.05 40.58 43.78 40.14 37.95 allows customers processing large Number of shares, diluted 1,229 1,229 1,229 1,229 1,229 1,229 volumes of data in real time. SAP Data per Share (EUR) generates 44% of revenues in the EPS 2.67 2.50 2.96 2.97 3.49 3.95 EMEA region (o/w 14% in Restated EPS 3.57 3.94 4.01 4.25 4.63 5.09 Germany), 40% in the Americas (o/w % change 4.8% 10.4% 1.9% 6.0% 8.8% 10.0% EPS bef. GDW 3.57 3.94 4.01 4.25 4.63 5.09 32% in the US), and 15% in Asia- BVPS 15.95 18.97 21.47 22.83 25.01 27.56 Pacific (o/w 4% in Japan). SAP's Operating cash flows 2.88 3.12 3.79 4.81 5.26 5.80 revenue split by industry is: Consumer FCF 2.35 2.50 3.00 3.84 4.24 4.89 Goods 25%, Energy & Natural Net dividend 1.10 1.15 1.20 1.30 1.40 1.50
Resources 22%, Discrete Manufacturing 18%, Services 16%, Source: Company Data; Bryan, Garnier & Co ests. Government 10%, and Financial Services 9%.
54
SAP
Update to our DCF valuation: EUR115 (vs. EUR108) We have applied our new beta of 0.90 to our DCF (WACC of 7.8%). As such, after the update to our methodology, SAP's valuation works out to EUR115.
Fig. 1: Update to our DCF valuation to EUR115 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 22 062 23 568 24 757 26 737 28 981 31 010 33 180 35 503 37 988 40 647 43 493 46 537 % chg 6,1% 6,8% 5,0% 8,0% 8,4% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% Adj. EBIT 6 629 6 866 7 466 8 275 9 253 9 613 10 286 11 006 11 776 12 601 13 483 14 427 as a % of sales 30,0% 29,1% 30,2% 30,9% 31,9% 31,0% 31,0% 31,0% 31,0% 31,0% 31,0% 31,0% Theoretical tax rate 25,4% 26,0% 26,0% 26,5% 26,5% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% Theoretical tax 1 681 1 785 1 941 2 193 2 452 2 596 2 777 2 972 3 180 3 402 3 640 3 895 NOPAT 4 948 5 081 5 525 6 082 6 801 7 018 7 509 8 034 8 597 9 199 9 842 10 531 Depreciation 588 690 780 880 980 1 240 1 327 1 420 1 520 1 626 1 740 1 861 as a % of sales 2,7% 2,9% 3,2% 3,3% 3,4% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% Capex 1 001 1 301 1 400 1 500 1 550 1 240 1 327 1 420 1 520 1 626 1 740 1 861 as a % of sales 4,5% 5,5% 5,7% 5,6% 5,3% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% WCR -952 -1 017 -1 068 -1 154 -1 251 -930 -995 -1 065 -1 140 -1 219 -1 305 -1 396 as a % of sales -4,3% -4,3% -4,3% -4,3% -4,3% -3,0% -3,0% -3,0% -3,0% -3,0% -3,0% -3,0% Change in WCR 29 -65 -51 -85 -97 320 -65 -70 -75 -80 -85 -91 Free cash flows 4 506 4 535 4 956 5 547 6 328 6 697 7 574 8 104 8 671 9 278 9 928 10 623
Discounted free cash flows 4 506 4 450 4 509 4 680 4 950 4 858 5 094 5 054 5 014 4 974 4 935 4 896 Sum of discounted FCF 48 517 Terminal value 93 287 Enterprise value 141 804 Fair value of associates 0 Fair value of financial assets 870 Provisions 641 Fair value minority interests 11 Dilution (s/o, warrants, conv bds) 0 NPV of tax credits 591 Net debt on 31/12/2016e 983 Equity value 141 630
Diluted nbr of shares (m) 1 228,50 Valuation per share (EUR) 115
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 115 27,0% 29,0% 31,0% 33,0% 35,0% 7,0% 123 131 139 146 154 7,5% 110 117 124 131 138 WACC (%) 7,8% 103 109 115 122 128 8,5% 91 96 102 108 113 9,0% 83 89 94 99 104
Source: Bryan, Garnier & Co ests
55
SAP
Price Chart and Rating History
SAP 120.0
110.0
100.0
90.0
80.0
70.0
60.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
SAP (XET) Fair Value Achat Neutre Vente
Ratings Date Ratings Price 19/06/17 BUY EUR94.4 20/01/15 NEUTRAL EUR57.51
Target Price Date Target price 08/07/17 EUR108 19/06/17 EUR110 26/04/17 EUR88 10/02/17 EUR84 25/01/17 EUR83 06/01/17 EUR84 24/10/16 EUR82 28/09/16 EUR79 21/07/16 EUR75 04/07/16 EUR74 05/04/16 EUR73 05/02/16 EUR74 06/01/16 EUR75 21/10/15 EUR70 24/03/15 EUR68 17/03/15 EUR62 21/01/15 EUR58
.
56
INDEPENDENT RESEARCH UPDATE Software AG 21st September 2017 Towards accelerated growth TMT Fair Value EUR45 (price EUR40.70) BUY
Bloomberg SOW GR We reiterate our Buy recommendation and our EUR45 Fair Value Reuters SOWG.DE based on our DCF model, following the change in our beta. Although 12-month High / Low (EUR) 43.1 / 31.6 quarterly business remains volatile, we believe that Software AG’s Market capitalisation (EURm) 3,109 Enterprise Value (BG estimates EURm) 3,001 recovery is ongoing and should accelerate as its sales reach expands Avg. 6m daily volume ('000 shares) 243.1 and the JV with Adamos in the IoT takes shape. The stock continues Free Float 64.3% to trade at a large discount. 3y EPS CAGR 4.2% Gearing (12/16) -7% Dividend yield (12/17e) 1.60% Recovery confirmed. Almost three years since Éric Duffaut stepped in as Chief Customer Officer, Software AG’s sales productivity has risen by YE December 12/16 12/17e 12/18e 12/19e Revenue (€m) 871.83 891.33 914.55 963.06 over 30%. The strategy launched at the start of 2015 has delivered solid EBITA €m) 277.6 275.8 283.5 305.2 results in Digital Business Platform solutions – with growth in the business Op.Margin (%) 31.8 30.9 31.0 31.7 portfolio, licence sales and contract sizes – together with a 2016 non-IFRS Diluted EPS (€) 2.40 2.49 2.53 2.72 EV/Sales 3.47x 3.37x 3.12x 2.80x operating margin of 31.2%, above the initial target of 30-31%, and profits EV/EBITDA 10.4x 10.4x 9.7x 8.5x above the consensus for eight quarters out of 10. EV/EBITA 10.9x 10.9x 10.1x 8.8x P/E 17.0x 16.4x 16.1x 15.0x ROCE 18.7 18.0 18.6 20.4 Taking transformation to the next level. The second stage of the new strategy now involves transforming the company’s commercial approach 45.2 and expanding its sales channels to accelerate growth from 2018: solution 43.2
41.2 sales, expansion of the partner ecosystem, increase in the company’s sales 39.2 reach. We expect this to lift organic growth to around 6% by 2020. 37.2
35.2 33.2 Potential upward revision to margin guidance. The company’s 2017 31.2 non-IFRS operating margin guidance (31-32%) shows very little 29.2 improvement compared with 2016. This seems conservative, given that 27.2 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 SOFTWARE (XET) SXX EUROPE 600 management wants to ensure ongoing flexibility in sales and marketing costs so as to boost growth. Growth could turn out to be less costly than anticipated if sales productivity continues to increase or if the offshore component of R&D expenses continues to grow.
Very attractive valuation. The stock is trading on a 2017e and 2018e EV/EBIT multiples of 10.9x and 10.1x. This point to a 40% discount to the average multiple for Europe’s main software publishers.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r Software AG
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 858 873 872 891 915 963 Change (%) -11.8% 1.8% -0.1% 2.2% 2.6% 5.3% lfl change (%) -6.8% -1.7% 1.2% 3.2% 4.8% 5.3% Adjusted EBITDA 250 278 291 287 295 317 Depreciation & amortisation (11.6) (14.4) (13.6) (11.6) (11.6) (11.6) Adjusted EBIT 238 263 278 276 283 305 EBIT 176 209 214 225 246 271 Change (%) -14.4% 19.0% 2.1% 5.2% 9.2% 10.2% Financial results (9.2) (2.9) (4.4) (2.6) (0.86) 1.1 Pre-Tax profits 167 207 209 222 245 272 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (56.3) (66.9) (69.1) (73.4) (80.8) (89.7) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.19 0.16 (0.20) 0.20 0.25 0.30 Net profit 110 139 141 149 164 182 Restated net profit 165 188 194 194 197 212 Change (%) -7.3% 13.6% 3.0% 0.3% 1.6% 7.7% Cash Flow Statement (EURm) Operating cash flows 147 180 155 205 208 223 Change in working capital (3.5) 5.3 48.9 13.6 6.9 7.4 Capex, net (8.0) (9.8) (12.3) (28.7) (12.0) (12.5) Financial investments, net (1.3) 43.5 4.6 1.4 0.0 0.0 Acquisitions, net 14.4 (1.5) (43.6) (49.4) 0.0 0.0 Dividends (36.4) (39.6) (42.1) (44.3) (49.7) (53.5) Other (174) (127) (27.1) (23.5) (20.5) (20.9) Net debt 70.4 13.9 (86.6) (108) (256) (415) Free Cash flow 135 176 191 190 203 218 Balance Sheet (EURm) Company description Tangible fixed assets 61.2 56.2 75.6 92.7 93.1 94.0 Founded in 1969, and listed on the Intangibles assets & goodwill 1,037 1,057 1,086 1,106 1,087 1,070 Investments 7.1 24.5 46.0 44.6 44.6 44.6 Frankfurt Stock Exchange since 1999, Deferred tax assets 10.9 11.0 15.5 15.5 15.5 15.5 Software AG markets enterprise Current assets 359 353 346 343 345 356 software addressing two specific Cash & equivalents 374 312 388 395 528 672 needs: 1) helping businesses to digitise Total assets 1,849 1,815 1,957 1,997 2,113 2,252 their processes, through its Digital Shareholders' equity 1,013 1,090 1,196 1,231 1,346 1,474 Provisions 135 81.9 118 126 134 141 Business Platform (65% of Product Deferred tax liabilities 17.1 16.7 13.5 13.5 13.5 13.5 revenues: business and IT L & ST Debt 444 326 302 287 272 257 transformation, streaming analytics, Current liabilities 240 300 329 339 348 367 agile apps, IT portfolio management, Total Liabilities 1,849 1,815 1,957 1,997 2,113 2,252 Capital employed 1,084 1,104 1,109 1,123 1,089 1,059 integration and connectivity, IoT); 2) modernisation of legacy IT systems on Ratios Operating margin 27.75 30.17 31.85 30.94 31.00 31.69 mainframes through Adabas & Tax rate 33.73 32.40 33.00 33.00 33.00 33.00 Natural (35% of Product revenue: Net margin 12.86 15.97 16.12 16.69 17.90 18.87 database management systems and ROE (after tax) 10.89 12.80 11.76 12.08 12.17 12.33 application development). The ROCE (after tax) 16.57 17.74 18.70 17.96 18.59 20.39 Gearing 6.95 1.27 (7.24) (8.79) (19.04) (28.17) company generates 47% of Product Pay out ratio 39.39 31.16 33.72 33.38 32.67 33.63 revenues in America, vs. 45% in the Number of shares, diluted 88.66 80.68 80.68 78.08 78.08 78.08 EMEA region (incl. 13% in Germany) Data per Share (EUR) and 8% in Asia Pacific. By Industry, EPS 1.27 1.77 1.78 1.95 2.14 2.38 20% of Product revenues are made Restated EPS 1.87 2.33 2.40 2.49 2.53 2.72 with Governments, vs. 19% in % change -7.2% 24.9% 3.0% 3.6% 1.6% 7.7% EPS bef. GDW 1.87 2.33 2.40 2.49 2.53 2.72 Financial Services, 18% in IT Services, BVPS 11.43 13.51 14.82 15.77 17.23 18.88 12% in Manufacturing, 10% in Operating cash flows 1.65 2.23 1.92 2.63 2.67 2.86 Business Services, and 21% with other FCF 1.52 2.18 2.37 2.43 2.60 2.80 industries (Telecoms/Media, Net dividend 0.50 0.55 0.60 0.65 0.70 0.80 Transport/Logistics, etc.). Source: Company Data; Bryan, Garnier & Co ests.
58
Software AG
Update to our DCF model: EUR45 We have applied our new 1.08 beta to our DCF model (9.2% WACC). After updating our methodology, our valuation of Software AG is EUR45.
Fig. 1: Updated DCF valuation: EUR45 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 872 891 915 963 1 021 1 051 1 083 1 115 1 149 1 183 1 219 1 255 % chg -0,1% 2,2% 2,6% 5,3% 6,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% Operating profit 278 276 283 305 332 347 357 368 379 390 402 414 as a % of sales 31,8% 30,9% 31,0% 31,7% 32,5% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax rate 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 92 91 94 101 110 114 118 121 125 129 133 137 NOPAT 186 185 190 204 222 232 239 247 254 262 269 278 Depreciation 14 12 12 12 12 14 14 14 15 15 16 16 as a % of sales 1,6% 1,3% 1,3% 1,2% 1,2% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% Capex 13 29 12 13 13 14 14 14 15 15 16 16 as a % of sales 1,5% 3,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% WCR 17 4 -3 -10 -19 -11 -11 -11 -11 -12 -12 -13 as a % of sales 2,0% 0,4% -0,3% -1,1% -1,8% -1,0% -1,0% -1,0% -1,0% -1,0% -1,0% -1,0% Change in WCR -49 -14 -7 -7 -8 8 0 0 0 0 0 0 Free cash flows 236 181 196 211 229 224 240 247 254 262 270 278
Discounted free cash flows 236 177 176 173 173 155 151 143 135 127 120 113 Sum of discounted FCF 1 529 Terminal value 1 737 Enterprise value 3 266 Fair value of associates 0 Fair value of financial assets 45 Provisions 126 Fair value minority interests 1 Dilution (s/o, warrants, conv bds) 41 NPV of tax credits 16 Net debt on 31/12/2017e -108 Equity value 3 349
Diluted nbr of shares (m) 75,2 Valuation per share (EUR) 45
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 45 29,0% 31,0% 33,0% 35,0% 37,0% 8,0% 49 51 54 56 58 8,5% 45 47 49 51 54 WACC (%) 9,2% 41 43 45 46 48 9,5% 39 41 42 44 46 10,0% 36 38 40 41 43
Source: Bryan, Garnier & Co ests.
59
Software AG
Price Chart and Rating History
Software AG 47.0 45.0
43.0
41.0
39.0
37.0
35.0
33.0
31.0
29.0
27.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
SOFTWARE (XET) Fair Value Achat Neutre Vente
Ratings Date Ratings Price 29/10/14 BUY EUR18.69 16/07/14 NEUTRAL EUR20
Target Price Date Target price 07/09/17 EUR45 26/06/17 EUR46 24/04/17 EUR47 30/01/17 EUR39 14/04/16 EUR40 05/04/16 EUR39 22/03/16 EUR38 20/01/16 EUR34 18/12/15 EUR33 29/10/15 EUR31 14/09/15 EUR30 24/07/15 EUR31 24/03/15 EUR30 29/01/15 EUR27 Bryan Garnier stock rating system
60
INDEPENDENT RESEARCH UPDATE Sopra Steria Group 21st September 2017 A quiet transformation TMT Fair Value EUR178 vs. EUR165 (price EUR156.60) BUY
Bloomberg SOP FP We reiterate our Buy recommendation and are raising our DCF-derived Reuters SOPR.PA Fair Value from EUR165 to EUR178 following the change in our beta. 12-month High / Low (EUR) 159.8 / 91.6 Sopra Steria is making swift progress in terms of adopting digital Market capitalisation (EURm) 3,216 Enterprise Value (BG estimates EURm) 3,679 transformation solutions for its clients. Moreover, we expect the Avg. 6m daily volume ('000 shares) 26.50 increase in the portion of sales generated by the Solutions division to Free Float 69.1% translate into a double-digit operating margin by 2020/21. 3y EPS CAGR 10.5% Gearing (12/16) 46% Dividend yield (12/17e) 1.53% Transformation is well underway. Sopra Steria is working on its own digital transformation and most of the contracts won in recent months YE December 12/16 12/17e 12/18e 12/19e Revenue (€m) 3,741 3,820 4,021 4,233 related to its clients’ digital transformations. The company is investing in EBITA €m) 301.2 326.4 358.3 392.7 new digital solutions in the Sopra Banking Software division (PSD2 Op.Margin (%) 8.1 8.5 8.9 9.3 directive, open banking), the Real Estate Solutions division, and its Diluted EPS (€) 9.26 10.08 11.25 12.49 EV/Sales 0.99x 0.96x 0.88x 0.79x application management (artificial intelligence) and consulting activities. EV/EBITDA 10.8x 10.4x 8.6x 7.5x This has led to the establishment of a digital ecosystem with start-ups, large EV/EBITA 12.4x 11.3x 9.8x 8.5x publishers, universities, clients and "digital hubs". P/E 16.9x 15.5x 13.9x 12.5x ROCE 13.4 14.3 15.7 17.2
These investments should pay off in terms of margins. Thanks to
160.3 these investments, which form part of its independent strategic plan, Sopra
150.3 Steria expects to generate 20% of its sales in Solutions and 15% in 140.3 Consulting in 2020. We believe that this could result in a double-digit 130.3 operating margin by 2020-21. 120.3
110.3 100.3 Substantial capacity to pay down debt to finance acquisitions. Based 90.3 on our forecasts, assuming that synergies with Steria will come to an end, 80.3 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 SOPRA STERIA GROUP SXX EUROPE 600 free cash flow should reach EUR200m a year in 2018, enabling Sopra Steria to reduce its gearing to zero by 2020. We are not worried about its ability to finance future acquisitions (up to EUR100-150m a year), given that it has EUR1bn in unused credit facilities.
Attractive valuation. While we expect average annual EPS growth of 11%, the stock is trading on 2017e and 2018e EV/EBIT multiples of 11.3x and 9.8x respectively.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
Sopra Steria Group
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 2,280 3,584 3,741 3,820 4,021 4,233 Change (%) 69.0% 57.2% 4.4% 2.1% 5.3% 5.3% lfl change (%) 5.4% 2.0% 5.2% 2.8% 4.9% 5.3% Adjusted EBITDA 220 304 345 352 409 444 Depreciation & amortisation (27.0) (58.4) (44.1) (26.1) (51.1) (51.1) Adjusted EBIT 193 246 301 326 358 393 EBIT 148 153 240 270 301 334 Change (%) 42.6% 3.0% 57.4% 12.3% 11.5% 11.2% Financial results (18.1) (23.0) (14.3) (13.1) (11.5) (9.4) Pre-Tax profits 130 130 226 257 289 325 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (34.4) (47.2) (80.9) (84.7) (95.5) (107) Profits from associates 5.8 7.2 10.8 7.9 9.7 11.7 Minority interests 3.3 5.2 5.4 5.4 5.7 6.0 Net profit 98.2 84.4 150 174 198 223 Restated net profit 133 150 190 207 231 257 Change (%) 77.2% 12.8% 26.4% 9.2% 11.6% 11.3% Cash Flow Statement (EURm) Operating cash flows 118 174 212 220 264 290 Change in working capital 14.8 (81.9) (17.0) (29.4) (9.5) (10.1) Capex, net (26.2) (42.3) (46.7) (49.0) (51.0) (53.0) Financial investments, net (4.3) 1.9 5.3 0.90 0.0 0.0 Acquisitions, net (134) (92.3) (103) (57.2) 0.0 0.0 Dividends (22.5) (37.5) (34.4) (45.2) (49.3) (53.4) Other (57.0) 120 15.2 23.9 18.1 16.7 Net debt 442 531 506 463 306 132 Free Cash flow 106 49.4 149 142 204 227 Balance Sheet (EURm) Company description Tangible fixed assets 110 119 121 146 150 156 Founded in 1968, and listed on Intangibles assets & goodwill 1,695 1,801 1,757 1,790 1,766 1,741 Investments 230 245 234 241 250 262 Euronext Paris since 1990, Sopra Deferred tax assets 155 143 145 145 145 145 Steria Group is an IT Services group Current assets 1,098 1,291 1,364 1,370 1,431 1,494 employing more than 40,000 staff. Cash & equivalents 222 223 265 309 465 640 The group generates 59% of its Total assets 3,510 3,821 3,885 4,000 4,207 4,438 revenues in Consulting & Systems Shareholders' equity 1,087 1,233 1,103 1,197 1,346 1,516 Provisions 528 444 585 630 636 643 Integration, 14% in Infrastructure Deferred tax liabilities 8.1 15.8 15.9 15.9 15.9 15.9 Management, 13% in Business L & ST Debt 665 754 771 771 771 771 Process Services, and 15% in Current liabilities 1,222 1,375 1,410 1,386 1,437 1,491 Solutions (Sopra Banking Software Total Liabilities 3,510 3,821 3,885 4,000 4,207 4,438 Capital employed 1,529 1,764 1,609 1,660 1,652 1,648 9%, Sopra HR Software 4%, Real
Estate Solutions 2%). France accounts Ratios Operating margin 8.46 6.85 8.05 8.54 8.91 9.28 for 50% of group sales, followed by Tax rate 26.44 36.42 35.81 33.00 33.00 33.00 the UK (26%), the rest of Europe Net margin 4.31 2.35 4.02 4.57 4.92 5.28 (22%) and the rest of the World (2%). ROE (after tax) 9.04 6.84 13.63 14.57 14.70 14.74 Government is the largest contributor ROCE (after tax) 10.14 10.97 13.44 14.35 15.72 17.16 Gearing 40.71 43.05 45.87 38.65 22.74 8.69 to Sopra Steria's revenues (23%), Pay out ratio 37.87 41.10 29.97 28.25 26.98 25.73 followed by Banking (22%), Number of shares, diluted 19.65 20.45 20.49 20.55 20.55 20.60 Aerospace/Defence/Homeland Data per Share (EUR) Security (19%), Energy/Utilities (8%), EPS 5.02 4.14 7.34 8.50 9.64 10.88 Telecom/Media (6%), Insurance (5%), Restated EPS 6.77 7.34 9.26 10.08 11.25 12.49 Transport (6%) and Distribution (2%). % change 7.8% 8.5% 26.1% 8.9% 11.6% 11.1% EPS bef. GDW 6.77 7.34 9.26 10.08 11.25 12.49 BVPS 55.30 60.31 53.83 58.24 65.48 73.62 Operating cash flows 5.99 8.49 10.36 10.71 12.86 14.08 FCF 5.41 2.42 7.26 6.89 9.92 11.02 Net dividend 1.90 1.70 2.20 2.40 2.60 2.80
Source: Company Data; Bryan, Garnier & Co ests.
62
Sopra Steria Group
Our updated DCF model: EUR178 (vs. EUR165) We have applied our new 1.17 beta to our DCF model (8.8% WACC). After updating our methodology, we obtain a valuation of EUR178 for Sopra Steria.
Fig. 1: Our updated DCF valuation: EUR178 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 3 741 3 820 4 021 4 233 4 402 4 578 4 761 4 952 5 150 5 356 5 570 5 793 % chg 4,4% 2,1% 5,3% 5,3% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% Operating profit 301 326 358 393 418 435 452 470 489 509 529 550 as a % of sales 8,1% 8,5% 8,9% 9,3% 9,5% 9,5% 9,5% 9,5% 9,5% 9,5% 9,5% 9,5% Theoretical tax rate 35,8% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 108 108 118 130 138 144 149 155 161 168 175 182 NOPAT 193 219 240 263 280 291 303 315 328 341 355 369 Depreciation 44 26 51 51 53 55 57 59 62 64 67 70 as a % of sales 1,2% 0,7% 1,3% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% Capex 47 49 51 53 53 55 57 59 62 64 67 70 as a % of sales 1,3% 1,3% 1,3% 1,3% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% WCR -45,7 -16,3 -6,9 3,2 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 as a % of sales -1,2% -0,4% -0,2% 0,1% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% Change in WCR 17 29 9 10 -3 0 0 0 0 0 0 0 Free cash flows 174 166 231 251 283 291 303 315 328 341 355 369
Discounted free cash flows 174 163 208 208 215 204 195 186 178 170 162 155 Sum of discounted FCF 1 888 Terminal value 2 514 Enterprise value 4 402 Fair value of associates 210 Fair value of financial assets 30 Provisions 630 Fair value minority interests 38 NPV of tax credits 145 Dilution (s/o, warrants, conv bds) 10 Net debt on 31/12/2017e 463 Equity value 3 667
Diluted nbr of shares (m) 20,6 Valuation per share (EUR) 178
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 178 8,5% 9,0% 9,5% 10,0% 10,5% 8,0% 187 199 210 221 233 8,5% 168 179 189 199 210 WACC (%) 8,8% 159 168 178 188 198 9,5% 139 148 157 165 174 10,0% 128 136 144 152 159
Source: Bryan, Garnier & Co ests.
63
Sopra Steria Group
Price Chart and Rating History
Sopra Steria Group 170.0
160.0
150.0
140.0
130.0
120.0
110.0
100.0
90.0
80.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
SOPRA STERIA GROUP Fair Value Achat Neutre Vente
Ratings Date Ratings Price 31/07/17 BUY EUR143.25 27/04/17 NEUTRAL EUR138.85
Target Price Date Target price 31/07/17 EUR165 27/06/17 EUR135 28/02/17 EUR132 29/07/16 EUR125 04/07/16 EUR127 27/05/16 EUR130 03/05/16 EUR121 01/03/16 EUR113 04/11/15 EUR115 07/08/15 EUR111 20/03/15 EUR90 19/03/15 Under review 13/01/15 EUR91
64
INDEPENDENT RESEARCH UPDATE Sword Group 21st September 2017 Built to outperform TMT Fair Value EUR40 vs. EUR33 (price EUR32.55) BUY vs. NEUTRAL
Bloomberg SWP FP We are upgrading our recommendation to Buy from Neutral and Reuters SWP.PA raising our DCF-derived Fair Value to EUR40 from EUR33 following 12-month High / Low (EUR) 37.5 / 26.1 the change in our beta. Since it was founded in 2000, Sword has Market capitalisation (EURm) 311 Enterprise Value (BG estimates EURm) 276 achieved double-digit organic sales growth every year, except during Avg. 6m daily volume ('000 shares) 6.50 the 2009-2011 period, and its operating margin has remained Free Float 57.5% consistently above 12.5%. The group has the means to successfully roll 3y EPS CAGR 15.0% Gearing (12/16) -21% out its 2020 plan, which we believe can be achieved via acquisitions. Dividend yield (12/17e) 3.69%
Targets intact for 2020. For 2020, Sword is targeting sales of around YE December 12/16 12/17e 12/18e 12/19e EUR300m (10% average lfl growth + EUR40m from acquisitions) with Revenue (€m) 160.00 176.00 197.00 221.00 EBITA €m) 22.0 23.0 27.0 32.0 an EBITDA margin of 14.5% (vs. 15.5% in 2016). Through to 2020, the Op.Margin (%) 13.7 13.4 13.9 14.4 sales mix should remain similar to that of today (70% services and 30% Diluted EPS (€) 1.67 1.88 2.19 2.54 EV/Sales 1.74x 1.57x 1.38x 1.20x software). The EBITDA margin is likely to be eroded as Sword plans to EV/EBITDA 11.1x 10.2x 8.8x 7.6x invest more heavily to expand its software division, which would therefore EV/EBITA 12.7x 12.0x 10.1x 8.3x see its EBITDA margin contract to 26-27% in 2020 from 29.8% in 2016. P/E 19.5x 17.3x 14.9x 12.8x ROCE 14.3 14.0 15.0 17.4 As for the services division, EBITDA margin should edge up slightly from
the 9.6% achieved in 2016, thanks to an improvement in the UK (5.4% in
38.7 2016).
36.7
34.7
32.7 Acquisitions: sticking firmly to its strategic principles. If the 10-15% 30.7 lfl sales growth is confirmed, Sword is likely to focus on organic growth 28.7 rather than acquisitions. However, management is not ruling out the 26.7
24.7 prospect of making acquisitions if the right opportunity comes along, 22.7 provided that its growth potential and EBITDA margin remain in double 20.7 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 digits and that acquisition multiples are reasonable. The company has the SWORD GROUP SXX EUROPE 600 means to achieve its targets, with a net cash position of EUR19.3m.
Attractive valuation. While we anticipate average EPS growth of 15% a year over the 2016-2019 period, we believe that, based on the current valuation multiples (2017e and 2018e EV/EBIT multiples of 10.2x and 8.8x), the stock offers 23% upside.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
Sword Group
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 117 138 160 176 197 221 Change (%) 9.9% 17.5% 16.4% 9.7% 12.0% 12.0% lfl change (%) 12.0% 15.7% 17.0% 13.5% 14.5% 12.0% Adjusted EBITDA 19.0 22.0 25.0 27.0 31.0 35.0 Depreciation & amortisation (3.0) (3.0) (3.0) (3.0) (3.0) (3.0) Adjusted EBIT 17.0 19.0 22.0 23.0 27.0 32.0 EBIT 13.0 11.0 15.0 21.0 25.0 29.0 Change (%) -40.8% -11.9% 34.5% 38.9% 18.1% 17.4% Financial results 4.0 3.0 1.0 2.0 2.0 2.0 Pre-Tax profits 17.0 14.0 16.0 23.0 27.0 31.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (3.0) (3.0) (5.0) (6.0) (8.0) (9.0) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 1.0 1.0 0.0 1.0 1.0 1.0 Net profit 12.0 10.0 11.0 16.0 19.0 22.0 Restated net profit 15.0 17.0 16.0 18.0 21.0 24.0 Change (%) 87.5% 13.3% -5.9% 12.5% 16.7% 14.3% Cash Flow Statement (EURm) Operating cash flows 19.0 16.0 19.0 21.0 24.0 27.0 Change in working capital 9.0 3.0 3.0 3.0 (2.0) (2.0) Capex, net (9.0) (8.0) (6.0) (11.0) (6.0) (6.0) Financial investments, net 6.0 0.0 0.0 0.0 0.0 0.0 Acquisitions, net (7.0) (7.0) (14.0) (2.0) 0.0 0.0 Dividends (9.0) (11.0) (11.0) (11.0) (11.0) (11.0) Other (13.0) (37.0) (8.0) 0.0 0.0 0.0 Net debt (48.0) (42.0) (32.0) (35.0) (38.0) (45.0) Free Cash flow 19.0 11.0 16.0 13.0 16.0 19.0 Balance Sheet (EURm) Company description Tangible fixed assets 4.0 8.0 8.0 7.0 7.0 6.0 Founded in 2000, Sword Group is a Intangibles assets & goodwill 100 104 97.0 104 105 106 Investments 2.0 3.0 3.0 5.0 8.0 10.0 specialist Software and IT Solutions Deferred tax assets 2.0 2.0 1.0 1.0 1.0 1.0 company listed on Euronext Paris Current assets 53.0 68.0 75.0 78.0 87.0 98.0 since 2002. The firm has a particular Cash & equivalents 104 62.0 46.0 49.0 52.0 59.0 focus on corporate compliance Total assets 265 247 230 244 260 280 management, i.e. solutions that enable Shareholders' equity 162 161 152 160 168 180 Provisions 4.0 2.0 2.0 2.0 2.0 2.0 large accounts to be compliant with Deferred tax liabilities 2.0 2.0 2.0 2.0 2.0 2.0 laws and regulation changes and with L & ST Debt 56.0 20.0 14.0 14.0 14.0 14.0 their own internal IT policy policies Current liabilities 41.0 62.0 60.0 66.0 74.0 82.0 (legal, accounting, applications, Total Liabilities 265 247 230 244 260 280 Capital employed 114 119 120 125 130 135 payments). In 2010, the group generated 56% of its sales in Software Ratios Operating margin 14.20 13.80 13.70 13.40 13.90 14.40 (43% in Insurance, 27% in CRM, 22% Tax rate 17.60 21.40 31.30 26.10 29.60 29.00 in Wholesale Finance and Anti-Money Net margin 10.30 7.20 6.90 9.10 9.60 10.00 Laundering, 8% in ROE (after tax) 7.40 6.20 7.20 10.00 11.30 12.20 Energy/Construction/Utilities) and ROCE (after tax) 12.80 13.80 14.30 14.00 15.00 17.40 Gearing (30.00) (26.00) (21.00) (22.00) (23.00) (25.00) 44% in IT Services and Pay out ratio 92.30 110 108 73.20 61.50 52.20 Communication Technologies (43% in Number of shares, diluted 9.40 9.40 9.40 9.50 9.50 9.50 Benelux, 23% in France, 13% in Data per Share (EUR) Switzerland, 20% in other countries). EPS 1.30 1.09 1.11 1.64 1.95 2.30 An est. 54% of revenues in the Restated EPS 1.64 1.76 1.67 1.88 2.19 2.54 Software division is recurring. Sword % change 82.2% 7.3% -5.1% 12.6% 16.5% 16.0% EPS bef. GDW 1.64 1.76 1.67 1.88 2.19 2.54 operates in 55 countries, and 30% of BVPS 17.23 17.13 16.17 16.84 17.68 18.95 its billed revenues stem from the UK, Operating cash flows 2.02 1.70 2.02 2.21 2.53 2.84 vs. 19% from Benelux, 19% from the FCF 2.02 1.17 1.70 1.37 1.68 2.00 US, and 11% from France. Net dividend 1.20 1.20 1.20 1.20 1.20 1.20
Source: Company Data; Bryan, Garnier & Co ests.
66
Sword Group
Update to our DCF model: EUR40 (vs. EUR33) We have applied our new 1.14 beta to our DCF model (9.6% WACC). After updating our methodology, the valuation we obtain for Sword is EUR40.
Fig. 1: Updated DCF valuation: EUR40 in EURm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 160 176 197 221 243 267 294 323 355 391 430 473 % chg 16,4% 9,7% 12,0% 12,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% Operating profit 22 23 27 32 33 36 40 44 48 53 58 64 as a % of sales 13,8% 13,1% 13,7% 14,5% 13,5% 13,5% 13,5% 13,5% 13,5% 13,5% 13,5% 13,5% Theoretical tax rate 30,2% 28,0% 28,0% 28,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% 33,0% Theoretical tax 7 6 8 9 11 12 13 15 16 17 19 21 NOPAT 15 17 19 23 22 24 27 29 32 36 39 43 Depreciation 3 3 3 3 5 5 6 6 7 8 9 9 as a % of sales 1,9% 1,7% 1,5% 1,4% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% Capex 6 11 6 6 5 5 6 6 7 8 9 9 as a % of sales 3,8% 6,3% 3,0% 2,7% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% WCR 15 12 14 16 27 29 32 36 39 43 47 52 as a % of sales 9,4% 6,8% 7,1% 7,2% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% Change in WCR -3 -3 2 2 11 2 3 4 3 4 4 5 Free cash flows 15 12 14 18 11 22 24 25 29 32 35 38
Discounted free cash flows 15 12 12 15 8 15 15 14 15 15 15 15 Sum of discounted FCF 136 Terminal value 214 Enterprise value 350 Fair value of associates 5 Fair value of financial assets 1 Provisions 2 Fair value minority interests 5 Dilution (s/o, warrants, conv bds) 0 Net debt on 31/12/2017e -35 Equity value 384
Diluted nbr of shares (m) 9,5 Valuation per share (EUR) 40
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (EUR)
EBIT margin (%) 40 11,5% 12,5% 13,5% 14,5% 15,5% 8,5% 41 45 48 51 55 9,0% 38 41 44 47 50 WACC (%) 9,6% 34 38 40 43 46 10,0% 33 36 38 41 43 10,5% 31 33 36 38 40
Source: Bryan, Garnier & Co ests.
67
Sword Group
Price Chart and Rating History
Sword Group 40.0 38.0
36.0
34.0
32.0
30.0
28.0
26.0
24.0
22.0
20.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
SWORD GROUP Fair Value Achat Neutre Vente
Ratings Date Ratings Price 27/07/17 NEUTRAL EUR34.4
Target Price Date Target price 27/07/17 EUR33 26/04/17 EUR34 25/10/16 EUR32 07/09/16 EUR31 06/09/16 EUR26 27/07/16 EUR25 05/04/16 EUR26 04/12/15 EUR28 30/11/15 EUR26 09/09/15 EUR25 24/07/15 EUR26 24/03/15 EUR25 11/03/15 EUR24 13/01/15 EUR21
68
INDEPENDENT RESEARCH UPDATE Temenos Group 21st September 2017 Awaiting further major contracts… TMT Fair Value CHF100 vs. CHF90 (price CHF98.40) NEUTRAL
Bloomberg TEMN SW We reiterate our Neutral recommendation and have raised our DCF- Reuters TEMN.SW derived Fair Value from CHF90 to CHF100 following the change in our 12-month High / Low (CHF) 99.1 / 61.2 beta. We believe that the stock is fairly valued, given the strong growth Market capitalisation (CHFm) 6,972 Enterprise Value (BG estimates CHFm) 7,079 anticipated, even though our forecasts do not factor in potential licence Avg. 6m daily volume ('000 shares) 228.4 deals for more than USD5m. Free Float 77.2% 3y EPS CAGR 13.4% Gearing (12/16) 45% Market set to grow 8% a year. With the surge in digital developments, Dividend yield (12/17e) 0.64% such as the "customer experience" and the industry’s "uberisation" as new competitors (FinTechs) arrive on the scene, banks have gradually started YE December 12/16 12/17e 12/18e 12/19e Revenue (US$m) 634.04 704.97 783.25 874.20 to modernise their IT systems. These strategic plans span four years on EBITA US$m) 210.2 233.8 270.4 312.7 average and often involve replacing banking hubs with software platforms Op.Margin (%) 33.2 33.2 34.5 35.8 from third-party publishers. Diluted EPS (US$) 2.49 2.63 3.11 3.63 EV/Sales 11.71x 10.44x 9.16x 7.90x EV/EBITDA 29.2x 26.4x 22.6x 19.1x A spiral of success. Temenos’ return to double-digit organic growth since EV/EBITA 35.3x 31.5x 26.5x 22.1x P/E 41.1x 38.9x 32.9x 28.2x 2015, driven by business with tier 1 and tier 2 banks, is the logical result of ROCE 33.4 37.1 46.8 61.3 its sound choices of architecture and partnerships forged to integrate and expand its product range over the last 5-10 years. We believe that this 102.9 growth is sustainable, given the company’s growing ability to win contracts 92.9 worth at least USD5m (Nordea, Standard Chartered, Bank of Ireland, etc.).
82.9
72.9 Potential for an upward revision to guidance. For 2017, factoring in
62.9 the acquisition of Rubik Financial, Temenos expects same-currency sales
52.9 to grow 10-13%, with a non-IFRS operating margin of around 31%. We are not ruling out the prospect of an increase in this guidance if the 42.9 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17 TEMENOS GROUP SXX EUROPE 600 company signs new licence deals for more than USD5m.
Correctly valued. The stock is trading at 2017e and 2018e EV/EBIT multiples of 31.5x and 26.5x, respectively, based on EPS growth which we estimate at 13% for the 2016-2019e period. Should new deals be signed for more than USD5m, our fair value would increase by no more than CHF2-3 per share.
Analyst: Sector Analyst Team: Gregory Ramirez Richard-Maxime Beaudoux 33(0) 1 56 68 75 91 Thomas Coudry [email protected] Frédéric Yoboué Dorian Terral
r r
Temenos Group
Income Statement (USDm) 2014 2015 2016 2017e 2018e 2019e Revenues 469 543 634 705 783 874 Change (%) 0.2% 15.7% 16.9% 11.2% 11.1% 11.6% lfl change (%) 2.0% 12.0% 14.0% 10.4% 11.1% 11.6% Adjusted EBITDA 182 212 255 279 317 361 Depreciation & amortisation (41.9) (45.2) (44.4) (45.0) (47.0) (48.0) Adjusted EBIT 140 167 210 234 270 313 EBIT 118 96.8 149 169 212 255 Change (%) 26.4% -18.1% 54.2% 13.1% 25.8% 19.9% Financial results (11.9) (18.7) (17.1) (13.5) (11.0) (7.0) Pre-Tax profits 106 78.1 132 155 201 248 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (14.7) (11.7) (16.3) (22.5) (31.2) (40.6) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 Net profit 91.6 66.3 116 133 170 207 Restated net profit 108 121 166 186 220 257 Change (%) 15.2% 12.0% 36.9% 12.5% 18.2% 16.7% Cash Flow Statement (USDm) Operating cash flows 171 189 236 231 267 305 Change in working capital 10.9 27.1 11.7 27.3 28.1 32.5 Capex, net (51.4) (55.4) (56.2) (55.0) (54.0) (52.0) Financial investments, net 1.5 1.9 6.0 3.1 0.0 0.0 Acquisitions, net 0.04 (298) (1.1) (51.8) 0.0 0.0 Dividends (26.6) (28.6) (31.7) (39.5) 0.0 0.0 Other 91.5 168 (101) (11.1) (59.0) (13.1) Net debt 99.5 267 178 111 (70.9) (343) Free Cash flow 131 161 191 204 241 286 Balance Sheet (US$m) Company description Tangible fixed assets 14.1 15.6 15.8 12.8 9.4 5.8 Founded in 1993, and listed on SIX Intangibles assets & goodwill 438 738 690 720 693 664 Investments 0.0 0.0 0.0 (3.1) (3.1) (3.1) Swiss Exchange since 2001, Temenos Deferred tax assets 23.9 17.3 19.0 19.0 19.0 19.0 Group is one of the largest global Current assets 257 265 252 264 278 295 vendors of banking software Cash & equivalents 193 193 194 261 443 715 platforms. Its Temenos T24 platform Total assets 926 1,229 1,172 1,273 1,440 1,696 addresses retail, universal, private, Shareholders' equity 342 375 399 455 579 786 Provisions 6.4 7.9 9.2 16.2 16.2 16.2 wholesale, retail and Islamic banks. Its Deferred tax liabilities 1.1 23.2 16.6 16.6 16.6 16.6 functional coverage is centred on Core L & ST Debt 292 460 372 372 372 372 Banking (withdrawals, deposits, Current liabilities 284 362 375 413 456 505 settlements, credits...), distribution Total Liabilities 926 1,229 1,172 1,273 1,440 1,696 Capital employed 442 642 577 566 508 442 channels (branch, call centre, mobile, web), customer relationship Financial Ratios Operating margin 29.84 30.77 33.16 33.16 34.52 35.76 management, general support, Tax rate 13.83 15.03 12.32 14.50 15.50 16.40 payments, reporting, fund Net margin 19.55 12.23 18.27 18.83 21.72 23.68 administration, and risk & compliance ROE (after tax) 26.79 17.68 29.02 29.19 29.39 26.34 management. The company generates ROCE (after tax) 28.04 23.93 33.38 37.07 46.83 61.28 Gearing 29.09 71.20 44.50 24.50 (12.25) (43.70) 53% of its total licensing revenues in Pay out ratio 30.51 45.19 31.63 34.70 31.24 29.10 Europe, 19% in Asia-Pacific, 18% in Number of shares, diluted 70.04 66.65 66.62 70.86 70.86 70.86 America, and 10% in Middle East & Data per Share (USD) Africa. EPS 1.31 1.00 1.74 1.87 2.40 2.92 Restated EPS 1.54 1.82 2.49 2.63 3.11 3.63 % change 19.5% 17.7% 37.0% 5.7% 18.2% 16.7% EPS bef. GDW 1.54 1.82 2.49 2.63 3.11 3.63 BVPS 4.88 5.63 5.99 6.42 8.17 11.09 Operating cash flows 2.44 2.84 3.54 3.26 3.77 4.31 FCF 1.86 2.41 2.87 2.87 3.41 4.03 Net dividend 0.40 0.45 0.55 0.65 0.75 0.85
Source: Company Data; Bryan, Garnier & Co ests.
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Temenos Group
Update to our DCF model: CHF100 (vs. CHF 90) We have applied our new 0.88 beta to our DCF model (7.8% WACC). After updating our methodology, we obtain a valuation of CHF100 for Temenos.
Fig. 1: Updated DCF valuation: CHF100 in USDm (FYE 31/12) 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e
Sales 634 705 783 874 953 1 039 1 132 1 234 1 345 1 466 1 598 1 742 % chg 16,9% 11,2% 11,1% 11,6% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% Operating profit 210 234 270 313 343 374 408 444 484 528 575 627 as a % of sales 33,2% 33,2% 34,5% 35,8% 36,0% 36,0% 36,0% 36,0% 36,0% 36,0% 36,0% 36,0% Theoretical tax rate 12,3% 14,5% 15,5% 16,4% 21,0% 21,0% 21,0% 21,0% 21,0% 21,0% 21,0% 21,0% Theoretical tax 26 34 42 51 72 79 86 93 102 111 121 132 NOPAT 184 200 228 261 271 295 322 351 383 417 454 495 Depreciation 44 45 47 48 67 73 79 86 94 103 112 122 as a % of sales 7,0% 6,4% 6,0% 5,5% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% Capex 56 55 54 52 67 73 79 86 94 103 112 122 as a % of sales 8,9% 7,8% 6,9% 5,9% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% WCR -122 -150 -178 -210 -210 -229 -249 -271 -296 -323 -352 -383 as a % of sales -19% -21% -23% -24% -22% -22% -22% -22% -22% -22% -22% -22% Change in WCR -12 -27 -28 -32 1 -19 -21 -22 -24 -27 -29 -32 Free cash flows 184 217 250 290 270 314 343 373 407 444 484 527
Discounted free cash flows 184 213 227 245 212 229 231 234 237 239 242 245 Sum of discounted FCF 2 310 Terminal value 4 745 Enterprise value 7 056 Fair value of associates 0 Fair value of financial assets -3 Provisions 16 Fair value minority interests 0 Dilution (s/o, warrants, conv bds) 225 NPV of tax credits 19 Net debt on 31/12/2017e 111 Equity value 7 169 Diluted nbr of shares (m) 69,3 Valuation per share (USD) 104
CHF/USD 1,040 Valuation per share (CHF) 100
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 2: Sensitivity analysis – EBIT margin and WACC (CHF)
EBIT margin (%) 100 32,0% 34,0% 36,0% 38,0% 40,0% 7,0% 106 112 117 123 129 7,5% 95 100 105 110 115 WACC (%) 7,8% 90 95 100 104 109 8,5% 79 83 87 91 94 9,0% 72 76 80 83 87
Source: Bryan, Garnier & Co ests.
71
Temenos Group
Price Chart and Rating History
Temenos Group 110.0
100.0
90.0
80.0
70.0
60.0
50.0
40.0 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 18/06/17 18/09/17
TEMENOS GROUP Fair Value Achat Neutre Vente
Ratings Date Ratings Price 22/05/17 NEUTRAL CHF89 03/10/16 BUY CHF61.2 05/04/16 NEUTRAL CHF52.65 11/02/15 BUY CHF30.1 13/01/15 SELL CHF36.9
Target Price Date Target price 20/07/17 CHF90 22/05/17 CHF87 21/04/17 CHF84 06/01/17 CHF80 17/10/16 CHF77 03/10/16 CHF71 21/07/16 CHF54 20/04/16 CHF52 05/04/16 CHF51 12/02/16 CHF53 08/01/16 CHF52 21/10/15 CHF47 11/09/15 CHF42 22/07/15 CHF41 22/04/15 CHF40 24/03/15 CHF42 04/03/15 CHF39 11/02/15 CHF34 26/01/15 CHF29 16/01/15 Under review
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Software and IT Services
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