The impact of the COVID-19 pandemic was limited in Q1 20. Organic revenue growth was +3.3% thanks to the good performance of the public sector in Scandinavia, solid growth of the two joint-ventures in the UK and the activities related to the information system for the Sparda banks in Germany. Q2 20 is expected to be more difficult with a decrease in organic revenue of 7-15% depending on customers’ reactions to the economic situation.
Companies: Sopra Steria Group
Sopra Steria met expectations in 2019 in terms of organic revenue growth (+6.5%) and operating margin on business activity (+0.5pt to 8% of revenue). Free cash flow (€229m) largely exceeded guidance (>€150m), also when restated from the non-recurring items of €50m. The growth potential is positive in the medium term with organic revenue growth of +4-6% and an operating margin on business activity of 10% of revenue.
Organic revenue growth surged by +8.3% in Q3 19 (vs +3.7% in Q3 18). Sopra Steria benefited from a very strong quarter in IT services in France, the UK and Other Europe, despite flat revenue in Germany, while the software businesses benefited from a low comparative last year. Nevertheless, Sopra Banking Software reached important milestones that should contribute to its recovery in 2020. Guidance for 2019 is revised upwards at the top-line and unchanged at the operating margin level.
Organic revenue growth was robust in Q2 19, +7.5% (vs +7.3% in Q1 19) thanks to a strong performance in IT services in France, the UK and Other Europe excluding Germany. The operating margin on business activity improved slightly (+0.2pt to 6.8% of revenue) thanks to a strong profitability in France and the recovery from low levels in the UK. Finally, organic revenue growth was raised to +6% or more (vs +4-6% previously) in 2019.
Organic revenue growth was very strong in Q1 19 (+7.3%), above expectations, despite the decrease in organic revenue at Sopra Banking Software. Sopra Steria performed well in the consulting & systems’ integration in France and Other Europe and benefited from the development of cloud infrastructure and cybersecurity services in France. The return to organic growth was confirmed in the UK, essentially in the JVs SSCL and NHS SBS. 2019 guidance is maintained.
In Q4 18, Sopra Steria had strong organic revenue growth (+5.5%) despite the drop in organic revenue at Sopra Banking Software (-8.6%). In addition, the return to organic revenue growth was confirmed in the UK (+3%). In 2018, the operating margin on business activity was in line with expectation (7.5% of revenue, -1.1pt) and WCR improved significantly. Management gave reassuring guidance for 2019 including strong organic revenue growth (+4-6%) and a slight increase in the operating margin on business activity.
The stock is trading at moderate P/Es historically, or 11× 2018E and 8.3× 2019E (situation on 19 November 2018). There is no catalyst for a rebound of the share price in the short term. Nevertheless, we maintain a positive recommendation in the medium term due to the need for customers to be up-to-date in their digital transformation.
In the profit warning made a few days ago, Sopra Steria gave information that was reiterated in the Q3 18 release. Nevertheless, excluding the difficulties at Sopra Banking Software, Q3 18 was indeed a good quarter in the group’s IT services activities with strong organic revenue growth in France (+4.3%), Other Europe (+13.6%) and a positive turnaround in the UK (+3.5%) confirmed for Q4 18.
Sopra Steria gave a profit warning on 2018 earnings. Sopra Banking Software, which is specialised in solutions for the banking sector, will not meet expectations in Q3 18 and therefore the whole year 2018.
Sopra Steria mentioned two problems related to Sopra Banking Software. A significant software deal did not materialise in Q3 18 and there have been delivery issues consecutive to the commercial success for more than a year. Consequently, revenue should drop by 20% in Q3 18 and the operating result on business activity should be €42m (€27m related to licence revenue, €15m related to the project margin) below expectations in FY2018. Our understanding is that the contribution of Sopra Banking Software would be zero at best or negative at the operating income on business activity level vs €39m in 2017.
In 2018, for Sopra Steria, based on organic revenue growth estimated at +4.5% (previous guidance: +3-5%), o/w +3.7% in Q3 18 including a poor top-line at Sopra Banking Software, the group’s operating margin on business activity is estimated to be slightly above €300m (vs €330m in 2017), corresponding to a margin rate of 7.5% of revenue compared to the company’s consensus at 8.5% of revenue and our estimate at 8.7% of revenue. The other negative impact is on free cash flow which should be flat (vs €110m in 2017) contrary to the initial guidance of €170m.
Organic revenue growth was strong in H1 18 despite the weakness of the businesses in the UK as expected. Conversely, the group’s results were low and are not representative of the trend for the year 2018. A positive turnaround in organic revenue and operating margin on business activity is assumed in the UK in H2 18. In addition, higher R&D costs at Sopra Banking Software occurred in H1 which is usually lower in terms of licences revenue than H2.
Organic revenue growth was satisfactory in Q1 18 (+3.8%) and was sustained by a remarkable double-digit organic growth in Other Europe and at Sopra Banking Software. The UK was the only country to see a decrease in organic revenue, as expected. The joint-venture SSCL is involved in the final phase of its reorganisation and investments are ongoing in the UK private sector. The UK is expected to do better in 2019-20.
Organic revenue growth and the operating margin on the activity were above guidance in 2017. This was not the case for free cash flow which was impacted by a lower than expected collection of trade receivables and the delay of the migration of the Metropolitan Police onto the SSCL platform. There is likely to be a moderate increase in the operating margin rate in 2018, considering the investments in France and the UK and at Sopra Banking Software which are needed to achieve the 2020 target.
Organic revenue growth accelerated in Q3 17 to +3.3% and the target of +2-3% in 2017 was maintained. In 9m17, organic revenue growth was +2.8%.
Q3 17 revenue
Revenue reached €895m (+2.3%, +3.7% at constant currency). The change in perimeter added €3.3m and the currency effect was a negative €11.7m.
Organic revenue growth was good (+3.3% vs +4.7% in Q3 16) mainly driven by France (+3.4%, o/w +3.7% in the Consulting & Systems integration activity despite one less working day), Other Europe (+12.3%, o/w Germany with double-digit growth) and Sopra Banking Software (+17.4%) which benefited from the contract with La Banque Postale. Other solutions had moderate organic growth (+2.3%) and the UK continued to be in a negative trend (-9.8%) taking into account that SSCL is in a transition phase in 2017.
In France, organic growth in Consulting & Systems integration (+3.7%) included a fast development in consulting (11% of the total) (+13.5%). Conversely, organic growth was lower at I2S (+1.8%), reflecting a slight decrease in the IT infrastructure management activity (-0.6%) and a buoyant activity in cybersecurity services (+26.1%).
The activities were weak in the group’s two main markets in Q2 17 (organically, -0.8% in France taking into account three working days less yoy, -7.8% in the UK due to SSCL which has been in a transition phase all year). Nevertheless, the group’s operating margin on business activity improved in line with expectations (+0.4pt to 7.5% of revenue).
H1 17 figures
Revenue was €1,903m (1.3%). There was a significant negative currency impact (€-44.5m) due mainly to the depreciation of the £ vs € (-9.5%) and a positive scope effect (€+20.5m).
Organic growth slowed significantly in Q2 17 (+0.3%) vs Q1 17 (+4.8%) due to three working days less in France (-0.8% in Q2 17 vs +5% in Q1 17) and a drop in the UK (-7.8% in Q2 17 vs -3.6% in Q1 17) largely attributable to the JV SSCL which has been in a transition phase throughout 2017.
Conversely, Other Europe had strong organic revenue growth (+11.1%, o/w +6.5% in Q2 17 and +15.9% in Q1 17) attributable to all countries, in particular Germany (+12.7% in H1 17).
In software, organic revenue growth was more dynamic at Sopra Banking Software (+8%, o/w +10.3% in Q2 17) than for Other Solutions (+3.5%, o/w +3% in Q2 17).
The operating result on business activity increased to €142m (+5.9%), corresponding to an increase in margin to 7.5% of revenue (+0.4pt).
This improvement was attributable to France (+0.4pt to 9.0% of revenue) thanks to the on-going earnings recovery of I2S (+2.6pts to 3.1% of revenue) while C&SI had a stable margin (9.8% of revenue), Other Europe (+2.4pts to 6.8% of revenue) and Other Solutions (+2pts to 11.2% of revenue).
The reported operating profit was rather stable at €102.7m after higher expenses related to stock options (€-17m vs €-10.2m in H1 16).
Group net profit surged by 22% to €66m thanks to the lower income tax rate (31.8% vs 46.8% in H1 16) whose level is representative of the rate for 2017.
The FCF, usually negative in H1, was €-109m in H1 17 (vs €-101m in H1 16). Net investment in shares amounted to €27m (vs €-105m in H1 16).
On 30 June 2017, net financial debt was €643.3m (-11% yoy) and represented 59% of shareholders’ equity. The net debt/EBITDA ratio (1.9x vs 2.2x on 30 June 16) is below the bank covenant (3x maximum).
In Q1 17, strong organic revenue growth (+4.8%) was led by the Consulting and Systems integration activities in France and Other Europe, and the Solutions businesses. Like its peers, Sopra Steria benefited from a higher number of working days in most European countries.
Q1 17 revenue
Revenue reached €954m (+4.4%). Total growth included a positive change of perimeter (€19.4m) and a negative currency effect (€-22.8m) related to the drop in the pound vs the euro (-10.4% during the quarter).
Organic revenue growth was strong (+4.8% vs +3.3% in Q1 16). In IT services, growth came from France (+5%) and Other Europe (an impressive +15.9%). As expected, organic revenue decreased in the UK (-3.6%) due to lower revenue of the JV SSCL which is in a transition phase.
Software (14% of group revenue) is not linear quarter by quarter. Growth in a quarter is not representative of the annual trend. In Q1 17, organic revenue growth was higher for the Other Solutions (HR, property management) than for Sopra Banking Software (+4.1% and +2.8% respectively).
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The FY 2020 results are in line with our expectations and reflect the impact of the previously announced switch from large perpetual licences to recurring annual term licences during the year. Despite the COVID strictures, with its large global partnerships, D4t4 continues to close numerous lucrative data gathering and data management contracts with major blue-chips around the world. It is successfully converting a high proportion of its new sales to recurring revenue contracts, but this will sacrifice growth and earnings in FY 2020 and FY 2021. Nevertheless, with growing recurring revenue base, an exciting pipeline and a very strong balance sheet, D4t4 is very well positioned for continued long-term growth and security.
Companies: D4T4 Solutions
The ‘Moving Forward Act', the strongest automotive safety bill in decades, has now been passed in the House of Representatives. The bill is focused on advancing safety technologies proven to reduce crash and harm and to make sure strong safety standards are in place to save lives. The bill, which now needs to be passed in the Senate, will mandate automatic braking, lane-keeping, blind-spot detection, event data recorders as well as DMS in all cars and trucks sold in the US from 2024. This aligns with the European General Safety Regulation, which passed into law in November 2019.
However, in the EU, the European Association of Automobile Manufacturers (ACEA) has requested a 2‐year delay for the introduction of the 2022 Euro-NCAP protocols due to the projected lengthy time that will be needed to recover from the effects of COVID-19. Euro NCAP has agreed, and a delay is now expected to the 2022 and 2024 rating. The new dates will give automakers and Tier 1 suppliers more time to incorporate the necessary changes given the events of recent months with a number of manufacturers announcing 12 month delays to new models.
Companies: Seeing Machines
GB Group reported strong performance in FY20 and started taking measures to preserve cash in Q420. Trading in Q121 has been mixed and while management is unwilling to provide guidance for FY21, it has confidence that in the longer term it is well positioned to benefit from the acceleration in digital transformation that should drive demand for its identity data intelligence services. We have upgraded our EPS forecasts by 5% in FY21 and 3% in FY22.
Companies: GB Group
CentralNic’s capital markets day (CMD) on 24 June 2020 introduced the divisional management team and provided insight on each of the three key segments as they will report in FY20: Indirect (Wholesale, Registry); Monetisation (Team Internet); and Direct (Retail, Corporate). We have picked out what we believe are the four key themes from the CMD: FY20 performance, COVID-19 and seasonality; organic growth; M&A; and, pulling it all together, the benefit of scale. CentralNic continues to trade on an FY20 EV/EBITDA of 9.1x and a P/E of 15.8x, a material discount to its peer group, with our DCF indicating further share price upside. M&A could bring CentralNic’s multiples down further.
Companies: Centralnic Group
Touchstar is a supplier of mobile data computing solutions and managed services to a variety of industrial sectors. This morning, the group has provided a trading update to coincide with its AGM.
Encouragingly, the business continues to perform in line with the trends seen at the time of the full year results in May and the Board anticipates Touchstar will be profitable in the six months to 30 June. Cash generation is again reported to have been good, with ‘significantly higher cash balances' expected to be reported than at the beginning of the year (FY 2019A £850k). The group has drawdown a CBIL of £150,000, which provides additional liquidity alongside its undrawn banking facilities of £300,000. Looking ahead, the order book is a more normal level than last reported at over £500,000 at the end of June, which compares to an exceptionally strong £1.2m at the beginning of the year.
FY20 results: inline with guidance
LoopUp has provided an update on trading to coincide with today’s AGM…in essence, the group continues to see activity “materially” above pre-COVID levels, and is confident of exceeding expectations for 2020. We choose to leave our forecasts (that we believe to be roughly in line with consensus estimates) unchanged for now, in advance of further detail likely with a fuller H1 update in early July.
Companies: Loopup Group
CentralNic's CMD gave us new positive insights into the company's investment case. CentralNic's organic growth is stronger than we thought, the Direct division generates high ROI, the monetisation market was shown to be critical to the domain name market, Team Internet's market leadership was further reinforced and acquisition opportunities were shown to be larger than anticipated. These investment views are not reflected in CentralNic's low valuation multiples, in our view.
Blackbird plc* (BIRD.L, 19.25p/£64.7m) | Mirada plc* (MIRA.L, 92.5p/£8.2m) | Tern plc* (TERN.L, 10.75p/£29.0m) | Checkit plc (CKT.L, 39.5p/£24.5m)
Companies: BIRD MIRA MIRA TERN CKT
Gresham continues to show strong progress in difficult times. 18% yoy organic growth in Clareti ARR is amongst the fastest growth of any UK software company. It is being achieved because Gresham has built a disruptive product that is now replacing incumbents at Tier 1 financial institutions around the world. These results underpin our FY20 EBITDA expectations. The implied valuation of Clareti’s ARR is <6x revs, which we think offers value for an emerging leader.
Companies: Gresham Technologies
ECSC Group plc* (ECSC.L, 71.5p/£7.2m) | Trackwise Designs plc (TWD.L, 90.5p/£20.0m) | Transense Technologies plc (TRT.L, 59.5p/£9.7m)
Companies: ECSC Group Trackwise Designs
The Coronavirus pandemic is a human tragedy of vast proportions – as well as the terrible human toll, COVID-19 has led to economies across the globe going into physical lockdown and financial freefall. Entire populations are adapting to the “stay at home” edict, to safeguard the vulnerable – and some of these changes will lead to long-lasting or perhaps permanent changes in the way we live or work. This note describes some of our client companies whose business models are well adapted to these changes, or who might see a change in long-term structural demand.
Companies: AMO BGO FDM GAMA KAPE LOOP TERN ZOO
Today’s update is a positive one and acts as a reminder of DOTD’s solid and recurring business model. Such visibility, combined with excellent profitability (30% AOP margin) and strong cash resources (£22.6m net) means the company is strongly placed for a challenging macro environment, and worthy of attention in view of indiscriminate SP weakness. At a time, when many companies are seeing sales fall, DOTD has today revealed that demand continues to grow – evidencing DOTD’s secular growth drivers and omnichannel opportunity. New business is however taking longer to convert, as events and businesses have seen disruption. Offset against this, retention has improved, as customers’ digital transformation plans have slowed. Related to this, we also highlight that key customer risk is very low, as no customer represents >1.5%/sales, furthermore sector exposure is diversified. In view of today’s update, we therefore reduce FY20E sales by £2m to £46.8m, but flag that this still implies 6% growth in H2. DOTD has meanwhile identified savings (by reallocating its marketing budget) such that FY20E profit remains unchanged. Notwithstanding the company’s solid (90% recurring) business model, we view it conservative to withdraw FY21&22 estimates, given the potential for prolonged disruption. Despite this, much confidence can be taken from the company’s strong financial profile and growth opportunities, which (we view) will be unaffected longer term.
Companies: Dotdigital Group
LoopUp recently updated on the first four months of 2020, which have seen an exceptional level of customer activity and new client wins. This is largely driven by the COVID-19 pandemic and the associated shift towards remote working with additional use of conference calls, but the group has also recently implemented an increased focus on Professional Services, which in our opinion could boost long-term potential. This note focuses on current activity levels within the business, the opportunity within Professional Services and the attitude of investors towards remote meetings companies.