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SOPRA STERIA GROUP - BUY | EUR162 Acquisition of ADN'Co, a specialist in Payments ADN’Co is a consulting firm specialised in payment systems Sopra Steria confirms its leading position in payment consulting A small “tuck-in” acquisition with immaterial impact to EPS
Sopra Steria Group
SOPRA STERIA GROUP - BUY | EUR162 SSCL signed a GBP300m 7-year contract with the British MoD SSCL will deliver new platforms for the British Armed forces This deal is another sign of confidence from the Cabinet Office We expect 1% additional revenues from 2020 We reiterate our Buy rating
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.
SOPRA STERIA GROUP - BUY | EUR162 vs. EUR158 (+34%) Q3 2019 sales above expectations; FY19 guidance upped Q3 2019 revenues were above expectations France continuing to deliver outstanding growth FY19 guidance is upped We raise our Fair Value to EUR162 from EUR158; Buy reiterated
Software & IT services Q4 2019 Top Picks: adding Atos, removing SAP and Sopra Steria European IT stocks have clearly underperformed in Q3 2019 We do not expect material trend changes in Q4 2019 We remove SAP and Sopra Steria from our Top Pick list… …and replace them by Atos on expected better growth momentum
SOP RAP SAP ATO
SOPRA STERIA GROUP - BUY - Top Picks | EUR158 vs. EUR156 (+35%) H1 2019 meeting feedback: the ability to over-deliver Sopra Banking Software is eagerly awaited in 2020 The slowdown in Germany is under control Sparda-Bank is a long-term play We raise our Fair Value to EUR158 from EUR156
SOPRA STERIA GROUP - BUY - Top Picks | EUR156 H1 2019 results above estimates; FY19 growth guidance raised H1 2019 results were ahead of expectations France and the UK were the growth and profitability drivers Net debt has been stabilised despite seasonality FY19 lfl revenue growth guidance was raised
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).
Sopra Steria had a strong 2016 with organic revenue growth slightly above the top of guidance (+5.2%, o/w +5.1% in Q4 16), an operating margin on business activity above expectations at 8% of revenue (+1.2pts) and FCF of €151m. FY2016 figures: Revenue reached €3,741m (+4.4%). Overall growth included a negative currency effect (-3.9%), mainly due to the fall in the pound vs the euro, and the change in the perimeter (+3.1%). Organic growth was 5.2%, driven by all divisions (France: +6.7%, Other Europe: +5.8%, Sopra Banking Software: +11.7%, Other solutions: +3.7%) except for the UK as expected (+0.4%) considering that SSCL has been in a transformation phase. Operating income on business activity was up to €301m (+23%), corresponding to a margin rate of 8% of revenue (+1.2pts). The margin improvement came from all divisions except for SBS which had a stable margin (9.1% of revenue). - France: 8.1% of revenue, +0.6pts based on strong organic revenue growth at C&SI France and the earnings recovery at I2S. - UK: 8% of revenue, +0.7pts attributable to on-going cost-savings. - Other Europe: 5.7% of revenue, +3pts thanks to a higher performance in all countries, o/w the recovery in Germany. - SBS: stable margin at 9.1% including higher R&D (€+14m) to 27% of revenue. - Other Solutions: 14.2% of revenue, +2.6pts sustained by top-line growth. The reported operating income surged to €240m (+57%) after lower restructuring costs at €-23m, o/w half related to I2S and C&SI Germany (vs €-67m in 2015). Group net profit was €150m (vs €84m in 2015) after the higher contribution from the associate Axway Software (33.5%-owned in 2016 vs 24.9% in 2015) and a lower effective tax rate (-0.6pts to 35.8%). FCF surged to €151m (vs €49m in 2015) taking into account a cash-out of €30m related to the restructurings, an additional pension-related payment of €21m and capex of €47m. Other cash-out flows included significant investments in shares (€119m, o/w €39m for the purchase of additional Axway Software shares) and the payment of the dividend (€31m). Net debt decreased was reduced by 5% to €503m at year-end 2016, representing 46% of total equity. The proposed dividend is €2.2/share (+29%), above our estimate.
In Q3 16, Sopra Steria had solid organic revenue growth (+4.7% following +5.4% in H1 16) mainly driven by France, Other Europe and the software businesses. Q3 16 revenue: Revenue reached €875m (+3.5%). The overall growth rate included a change in perimeter (+4%) related to the integration of LASCE Associates and Active 3D and a negative currency effect (-5.2%) mainly related to the translation effect of the drop of the pound vs the euro. Organic revenue growth was good (+4.7% vs +3.2% in Q3 15), driven by the Consulting & Systems integration activity in France, €309.5m, +6.6% (vs +5.6% in Q3 15), o/w +12% in consulting services alone, thanks to strong demand in the aeronautics & defence and the transport sectors, the activities in Other Europe, €172m, +6.4% (vs +8.7% in Q3 15), in particular in Italy and Benelux, +20% organically, and the software businesses including Sopra Banking Software, €80.7m, +8.9% (vs +10.8% in Q3 15), and Other Solutions, €48m, +4.3% (vs +8.3% in Q3 15). In the UK, organic revenue growth was low, +1.1% (vs +2.4% in Q3 15), o/w +0.5% in the public sector and +2.4% in the private sector. This was not attributable to Brexit. As expected, it was due to the slowdown of the activities in the JV SSCL which is in the mature phase of its development.
Sopra Steria had a good H1 16 including strong organic revenue growth (+5.4%), cost optimisation that enabled a higher operating margin in the UK despite no revenue growth and the continuing positive impact of the restructurings and reorganisation in I2S France and C&SI in Germany. H1 16 earnings. - Revenue reached €1,879m (+6.3%). Organic revenue growth was strong and included an acceleration (+5.4% o/w +7.4% in Q2 16). Organic growth was driven by the Consulting and Systems integration France (+9.5%, o/w +11.4% in Q2 16) including a slowdown in lower organic revenue for I2S France (-1.3% in Q2 16, following -4.5% in Q1 16), Other Europe (+5.7%, o/w +7.7% in Q2 16) and Sopra Banking Software (+7.4%, o/w +13.7% in Q2 16). Conversely, organic revenue declined slightly in the UK (-0.9%, o/w +0.6% in Q2 16) and increased moderately in Other Solutions (+1.7% o/w +2% in Q2 16). - The operating result on business activity surged to €134m (+25%) and the margin rate improved to 7.1% of revenue (+1pt). This performance was mainly attributable to C&SI France (+0.6pt to 8.6% of revenue), the UK despite no revenue growth (+0.9pt to 7.3% of revenue thanks to cost optimisation), Other Europe (+3.8pts to 4.4% of revenue, including the renewal to profit in Germany). - The operating profit was €103m (+56%) after higher expenses related to stock options (€-10m vs €-0.4m in H1 15), amortisation of allocated intangible assets (€-10m, +6%) and lower other net operating expenses (€-11m vs €-31m in H1 15) due mainly to lower restructuring/reorganisation costs (€-8m vs -30m in H1 15). - Group net profit was €54m (vs €27m in H1 15). The negative FCF was less yoy (€-101m vs -163m in H1 15) thanks to an improvement in the change of WCR. The funding of the acquisitions (Cassiopae, LASCE Associates, EchoSystems, 8.6% of the shares of Axway) represented significant cash out-flows of €105m. On 30 June 2016, net financial debt remained significant at €720m (vs €531m at year-end 2015 and €618m on 30 June 15). It represented 69% of total equity.
Sopra Steria had good organic revenue growth (+3.3%) led by the Consulting and Systems integration activity in France. Q1 16 revenue Revenue reached €913m (+4.7%). The overall growth rate included a change in perimeter (+2.9%) related to the integration of CIMPA and a negative currency effect (-1.5%). Organic revenue growth was good and accelerated (+3.3% vs +2.4% in Q1 15), driven by the Consulting & Systems integration activity in France, €337m, +9.5% o/w c.+20% in the consulting services alone, thanks to strong demand in the Aeronautics & Defence, Transport and Banking sectors. Organic revenue growth was satisfactory in Other Europe (€171m, +3.7% vs +2.4% in Q1 15) thanks to higher volumes in all countries except for Denmark and Switzerland. Conversely, revenue decreased to €237m (-5.7%) in the UK. Organic revenue was down, -2.3% vs +1.5% in Q1 15, due to no growth in the shared service platform SSCL in its current scope. 2016 will be a transitional year for SSCL. In software, revenue is not linear quarter by quarter and both activities were compared to a challenging basis of comparison last year. Sopra Banking software revenue was flat (vs +7.6% in Q1 15 which included significant licence revenue related to La Banque Postale contract) and organic revenue from the Other Solutions increased moderately, +1.4% vs +8% in Q1 15.
+FY2015 figures+ Revenue reached €3,584m (+57%, +6.4% pro forma for the Sopra Steria merger). Organic revenue growth was 2%, in line with expectations. Organic growth was driven by the Consulting & Systems Integration business in France (+3.5% driven by the Banking sector, Public sector, Aerospace/defence/security) and Other Europe (+6.3%), Sopra Banking Software (a disappointing +2.5%) and Other Solutions (+3.2%). There was rather flat organic revenue in the UK (-0.7% while we had expected -2%) and a drop in the Infrastructure management business (-10.3% to €183m as expected) that was not compensated for the strong performance in the small Security services activity (+25% to €17m). Operating profit on business activity (before stock options, the amortisation of allocated intangibles, and restructuring costs) increased to €245.5m (+27%, +6.2% pro forma) corresponding to a margin rate of 6.8% of revenue, above expectations (guidance: 6.5% of revenue). Cost synergies related to the Sopra Steria merger were higher than expected (€45m vs €30m estimated). The reported operating profit was €153m (+3%, -2.5% pro forma) after higher restructuring and reorganisation costs (€-67m mainly related to the Sopra Steria merger vs €-44m in 2014) and asset depreciations (€-3m). Group net profit was €84m (vs €98m reported in 2014 and €93m pro forma in 2014). It included a significant increase in the effective income tax rate (36.4% vs 24.7% pro forma in 2014 when there was €12m non-taxable in the UK, a favourable country mix). Net debt amounted to €531m (+20% pro forma) representing 1.76x EBITDA and gearing of 43%. The operating cash flow was €124m after an improvement in the change of WCR (DSO: reduction of 64 days) and FCF was €49m (initial guidance: zero). All of these included significant restructuring-related payments (€-56m). In 2016, the payment of some social costs on a monthly (vs quarterly) basis in France and shorter supplier payments in the UK will have a negative impact on the WCR (€30m estimated). The proposed dividend is €1.70/share (vs €1.90/share in respect of FY2014). There was no explanation for the reduction in the dividend. Given the decrease in 2015 group net profit, €1.70/share corresponds to the payment of a dividend of roughly €35m (P/O ratio of 41% vs 39% in respect of FY2014). Nevertheless, it is a disappointment as we had expected a stable dividend per share.
*Medium-sized IT services company, also a software editor* Sopra Steria Group is the new IT services company arising from the merger of Sopra and Steria in April 2014. It is a European IT company with significant exposure to France and the UK, at respectively 46% and 28% of estimated 2015 revenue. The Group whose new organization was effective on 1 January 2015 is specialized in consulting & systems integration (57% of revenue), infrastructure management and security services (16%), solutions (13%) and business process services (14%) (2014 figures). In IT services, the Group has a solid background in consulting (1,500 consultants) and systems integration (strength of Sopra and Steria) and has expertise in business process services (strength of Steria) o/w the operating of shared services platforms in the Public sector in the UK. Inversely to its French peers Capgemini and Atos which are not software editors, the Sopra Steria offering includes vertical/transversal software (banking, HR, property management) which complements IT services and accords the Group expert status in these domains. Finally, the Group is a reference in the financial services (27% of revenue in 2014), the public sector, and the aerospace/defense and transport/services sectors (respectively 23%, 15% and 12% of revenue in 2014). With revenue of €3.5bn estimated in 2016, Sopra Steria is a medium-sized IT services company compared to its peers Capgemini and Atos whose revenues are expected to be €13.0bn and €11.7bn respectively in 2016. This is reflected in the market capitalisation of €2.0bn (EV/2016Sales: 0.86x) which is substantially below those of Capgemini at €13.8bn (EV/2016Sales: 1.39x) and Atos at €7.2bn (EV/2016Sales: 0.89x). *Significant upside, earnings drivers* The stock is a Buy recommendation with a 42% upside (TP : €140/share) and is currently undervalued based on all valuation metrics. The appreciation of the stock should be driven by the Group's ability to drive organic revenue growth (+2% expected in 2015) and deliver the synergies related to the combination of Sopra and Steria. In 2015, guidance is for organic revenue growth of 2% and an operating margin on business activity of 6.5% of revenue. The combination of Sopra and Steria is expected to generate synergies of €62m in 2017 o/w €30m is expected in 2015 with implementation costs of €65m o/w €50m should be accounted in 2015. The cost synergies are principally in France and, to a lesser extent, the UK, and come from the reduction in staff (<1,000 employees), office rationalisation and IT purchasing. In addition to the delivery of merger-related synergies, the development strategy consists of growing organically (+2-4%/year forecast in the medium-term), managing the repositioning in value-added infrastructure management services in France (breakeven estimated in 2015; operating margin of 5% of revenue targeted in 2017), restructuring the consulting and systems integration business in Germany (breakeven estimated in 2015; operating margin of 8% in 2017), capitalizing on the success in BPS services in the public sector and developing these activities in the private sector in the UK, and accelerating organic growth in the Solutions activities (+5-10%/year forecast in the medium-term) through the acquisition of companies (priority to banking solutions) to reach 20% of total revenue in software in 2017 (vs 14% of revenue estimated in 2015). *Axway Software* Axway Software is a listed software editor controlled by the Pasquier and Odin families through the holding company Sopra GMT and Sopra Steria Group. There are product synergies between Sopra Steria and Axway Software. For instance, Sopra Banking Software co-developed the multiservices platform HeliPay with Axway Software. Sopra Steria does not plan any divestment from Axway Software and is targeting the development of commercial synergies with the company over the next three years. !Simplified_Shareholding_Structure.png! *Beyond the integration of Sopra and Steria* In the short-term (2016-17), the management priority is to achieve the targets assigned at the Sopra Steria merger, i.e. revenue of €3.8-4.0bn (vs €3.5bn estimated in 2015) and an operating margin of 8-9% of revenue in 2017. In addition, a reduction in net debt is also an important issue. Net debt is estimated at €513m (gearing 44%) at year-end 2015. In the medium-term, Sopra Steria Group will need to continue to participate in the consolidation of the IT services market to expand its geographical coverage in Europe.
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