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We have adjusted our revenue estimates to align with Sopra Steria''s recent changes in scope, notably the netting of part of Ordina''s revenue (IFRS 5). Our adjusted profit forecasts are unchanged. We do not consider the changes to be material; our rating is unchanged.
Sopra Steria Group Sopra Steria Group SA
France and Airbus in particular weighing on short-term outlook... Sopra Steria''s (SOP) sales warning on 18 July shone a harsh light on the company''s high dependence on France and Airbus and its ecosystem Airbus is c. 9% of revenue). As both tires went flat, Sopra Steria had to cut organic growth expectations from +3-4% to flat this year. ...but midterm prospects remain bright Although Airbus is unlikely to contribute to Sopra Steria''s growth until 2026, other factors we outlined in our upgrade note remain intact: CEO confirmed trends in Defence remain strong, consulting could rebound later this year or early 2025 as comps ease, and the NSandI contract in the UK should ramp-up in Q1 2025. Also, the guidance for flat organic growth HoH in H2 despite 2 additional working days now leaves risk skewed to the upside, in our view. Investors remain constructive on the name Investors we talked to after the warning generally saw the share price reaction on Friday (down c. -8%) as overdone, and we sensed temptation from holders to reinforce their positions, although we believe it may take several months for investors more remote to the story to come back to it. Valuation attractive, next big catalyst is the December CMD SOP now trades on 7.0x EV/EBIT 2025E, which we find attractive vs. 10yr NTM average of 8.5x (see p. 2). The next catalyst is the December CMD, where management is likely to highlight MandA plans to accelerate the group''s transformation towards higher value-add services. Growth acceleration in Q1 2025 as well as MandA are more catalysts next year. That said, in the short-term uncertainties related to the political situation in France, Airbus, and the midcap status of the group are likely to keep the risk premium elevated on the stock, which we now reflect in our DCF by increasing our WACC from 9.6% to 10.1%. We cut our TP to EUR245 (from EUR271). At our TP, the stock would trade on 9.4x EV/EBIT 2025E vs. CAP currently at 10.1x (12.9x at our TP).
No growth acceleration in Q2... or in H2 either Sopra Steria issued a sales warning yesterday after market, citing the political situation in France, a lack of (previously expected) acceleration in Aero, and a delay in the ramp-up of a significant contact in the UK (NSandI) impacting Q2 revenue growth and the outlook for H2. As a result, the company expects similar growth in Q2 as in Q1 (+0.3% LFL), and no significant rebound in H2 (from +4pp HoH expected previously). Temporary headwinds led to the warning CFO Etienne du Vignaux explained on the call that the delta between consensus'' expected +2.8% LFL growth for FY 2024 and the revised outlook for ''stable organic growth'' is explained 30%/25%/25%/20%, respectively, by 1/ the ''wait-and-see'' attitude of customers in France (3-9 months impact assumed), 2/ slower pace of ramp-up with Airbus, for which growth is unlikely to turn meaningfully positive before late 2025 to 2026, 3/ delayed contract ramp-up in the UK (now expected to ramp in Q1-Q2 2025), and 4/ other factors spread over the group. Changes to our estimates We have cut our estimates to reflect Sopra Steria''s revised guidance, and now expect +0.3% LFL growth for FY 2024E, and a rebound to +3.9% LFL in 2025E. We still expect adjusted EBIT to grow by +5.4%/9.1%/8.9% respectively over 2024-26E. All in all, our adjusted EPS estimates go down by 5-7% over 2024-26E (details on p.2). Outperform maintained, TP cut to EUR271 (from EUR290) Although SOP''s sales warning is disappointing, we think it was partially expected by the market following French elections and the successive warnings of Airbus and Dassault Systems. Growth is delayed but not cancelled, and the fundamentals of the company remain intact, paving the way for a growth re-acceleration next year. We maintain our O/P rating, and cut our TP to EUR271.
Sopra Steria has started to change for the better but its transformation towards value over volumes is still in its infancy. We expect this evolution to accelerate and forecast 10% EPS CAGR 24-27E. The CMD in Dec-24 and potential MandA from 2025 are key catalysts. We upgrade to Outperform. Clear drivers to growth acceleration in H2 In the short term, we see clear drivers to SOP''s expected +4pp HoH LFL growth acceleration in H2: working days impact, Airbus returning to growth YOY, and the NSandI ramp-up should add 2pp of growth in H2 and implies 2pp underlying growth acceleration, which seems conservative vs. CAP. Consulting, Aero and Defence to drive growth and profitability in the midterm Sopa Steria has big ambitions in consulting, aiming to double revenue to c.EUR1bn by ''28. Growth levers are clear: pricing remains 10-30% below peers, and the hiring of 70 partners and directors in 2022-23 bodes well for future volume growth. In Defense, SOP should benefit from increased government spending in France and the UK (7%e 2024-30 CAGR), and market share gains. CMD in Dec-2024: EUR8bn sales including potential MandA, 11% adj EBIT margin by 2027? We believe SOP remains a ''MSD grower'' in the midterm. With margin accretion from consulting/AandD, the partial sale of Sopra Banking Software, and the end of the SFT JV, we see room for 11% adj. EBIT margin in ''27e (BNPPE: 11.6%e), implying c. 10% adj. EPS CAGR ''24-27E. Including potential MandA, SOP could target EUR8bn sales by ''27e. Upgrade to Outperform, TP lifted to EUR290 (from EUR240) With an increased focus on value over volume, Sopra Steria is on its way to entering the big league of pan-European IT services players, as the December CMD should further highlight. This could help the 30% discount vs. CAP on EV/EBIT to narrow. We upgrade to Outperform and raise our TP to EUR290 (DCF-based), driven by higher growth and margin expansion expectations mid-term. At our TP, Sopra Steria would trade on 10x EV/EBIT...
No positive surprise in Q1 2024 Sopra Steria did not deliver any positive surprises with its Q1 24 sales. Total revenue came in at EUR1,587m, up +13.8% YOY including +0.3% organically at cc, in line with previous management''s message for ''stable'' growth in Q1 but below our own +1.7% LFL estimate. While the UK delivered very strongly again (+7.4% LFL), LFL growth in France (-2.6% LFL) and Banking Software (-4.1% LFL) dropped more than we anticipated. Trough confirmed CFO Etienne du Vignaux confirmed on the call that Q2 should see slightly better growth (BNPPE: +1.6% LFL), with a positive working day impact and consulting stabilizing (Q1 24: -7% YOY). For H2, the group remains confident that growth can accelerate by 4pp HoH thanks to easier comps in aero, NSandI ramping up in the UK, and a positive impact from working days (+2 YOY in H2 vs. flat in H1 YOY). While the reiteration that Q1 was the trough is reassuring, this nonetheless confirms that growth and margin expansion will be back-end loaded this year. Change to our estimates We have cut our LFL growth estimate for FY 24 from +3.6% to +3.2%, reflecting a slower start than we anticipated. This is offset by slightly higher margin expansion forecasts, leaving our EPS for 2024-25E largely unchanged. Neutral maintained, EUR240 TP Sopra Steria is changing for the better, as demonstrated by the recent market share gains in the UK and focus on consulting. However, we think the material growth acceleration required to achieve the FY 24 guidance is unlikely to show in the numbers before the group reports Q3 sales on 31 Oct, while the CMD will only take place mid-Dec. With few short-term catalysts ahead, we keep our Neutral rating and adjust our TP down to EUR240 (from EUR242) on lower growth.
We slightly adjust our quarterly estimates. We now expect +1.7% LFL growth for the group in Q1 2024 and +3.6% for FY 2024 (guidance: +2-4%), up from +3.4% before. We do not consider the changes to be material; our rating is unchanged.
Growth accelerates in Q4 Sopra Steria met or exceeded all its targets for FY 2023 and Q4 surprised positively: the company reported +6.2% LFL growth in the quarter, accelerating from c. +4% in Q3 despite a sluggish IT services environment. France was the only business unit to show growth deceleration, while the UK re-accelerated strongly to +13% LFL despite limited contribution from the NSandI contract win (c. EUR4m, i.e. c. 2pp of growth). Adjusted EBIT in H2 2023 came in 4% ahead as a result, and FCF for the year was also very strong at EUR390m, helped by customer prepayments. We model +3.4% LFL growth for FY 2024 Sopra Steria guides for +2-4% LFL growth in FY 2024, 9.5-10.0% adjusted EBIT margin, and EUR350m FCF. Management expects a ''stable'' Q1, with gradual acceleration in the following quarters. Considering the strong Q4, the former may prove conservative: we model +3.4% LFL growth for FY 2024, and +16% adjusted EBIT growth including Ordina. Change to our estimates We now integrate Ordina to our model for 2024 and beyond; our adjusted EBIT estimates (Sopra Steria definition) go up by 10-11% over 2024E-25E, including 7-8% from Ordina and 3-4% from an organic increase in our estimates following the Q4 beat. Our EPS estimates (BNPPE definition) go up by +5-6% as we also include the corresponding financing cost to Ordina''s acquisition. Neutral, TP up to EUR242 Sopra Steria again delivered a strong quarter, boding relatively well for FY 2024 despite a sluggish macro environment, and the value uplift strategy management is infusing seems to be bearing fruit. However, at 7% FCF yield 2024E post-Sopra Banking Software divestment, we see the shares as fairly valued for now. We increase our mid-term margin estimates in our DCF and roll it over by a year; our TP increases to EUR242 (from EUR200) as a result.
The increase in organic revenue (+4%) was below expectation in Q3 23. IT services organic growth slowed sequentially, in particular in France and the UK. Inversely, the software activities remained solid. The 2023 guidance of organic revenue growth of at least +6% was reiterated. A growth rate of +4% is expected in the Q4 23 given no negative calendar effect in France, the return to double-digit growth in the UK thanks to the signature of a multiyear contract and further growth in software.
Disappointing Q3 sales Sopra Steria reported disappointing Q3 sales with total revenue growing +10.6% to EUR1,345.5m, including +4.0% organic at cc vs. cons. expecting +4.8%, ending a streak of over-achievements. France, the UK, and Other Europe were all slightly softer than we anticipated, respectively impacted by the banking vertical, high comps, and Germany (also hit by a slowdown in banking, albeit still growing). We cut our FY 2023 LFL growth estimate from +6.8% to +6.1% We still think Sopra Steria will be able to achieve its FY 2023 growth guidance of at least +6% LFL despite the Q3 miss. This requires Q4 LFL growth of at least +4%, in line with Q3. However, Q4 will benefit from a few tailwinds vs. Q3: 1/ no more working day impact (-1 in Q3 YOY), which should add 1% of YOY growth; 2/ the UK accelerating thanks to recent contract wins adding 70-80bps of group LFL growth; and 3/ stronger growth from SFT in Other Europe. We believe this should be enough to offset incremental deterioration in underlying growth trends in the quarter, and model a slight acceleration in Q4 growth to +4.4%, leading to +6.1% for the FY 23 (from +6.8%). All eyes on 2024 Sopra Steria benefited this year from its relationship with Airbus, and a favourable vertical mix. However, Airbus is slowing down, and so is the banking sector (20% of Sopra Steria''s revenue), all while management has to work on the integrations of CS and Ordina. In that context, we would expect the group to be cautious when it guides on FY 24 growth in February: at this stage, +2-4% LFL growth guidance range for next year is our base case scenario. Neutral maintained, TP down to EUR200 (from EUR204) We have cut our TP to EUR200, reflecting the top-line miss and a more cautious view on margin improvement in 2024E (we now model 9.7% EBITA margin next year, down from 9.8%). However, with the banking vertical potentially decelerating, further execution risk related to MandA, and uncertainty related...
Strong H1 results confirm a change in status Sopra Steria''s H1 results reported last week confirmed a change in status for the company: the 12% LFL growth in Q2 in the UK showed it is now gaining share in the country, while the CEO''s indication of 6% price growth YOY in France in H1 illustrates his strategy of focusing on higher-value projects is working. As a result, and despite an IT services market that the group''s management sees slowing, the company grew +7% LFL in Q2, outpacing Capgemini at +4.7%. Confident message on c. 10% adjusted EBIT margin in 2024 On the road with us in Paris post-results, management reiterated that group margin should expand HoH in H2: although the price vs. wage inflation delta should narrow and margin in the UK may come down HoH, higher license sales at Sopra Banking Software and better margins in other divisions should help. We model 9.9% margin in H2, and 9.4% for the FY 2023. For FY 24, CEO remains confident the group can achieve c. 10% margin, with all divisions expected to improve YOY: pricing should remain a driver, and so will consulting, synergies with CS, real estate rationalisation, and the continued streamlining of RandD efforts at Sopra Banking Software. Changes to our estimates We have increased our LFL growth estimate for FY 2023 to +6.4% from +4.8%, and adjusted EBIT margin to 9.4% from 9.1%. For next year, we cautiously expect +3.3% LFL growth and 9.8% margin, assuming the European macro continues to deteriorate. This lifts our adjusted EPS over 2023-24E by 6-7%. Neutral maintained, TP up to EUR204 We think H1 results confirm Sopra Steria''s change in status, and we like CEO Cyril Marlarge''s focus on delivering higher value to customers to drive better profitability in the midterm. Valuation is undemanding today, but midcap IT services names can go to double-digit FCF yield in more severe downturns: we thus think better entry points may materialise in the coming quarters. We keep our Neutral rating,...
Q2 23 organic revenue growth was solid (+7.1%). The UK and Other Europe divisions were the most dynamic and aerospace, defence and security and the public sector were fast-growing. In H1 23, the operating margin on business activity improved strongly (+0.8pt to 8.8% of revenue). The 2023 guidance was upgraded for organic revenue growth and unchanged for the other metrics. Sopra Steria is in talks with the Cabinet Office which has a put option to sell its 25%-stake in SSCL.
We update our model following Sopra Steria''s Q1 revenue publication on April 28 and our recent contact with the company. We feel good about the company''s ability to achieve at least the top-end of its FY 2023 +3-5% organic growth guidance unless European macro badly deteriorates in H2, but at c. 10x EV/EBIT 2023E, in line with CAP, we think the stock is fairly valued. We increase our organic growth estimate for FY 2023 to +4.8% from +3.7% With c. +9% LFL growth in Q1, Sopra Steria delivered a strong start to the year and again beat sell-side expectations (+5.8%). Although we would expect the pricing boost to topline (5-6pp contribution to growth in France in Q1) to ease in the coming quarters as comps get tougher, the c. 5% LFL headcount growth in Q1 gives us confidence that Sopra Steria can deliver at least the top-end of the its +3-5% FY 2023 LFL growth guidance. We now expect +4.8%, up from +3.7% prior to the Q1 release. However, as we bake-in strong FX headwinds, our 2023-24E EPS barely move. IA comes into play Generate IA could have an impact on several of Sopra Steria''s business lines, although the group has already been collaborating with IBM''s Watson on chatbots for example. In BPO (13% of revenue), SOP sees generative AI as a continuation of other automation technologies already in use, such as ML and RBA. App development could also be impacted, but developers are unlikely to be replaced altogether. Also, Sopra Steria has already tested ChatGPT for its HR solutions, but so far, the result has been poor. From a high-level perspective, we would think that as long as companies'' desire to externalise non-core business processes and IT to Sopra Steria and peers remains intact, the potential headwind should be manageable. The key question (and still open, in our eyes) is to what extent generative AI can lead to the commoditisation of these services. Neutral maintained, TP up to EUR189 We have updated our DCF, rolling it forward by 6...
Q1 23 was strong with organic revenue growth of +9.1%. The overall growth was a mix of higher volume and strong price increases reflecting the inflationary context and higher added value of the services offering. In France (42% of the total), Sopra Steria benefited from strong demand in defence/homeland security, aeronautics, transport and the public sector which represent a resilient baseline in the coming quarters. The 2023 guidance was unchanged except that organic revenue growth should be at the high-end of +3-5%.
Sopra Steria has announced an offer for all the shares of Ordina in the Netherlands. This represents an investment of €518m funded by cash and debt. At year-end 22, Sopra Steria had cash & cash equivalents of €356m and a credit facility of €1.1bn. This operation is positive for the Group in that it offers diversification in Benelux which is a growing market (high single-digit growth) and significant revenue synergies (undisclosed figure) in various sectors. The operation should be accretive on EPS in 2024-25.
We hosted Sopra Steria Group CEO, Cyril Malarge, Head of IR, Olivier Psaume, and IR, Amelie Leblanc, on our annual Paris Tech Tour last week. Management is confident for 2023 despite macro uncertainties, but also on the 10% EBITA margin target for 2024. More consulting is the main driver to 10% EBITA margin target in 2024 Sopra Steria is fully focussed on adding more value to its customers. One of the main levers is to keep pushing on consulting. Besides its own brand (Sopra Steria Next), Consulting at Sopra Steria now has its own go-to-market strategy, led by the former head of banking for Europe at Accenture. Increasing consulting in the revenue mix (15% margin vs. 8.9% reported for the group in 2022), is expected to be a much stronger driver than offshoring to reach 10% EBITA margin in 2024. Confident for 2023 despite macro uncertainties CEO Cyril Malarge highlighted his confidence for this year despite macro uncertainties. While the low-end of the +3-5% LFL growth guidance for 2023 implies a sharp deterioration in business activity in H2, the high-end embeds ''business-as-usual'' but no stellar assumptions. Still room for MandA in Europe The group still sees room to grow inorganically in Europe through MandA, notably in France or in Benelux, where it is now one of the top 10 IT services providers with the acquisition of Toabania, which is a key region given its importance for the public sector (EU) and defence (NATO). Neutral maintained Sopra Steria management confirmed its optimism for the next couple of years, and CEO Cyril Malarge instils an impression of honest confidence in the strategic direction of the group for the years to come. The stock has reached new highs following the Q4 release though, and at 10.2x EV/EBIT 2023E vs. CAP at 11.4x (BNPPE definition of EBIT), we see limited room for further upside in the short-term. Neutral maintained.
Strong 8% organic growth in Q4 Sopra Steria delivered +8.0% organic growth at cc in Q4 2022, exceeding expectations by 2pp as France and the UK surprised again positively. Momentum in the UK seems particularly strong, and although strong visa processing probably helped again in the quarter, the CEO also mentioned on the call several contract expansions in the country, including back-office services for the NHS. H2 adjusted EBIT was also 5% better, driving FY 22 results above guidance on all metrics. FY 2023 guidance demonstrates Sopra Steria''s resilient profile Sopra Steria is guiding for +3-5% organic growth and adjusted EBIT margin 9% for FY 2023, which compares well (relative to the recent historical growth gap) to CAP and Accenture. We believe this reflects 1/ the vertical exposure and business mix of the company (retail and insurance combined represent 8% of 2022 revenue, same as consulting); but also 2/ market share gains with some accounts (Airbus in France, public sector in the UK). We now model +3.7% LFL growth in 2023, 9.0% adjusted EBIT margin We raise our estimates to factor in the better-than-expected revenue and adjusted EBIT guidance. We now model +3.7% organic growth at cc and 9.0% adjusted EBIT margin for 2023 (from +2.0%, and 8.8%, respectively). This, combined with a lower effective tax rate as indicated in the presentation for 2023-24 (26% and 24%) lead us to revise our adjusted EPS up by 8-9% over 2023-24E. Neutral maintained, TP up to EUR176 (from EUR165) Sopra Steria''s Q4 2022 and FY 2023 guidance have demonstrated the company''s resilience, with the potential end of the SFT JV with German banks the only element slightly troubling the waters. We raise our TP to EUR176 (DCF, 9.6% WACC), but keep our Neutral rating. Although Sopra Steria managed (again) to surprise us positively, from a tactical perspective (and as the August-October 2022 sell-off demonstrated), we would find it too risky to turn more bullish on the stock...
Sopra Steria had strong organic revenue growth in Q4 22 (+8%) and no sequential slowdown. In 2022, organic revenue increased by +7.6% above guidance and the operating margin on business activity improved to 8.9% of revenue (+0.8pt). Sopra Steria benefited from strong demand in consulting services, product lifecycle management, cybersecurity services and its solid positions in aeronautics/defence & security, the public sector and transport. This should continue in 2023. CS Group should be integrated on 1 March 2023.
We take the opportunity of the recent Accenture release to update our model on Sopra Steria and consolidate the CS Group and Tobania acquisitions. We think Sopra Steria''s profile should remain fairly resilient in a downturn, although potential risk of a disappointment in Banking Software and Other Europe (Sparda JV) keeps us from taking a more constructive stance. Neutral. Resilient profile into 2023... Accenture released its FQ1 2023 on Friday last week, mentioning that Strategy and Consulting revenue, which was up low single digit in the quarter (ended November 2023), would likely be down YOY in FQ2 (ending February 2023) before rebounding again in FH2 23. We think Sopra Steria will remain more resilient in 2023: 1/ Consulting is 10% of top line and focussed on digital transformation rather than strategy; 2/ Defence exposure (c. 20% of group revenue, notably Airbus) should remain a tailwind; 3/ revenue from the debt collection platform should be a 1-2% tailwind to revenue growth in the UK; 4/ juniorisation remains a lever to improve margins. ... but concerns remain SOP expects to sign c. EUR20m of highly profitable licenses in Sopra Banking Software in Q4, which might prove difficult in a deteriorating banking software environment. Secondly, issues remain around the digital transformation of the Sparda banks, and while soft EBIT contribution from the JV has so far been more than offset by beats in pure IT services, this might not be the case next year. Neutral maintained, TP down to EUR165 We have added CS Group and Tobania to our model, and now expect +2.0% LFL growth at the group level in 2023E, and +8.4% on a reported basis. We raise our EPS 2023E and 2024E by 8% and 4% respectively as a result of the consolidation of these acquisitions, as well as lower expected PandL tax rate (29% vs. 33% previously in our model). We continue to value the shares with a DCF, in which we raise the WACC to 9.6% from 9.2% previously to account for the recent...
Growth will slow, but by less than we previously expected Sopra Steria does not lack of margin levers for 2022 Management sticks to its 10% operating margin target for 2024
In Q3 22, organic revenue growth was significant (+7.7%) thanks to all the divisions except for Sopra Banking Software which is expected to benefit from strong licences revenue in Q4 22. Sopra Steria revised upwards its organic revenue growth forecast for 2022 to +7% (vs +5-6% previously) taking into account the strong achievement in Q3 22 and organic growth of +6% in Q4 22. Sopra Steria remains confident of its resilience in the event of a deterioration in the economic situation.
SOPRA STERIA GROUP | BUY | EUR200 • Growth momentum remains solid • Q3 sales slightly ahead of expectations • As for peers, decline in staff attrition shows market overheat is coming to an and • Company guidance for 2022 reiterated