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SOPRA STERIA GROUP
SOPRA STERIA GROUP
A milestone is achieved
27 Feb 17
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.
Solid organic growth
03 Nov 16
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.
Strong organic growth, margin improvement
28 Jul 16
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.
Buoyant Consulting & Systems Integration in France
03 May 16
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.
Strong C&SI business in France
29 Feb 16
+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.
Synergies from the merger as the first milestone
29 Jan 16
*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.
N+1 Singer - IQE - Upgrade cycle set to continue
24 Mar 17
IQE’s FY’16 results showed good growth in all key segments and came in c.4% ahead of our recently upgraded forecasts. We have upgraded our forecasts today by 5% and 3% in FY’17 and FY’18 respectively, but expect the upgrade cycle to continue. The increase in capex in FY’16 looks to us a strong indication of future volume increases, and we see scope for significant upgrades through the course of our forecast horizon. We highlight three opportunities in this note, each of which could materially move the needle in its own right. IQE is one of our key picks for 2017 and has performed strongly YTD (+48%), but we believe there is more to go for. We increase our target price to 76p and retain our Buy recommendation.
Or, helping a juggernaut turn on a dime
24 Mar 17
Sopheon has spent many years evolving a state-of-the-art platform allowing Enterprise customers to manage and monitor their pipelines of innovation. As this market matures and on the back of some major reference client wins, Sopheon’s Accolade product is beginning to see material success on a number of fronts. This note describes the marketplace, the technology, and the progress now being achieved.
Stronger and stronger
23 Mar 17
Sopheon has reported strong prelims in line with the January trading update which had demonstrated that revenue delivery had been achieved on cost underspend, leading to EBITDA (+7% vs FY16E) and adjusted PBT (+22%) outperformance. Strong licence sales, high levels of recurring revenue retention (94% by value), and ever upgrading product portfolio in terms of functionality delivered revenue strength. Gartner recognition illustrates the transition from a product which needed to be described then sold, to a solution set sought by customers to deal with the increasingly acknowledged enterprise problem of efficient product lifecycle management. Sopheon is well positioned for future growth, and board confidence for future growth leads to planned increase in investment, yet still delivering $5.6m ($5.3m pre FX) EBITDA. Having smashed through our FY16 forecasts and target price, we restore FY17 forecasts and lift the 12-month target from 360p to 620p.
Acquisition of Infracast Limited
27 Mar 17
IMImobile have announced the acquisition of Infracast Limited for an initial consideration of £8.2m. Infracast is a leading provider of multi-channel messaging applications and will expand IMImobile’s customer base whilst providing significant cross-selling opportunities. This looks another high quality acquisition. We remain Buyers and increase our T/P to 220p.