In H1 20, organic revenue declined by 2.6% (of which -8.4% in Q2 20) and the decrease in the operating margin on business activity was limited (-0.7pt to 6.1% of revenue). The group benefited from its revenue structure (40% recurring revenue) and its exposure to the public/semi-public sector (30% of revenue) to attenuate the drop in activities in aeronautic, the temporary fall in volumes on some outsourced services and the drop in licences revenue. Finally, the group gave encouraging guidance.
Companies: Sopra Steria Group SA
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.
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).
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GB Group (GBG) expects to report underlying revenue growth of 10% y-o-y for H121, with a one-off contract in the US making a material contribution to revenues. Combined with strict cost control this resulted in adjusted operating profit growth of 26% y-o-y and a £32m h-o-h reduction in net debt. With management guidance for revenue well ahead of our and consensus forecasts for FY21, we have upgraded our revenue and EPS forecasts for FY21–23. Despite COVID-19 related pressure on new business in the short-term, we view GBG as well placed to benefit from the accelerated shift in the digitalisation of business processes.
Companies: GB Group PLC
This new Q3 update is a welcome addition to QTX reporting calendar, particularly as it reveals impressive resilience through the pandemic; far better performance than originally thought. Management expects FY 2020 revenue and FCF to be in line with consensus forecasts but with earnings substantially ahead. There is a caveat on the impact of the second wave of COVID-19, but so close to YE the risk is relatively low and we raise our forecasts appropriately. Fleet is the driver; despite the impact of lockdowns on new subscriptions in Q2, the subscription base has grown 11% YoY across the 9 months to 168k, fuelling 7% YoY growth in Fleet revenue. The annualised subscription base has risen 5.3% from £20.8m at YE to £21.9m in September, comfortably underpinning our FY 2021 forecast.
Companies: Quartix Holdings Plc
Gamesys Group’s Q320 trading update is ahead of expectations with pro forma revenue growth of 31% and an improved financial position. As in previous quarters, the company increased the active player base responsibly and benefitted from new game launches. We increase our revenue forecasts for FY20–22 by 5.7–7.0%, and EBITDA forecasts by a slightly lower 2–3% as management further invests in growing a sustainable and repeatable business, while ensuring revenue growth is done responsibly. This follows an EBITDA upgrade of 7.8% for FY20 at the time of the interim results. For FY21e, the free cash flow yield is 9.2% and the dividend yield is 2.9%.
Companies: JP7 GYS JKPTF
Expected profitability in H1E will be consistent with the level delivered in the interim period last year, albeit at a substantially higher margin. Order flow had seen some disruption from COVID-19 in fiscal Q1E and into Q2E but the September cycle for RFPs and order wins has been encouraging. Our FY21E forecasts are unchanged, and with the stock at the bottom of its trading range, we maintain our buy recommendation.
Companies: Shearwater Group plc
LoopUp has announced a very strong H1 period, in line with the previous trading update and reflecting a number of months of exceptional performance. This is allowing the business to invest in the major identified new opportunity, to provide telephony within Microsoft Teams, where the early signs are extremely positive. We look forward to further detail on the Teams pipeline and sales levels over time.
Companies: LoopUp Group PLC
AGM statement as expected; Resume with a Buy
Companies: CloudCall Group PLC
Benefiting from the pandemic-driven surge in sofa shopping, Asos has released strong FY20 results. However, the strong trading performance in FY 20 and a good start to FY21 were not enough to relieve management’s cautious view on the outlook.
The recent return rate has started to climb back from the bottom in April and the macro-economic consequence of COVID-19 may start to weigh on consumer demand. We should see the sales growth pace and profitability normalising in the coming months.
Companies: ASOS plc
H1 results were ahead of our estimates. However, excluding select factors, profits were well above our expectations. Sumo’s strong underlying results positions it to outperform current market expectations. In addition, Sumo announced the acquisition of Pipeworks, which we estimate could drive 18% earnings accretion even based on conservative forecasts. Given the relatively modest share price reaction, Sumo now trades at a lower multiple than prior to the acquisition.
Companies: Sumo Group Plc
Gamesys Group’s interim results reporting pro forma adjusted EBITDA growth of 17% exceeded consensus expectations, demonstrating the strength of its strategy of growing the player base responsibly, while aiming for a high player retention rate. The improving financial position has resulted in the introduction of a new dividend (company commentary implies 36p/share for FY20) earlier than anticipated by us and consensus. We have increased our FY20 EBITDA forecast by 7.8%.
Companies: GYS JP7 JKPTF
CAP-XX Ltd* (CPX.L, 4.5p/£19.9m) | Gfinity plc* (GFIN.L, 3.8p/£28.9m) | MTI Wireless Edge Ltd* (MWE.L, 44p/£38.7m) | Newmark Security plc* (NWT.L, 1.175p/£5.5m)
Companies: CPX GFIN MWE NWT
Gaming Realms is a creator and licensor of innovative games for mobile, with operations in the UK, U.S. and Canada. Flagship brand Slingo® is a highly popular and unique game genre which combines elements of slot, bingo and table gameplay. These games are licensed by some of the biggest online gaming operators in the world, including DraftKings, Sky Betting & Gaming and GVC, and distributed directly to operators or via global partners such as Scientific Games & Relax Gaming using the company's proprietary Remote Game Server platform.
Companies: Gaming Realms PLC
essensys’ FY’20E prelims highlighted strong US performance. Group sales rose 9% y/y to £22.5m (recurring: +19% to £19.4m) underpinned by the US, were 59 new site adds drove recurring sales up +45% y/y to £8.1m. Lockdown saw some sales cycle elongation, yet Group recurring sales were stable h/h, 19 new sites were added in H2 and pipeline includes 47 new contracted Connect sites to deploy. Outlook remains positive, and reintroduced N1Se numbers forecast 15% CAGR in recurring sales to FY’22E. We also explore the adjacent addressable opportunity presented by the essensys STEP product which we estimate to be worth £90m pa in London alone (US market many multiples of that). Valuation at 2.9x EV/sales is at a c.50% discount to peers exhibiting similar attractive SaaS metrics and top-line visibility.
Companies: essensys PLC
Nanoco is now focused on generating value from three core areas: nanomaterials for the sensor market, where it has a framework agreement with STMicroelectronics; quantum dots for TV displays where a number of development projects are underway; and pursuit of the patent infringement litigation against Samsung. Noting that net cash consumption is now c £0.3m per month, which management, led by Brian Tenner, estimates gives a cash runway to December 2022, we have reinstated our estimates.
Companies: Nanoco Group PLC
Audioboom plc* (BOOM.L, 177.5p/£24.9m) | Starcom plc* (STAR.L, 0.85p/£3.0m)
Companies: Audioboom Group PLC (BOOM:LON)Starcom Plc (STAR:LON)
Interims reveal a particularly strong trading period for the group, with underlying organic sales growth accelerating to +20% c/c (previously mid-single digit), underpinned by both strong trading in the US (+c.50% u/l) and the UK (+11%). Additionally, Eckoh benefitted from a large perpetual Coral licence deal, bringing reported sales growth to +37%. In our view, these results speak to the strong proposition, opportunity and momentum Eckoh across its markets. We leave FY u/l forecasts unchanged but acknowledge they look more than achievable. Currently trading on a 5% FCF yield, rising to 6% in FY21E, we think Eckoh offers a unique investment opportunity.
Companies: Eckoh plc