Atos : Upside potential becoming limited

Fair Value EUR45 vs. EUR39 (price EUR43.54)       NEUTRAL vs. BUY
News published on February Monday 20, 2012
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We downgrade our rating to Neutral (from Buy) following a 43% share price rebound since its trough on 13th September 2011. Our DCF-derived fair value is upped to EUR45 from EUR39 in order to reflect the stock’s improved status. Atos’ defensive qualities remain intact and we are convinced the op. margin may reach 7.5% in 2013, but we consider it fairly valued in the absence of large acquisition prospects.

-          No surprises expected on FY11 results. Atos will report FY11 results on 23rd February before markets open. We are convinced the group will deliver numbers in line with company guidance (sales c.EUR6.8m, op. margin of 6.2% - or 4.9% on a pro-forma basis with 12 months of SIS -, free cash flow above EUR170m). Our forecasts and the consensus average are completely in line with these figures, so we don’t bank on any surprises. Q4 11 is likely to be Atos’ first quarter with positive organic growth in three years, based on the achievement of a book-to-bill ratio close to 105% in the quarter (100% for FY11).

-          Stable prospects. We still assume management will guide for flattish lfl sales in 2012 (between -1% and +1%) given the relative lack of visibility at the macroeconomic level, and an op. margin of 6.4%. Significant IT Outsourcing deals (with larger scopes) in Q4 11 are likely to fuel more growth from H2 12 when the ramp-up will be effective, while cyclical activities (est. 26% of sales) are likely to be less impacted by IT budget restrictions than feared. Finally, the business inherited from SIS is likely to improve the revenue trend, thanks to the improvement in sales productivity and the renegotiation of the Siemens deal in July 2011.

-          Valuation. Our new DCF-derived fair value of EUR45 is based on mid-term growth of 3% and a mid-term adj. EBIT margin of 8.5%, and a new company beta of 1.5 (vs. 1.75) reflecting the re-entering of Atos’ market cap above the EUR3bn threshold since mid-January. The stock is currently trading at est. 6.5x 2012 and 5x 2013 EV/EBIT multiples.

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