SAP : A leap forward in the Cloud

Fair Value EUR54 vs. EUR47 (price EUR48.09)       BUY
News published on February Tuesday 7, 2012
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Based on an updated model now including SuccessFactors and higher mid-term growth and margin assumptions, we raise our DCF-derived fair value to EUR54 from EUR47, for 12% upside potential. We consider with est. EUR380-455m revenue synergies by 2015, SuccessFactors should be 5% accretive on non-IFRS EPS by 2015. This new stage of SAP’s transformation into a growth company once more, will have a positive impact on valuation multiples, in our view.

-          A clear boost to SAP’s cloud strategy. Although it will add only 2% to 2012 sales, we believe SuccessFactors will allow SAP to make a great leap forward in the domain of cloud computing: 1). SuccessFactors is the second largest independent SaaS vendor in the world; 2). SuccessFactors’ founder and CEO Lars Dalgaard is expected to join SAP to lead the group’s cloud strategy with his successful vision of Cloud computing; 3). SAP is set to attain a new stage of its transformation into a growth company once again, with valuation multiples likely to benefit.

-          Cloud computing: a 5-to-10-year opportunity for SAP. We consider SuccessFactors as a step for SAP to become a leader in cloud-based applications. While “best-of-breed” SaaS pure-players are starting to see their operating margins under pressure due to high sales & marketing costs, we expect SAP to gradually grab market share in the cloud, as clients tend to consolidate their IT landscape towards a reduced number of suppliers.   

-          Est. EUR380-455m of synergies ahead. We deem the deal will be slightly dilutive (-1%) on non-IFRS 2012 EPS and slightly accretive (+1% and +3%) on non-IFRS 2013 and 2014 EPS. In 2015, we estimate this accretion will reach 5%. Our scenario includes EUR380-455m of revenue synergies by 2015 - excluding any use of tax loss carry forwards. 

-          Our only Buy in our Software universe. SAP’s shares are trading at est. 11x 2012 and 9.1x 2013 EV/EBIT multiples, with a c.30% discount versus the 10-year average. Our new EUR54 DCF-derived fair value is built on mid-term lfl growth of 11% (vs. 10%) and a mid-term adj. EBIT margin of 36% (vs. 35%).

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