Sopra Group : Raising the bar with margin accretive acquisitions

Fair Value EUR61 vs. EUR53 (price EUR47.95)       BUY
News published on February Monday 20, 2012
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We reiterate our Buy rating and raise our DCF-derived fair value to EUR61 from EUR53, based on an est. 8-10% EPS accretion from three acquisitions announced last week that enhance Sopra’s margin profile, and higher mid-term growth assumptions in our model.

-          More details on the 3 acquisitions announced last week. Following these deals, Sopra expects an end 2012 net gearing ratio slightly above 50%, but its margin profile is likely to be enhanced by 0.3-0.4ppt. We est. Business & Decision UK (EUR26m sales) and Tieto Financial Services (EUR22m sales) will be paid for at 0.6x sales and generate an op. margin close to 10%. We understand Callathaÿ & Wouters (EUR80m sales) generates an op. margin of 10.6% and is likely to be acquired for significantly more than 1x sales. C&W’s purchase relates to 80% of its shares, with an option to acquire the remaining 20% in 2014. 

-          Protecting profitability in 2012. Company guidance for FY12 assumes the op. margin will increase vs. the 8.8% reported in 2011. It is still unclear whether or not the margin would increase without the acquisitions, but if the relatively positive trend seen since early January continues, the margin may be able to rise even excluding the acquisitions.

-          Setting the “Project 2015”. With the very likely appointment of Deputy CEO Pascal Leroy as a CEO at the next AGM, Sopra is in the process of determining ambitious targets for 2015, with the goal to take its Consulting, Technology Services and Software businesses to the next level. This would imply a consolidation of Sopra’s strong position with French clients, the development in Europe and the acquisition of Software vendors around Banking, Real Estate and HR Management.

-          Valuation. Our new DCF-derives fair value of EUR61 is based on a 8-10% rise in adj. EPS (EUR4/share), a mid-term growth of 6% (vs. 5%) (EUR2/share), and a mid-term adj. EBIT margin of 10% (vs. 9.5%) (EUR2/share). Trading at est. 6.8x 2012 and 5.6x 2013 EV/EBIT.

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