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Growing concerns but still no signs of a slowdown
The financial crisis hit the market in June 07 and some experts claim that the
bulk of it is already behind us. On the other hand, despite sluggish GDP growth
forecasts, Industry and Services in France have not yet experienced any marked
slowdown in demand: the timing of the deceleration remains very uncertain at
this stage. Against this backdrop, the IT sector has gone through a sharp sell-off
as fears of a 2001-2003 repeat have emerged, with our coverage universe losing
14% YTD vs. 9% for the CAC mid & small 190. But so far, no French IT
company has warned the market of a lower-than-expected outlook and, within
our coverage universe, all players have reported very strong trends continuing
into 1Q08.
Cutting estimates…for FY09
Many IT players claim that they have built-up a more resilient business model
during the 2004-2007 period, by increasing recurring revenues and visibility on
longer projects. In our view, this is partly true and explains the strong
confidence of the sector in its FY08 outlook. Given the current backlog and
trends enjoyed so far, a slowdown is likely to be seen only as late as 4Q08. On
the other hand, we do not believe that IT services will make it two years in a row
through depressed economic conditions and we have accordingly cut our FY09
estimates.
A two-step sector play: buy 2008 outlook, sell 2009 consensus
We advise a two-steps play of the IT sector. In a first stage, we recommend
buying the “2008 outlook” of companies that we expect to meet or exceed their
targets and/or consensus expectations. For those companies, Q1 and Q2 earnings
releases could lead to a short-term re-rating backed by comforted FY08
expectations and an increased perception of resilience. Following this expected
rally, we advise selling FY09 consensus expectations, as we believe that massive
downgrades should occur in late FY08. So far, the consensus still expects FY09e
EPS growth of 14.7% (14.8% in FY08e) on our coverage universe, which
consider very optimistic. Our current FY09e EPS estimates stand roughly 16%
below the consensus estimates.
Investment recommendations
We currently have three favourites within our coverage universe of the French
IT and technology sector: Alten (BUY, EUR29 TP), Assystem (BUY vs. HOLD,
EUR12.5 TP) and Steria (BUY, EUR29 TP). The common denominator of these
investment cases is our expectation of seeing consensus earnings forecasts
moving North over the coming months. On the other hand, we have downgraded
Altran (REDUCE vs. HOLD, EUR4.5 TP) given its high relative valuation, and
Sopra (HOLD vs. BUY, EUR55 TP) as the stock continues to lack foreseeable
catalysts.
IT Services
Sector note/France
A last hooray in 08
21 April 2008
Analyst
Olivier Macquet
Tel: +33 1 55 67 72 42
Email: olivier.macquet@fortis.com
Please give us your vote
of confidence in the
EXTEL
2008 SURVEY
VOTE NOW
Contents
1 . Executive summary 4
2. FY07 reporting season highlights 6
2.1. Share performances 6
2.2. Operational performances 7
3. Picking in the deceleration 8
3.1. Market view – Cautiousness prevails 8
3.2. Looking for some recurrence 10
3.3. Some verticals to provide more comfort than others 11
3.4. EPS-risk score cards 14
4. Cutting estimates… but for FY09 17
4.1. FY08 estimates probably not at risk 17
4.2. FY09 should be regarded with greater caution 17
4.3. Adjusting target prices to higher risk 19
5. Valuation: reaching a trough… unless? 21
5.1. Current valuations provide short-term opportunities 21
5.2. A FY01-FY03-like scenario shows 50% downside to stocks 21
5.3. Free cash flow generation: not a support for shares 22
5.4. Key recommendations 23
6. M&A could add to short-term momentum 25
6.1. Recent M&A: transaction multiples are well above current valuations 25
6.2. Opportunities are arising 26
6.3. Our preys and predators 27
7 . Corporate calendar 28
8. Company-specific investment cases 29
Alten 30
Altran Technologies 34
Assystem 38
Ausy 42
Bull 46
Business & Decision 50
Gfi Informatique 54
Groupe Steria 58
Sopra 62
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