Atos: Share Price Dip Represents Buying Opportunity

Atos: Share Price Dip Represents Buying Opportunity

Atos: Share Price Dip Represents Buying Opportunity

Summary

Dividend    Revenue    Profitability    Financial Strength    Investment Case
  • Atos is a global provider of digital transformation solutions for customers mainly in Europe and North America.
  • Dividend, yielding 1.56%, is lower than in the past and sustainable.
  • Divestures and Covid – 19 crisis have led to decline in revenue in the last 3 years. The company expects to return to revenue growth this year. Shift of the business mix towards cybersecurity, cloud and decarbonization should improve both revenue and profitability. The company aims operating margin in the range of 11% – 12% while the current one is 9%.
  • The shares suffered from the Covid – 19 outbreak and most recently from auditors qualified opinion. That could be a buying opportunity for long – term investors as the stock could potentially appreciate by 75% according to the valuation method based on historic P/E.

Atos (ATO) provides digital solutions and products as well as consultancy services, digital security and decarbonization offerings. The company’s business is well diversified across industries and geographies. It has 105K employees in 71 countries.

An activity is split into the following divisions:

  • Infrastructure & Data Management, 55% of total revenue in 2020. Provides customers with business process automation, outsourcing for data centers and other services and products.
  • Business & Platform Solutions, 34% of revenue. Offers clients a migration of their applications to the cloud.
  • Big Data & Cybersecurity, 11% of revenue. This is the smallest division with the highest growth potential. Its growth was 16% in 2020 while other divisions were in decline. The performance was fueled by the double – digit growth in Cybersecurity Services and Products.

The company is moving its business mix towards digital, cloud, security and decarbonization. Last year, as part of that, Atos made 10 self – financed acquisitions, including Eagle Creek, SEC Consult and Motiv. This year those companies will be consolidated in the financial statements of Atos. The company would continue investing with emphasis on strengthening its Big Data & Cybersecurity division.

Atos is a worldwide IT Partner for the Olympic and Paralympic Games.

   Dividend

Dividend Dividend Yield 5Y Growth PayOut Ratio Ex-Dividend Date
EUR 0.90 per share 1.56% -4% per year 18% 2021 May 14

 

Atos targets to pay in dividends 25% – 30% of Group’s share of net income. In 2020 the company decided not to pay dividend for year 2019 due to Covid – 19 related crisis. This year it renewed dividend but now it is lower than in the past. With payout ratio of 18% the dividend is well covered by earnings. The dividend yield is quite low. Companies in Technology industry pay low dividends and Atos is no exception.

The dividend is lower than in the past and the payout ratio is low. So we could assume the dividend will grow more than earnings in the nearest future.

   Revenue

Revenue 5Y Growth Revenue Growth over 2020 Company Outlook 2021
EUR 11.18 B

in 2020

0.9% p. a. Total sales                           -3.5%

By division:

Infrastr. & Data Mngmt         -3%

Business & Platform Sol.       -8%

Big Data & Cybersec.          +16%

Revenue growth +3.5% to +4%

In the mid-term: growth between 5% – 7%.

 

The company’s revenue has been in downturn over the last 3 years. It was impacted by divesture of Worldline business and Covid – 19 related crisis. Revenue in 2020 is down by 3.5% year – on – year. Big Data & Cybersecurity experienced strong growth of 16% over the year but Manufacturing and Resource & Services divisions are each down around 9%. Manufacturing was hit by Covid – 19, particularly its Automotive, Aerospace and Industrial sectors in North America and Europe. Resources & Services also took a hit from Covid – 19. Particularly suffered Retail, Transportation and Hospitality sectors. Struggling customers terminated or postponed projects and the new contracts did not compensate the negative impact of that. The leading industry was Public Sector & Defense. It showed a growth of 7.5%, mainly in Northern Europe where the company has a large project with a weather forecast institution and various projects with other governmental agencies.

In 2020 Book – to – Bill ratio (the ratio of orders received to the amount billed) was 119% with Group order entry reaching EUR 13.33 B. The Book – to – Bill ratio was highest in Financial Services & Insurance (160%) and lowest in Manufacturing (76%).

Atos concluded large contract with a German manufacturer and renewed the contract with Siemens for EUR 3 B over 5 years. The full backlog (the full list of tasks to be implemented) amounted to EUR 23.7 B, or 2.1 year of revenue.

The company outlook suggests returning to revenue growth with weaker growth in 2021 and some acceleration afterwards. Shift towards cybersecurity, cloud and decarbonization as well as M&A activity should contribute considerably to the revenue growth. So, management’s expectations of 5% – 7% growth in the coming years could be reasonable.

   Profitability

Profit in 2020 5Y Growth Operating Profit Margin ROE Company Outlook 2021
EPS EUR 5.05;

Net Profit EUR 0.55 B

4.7% p. a. 9% in 2020

 

8% in 2020 Operating margin:

+40 to 80 bps versus 2020

The company’s EPS is up from EUR 3.84 in 2019 to EUR 5.05 in 2020. Net income from continuing operations is higher than in 2019, up from EUR 0.417 to EUR 0.55.

The company has operating margin of 9%. It is lowest, 3.3%, in Manufacturing and highest, over 12%, in Financial Services & Insurance and Healthcare & Life Sciences. Last year the company’s resource and non – personnel costs were down 2% and travel costs by 70%.

In the mid-term the company aims operating margin in the range of 11% – 12%. A shift of business mix towards higher margin segments and cost efficiency efforts of management should make achievable these margin targets. Revenue growth ambition in combination with operating margin targets should allow the company to grow EPS at least at the same rate as in the past, i.e., around 5% p.a.

   Financial Strength

Capital structure graph (3 yrs) + D/E ratio

Year 2019 2020  
Equity 7087 6871  
Cash 2378 3142  
Debt 5.371 3.585  
Net Debt 1.736 0.467  
Debt/Equity 76% 52%  

The debt is down substantially over the year mainly due to the disposal of Worldline shares. As a result, debt is well covered by operating cash flow as operating cash flow is almost 40% of debt. Net interest payments (EUR 33 M for 2020) are well covered by operating profit at 20x. So, the company’s balance sheet is sound.

   Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
Dividend could grow at 7% per year from EUR 0.9 to EUR 1.26. So the total dividend income over the next 5 years would amount to EUR 5.54.

We could assume EPS growth of 5% p.a. Then EPS in 5 years will be EUR 6.45 per share.

Projected stock price
Average P/E over the last 5 years (16.06) multiplied by EPS in 5 years = 16.06x EUR 6.45 = EUR 103.51
Future Returns Based on the Assumptions
Stock price upside potential                                       75%    from the current price of EUR 59

Overall return on investment*                                  85%

Compound Annual Return on Investment             13% p. a.

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

The above calculations show that a reversal of P/E multiple to pre – covid level could provide with the stock price upside of 75%. Thus, together with dividends, investors could earn each year around 13% in the coming years under the above assumptions.

At the beginning of April share price took a hit when its auditors issued a qualified opinion as revenue accounting of two US subsidiaries require further diligence. Those units generate about 11% of revenue according to the company. So, the impact of irregularities should be limited.

Atos has well diversified and stable business model although the growth is somewhat limited. Its shares suffered from the Covid – 19 outbreak and recently from auditors qualified opinion creating buying opportunity for long – term investors.

Notes

Data source – the company’s financial reports, presentations and its website. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.

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