Boss score harvest part 6: Reply SpA (ISIN IT0001499679) – Quick check
Cheap Italian companies are ” a dime for a dozen” at the moment. Cheap Italian companies with rising sales, improving margins and solid balance sheets are however as common as the common “black swan”.
One Italian company which looks good under my Boss Score model is Reply SPA from Italy.
Reply SPA looks relatively cheap based on traditional metrics, especially P/E and EV/EBITDA
Market Cap: 160 mn EUR
P/B 1
P/E Trailing 5.9
Div. yield 2.85%
EV/EBITDA 3.6
What really raised my interest was their half year update, which shows nicely improving figures:
The Board of Directors approves the Half-yearly Report as at 30 June 2012
2 August 2012“Double digits” growth for all economic and financial indicators:
Consolidated turnover of 244.2 million Euros (+11.6% compared with H1 2011);
EBITDA of 30.7 million Euros (+15.9% compared with H1 2011);
EBIT at 27.6 million Euros (+19.8% compared with H1 2011);
Earnings before taxes of 26.8 million Euros (+18.9% compared with H1 2011)
This is even more astonishing, as they have 3/4 of their activities in Italy. So how are they doing it and what are they doing anyway ? Bloomberg says the following:
Reply S.p.A. specializes in the design and implementation of solutions based on new communication channels and digital media. The Company’s services include consultancy, system integration, application management, and business process outsourcing. Reply S.p.A. provides services to business groups within Telco & Media, Industry & Services, and Banking & Insurance sectors.
If I understand correctly, they seem to be a kind of IT systems integration company. In their annual report, they use all the “buzzwords”, like cloud computing, mobile payments, big date business security etc.
Similar to German IT company Bechtle, Reply seems to have grown through acquisitions in the past and is more a “collection” of smaller IT companies than one monolithic company.
Balance Sheet
A quick look into the balance sheet:
Reply has relatively low debt (they had zero debt in 2010) which is good. However we can see a significant amount of Goodwill. This is a problem if profitability would go down.
So far it looks OK. With ROE of 16.5% and ROIC in the double digits (including Goodwill, 13.7%) it looks like they did not overpay for acquisitions.
One thing which caught my attention was the high amount of receivables, with almost 50% receivables compared to sales. However looking at the past, this seems a “normal” amount for reply. If we look at historic numbers, they were always in that range:
| Receivables | Sales | ||
|---|---|---|---|
| 2007 | 121 | 230 | 52.6% |
| 2008 | 144 | 277 | 52.0% |
| 2008 | 144 | 330 | 43.6% |
| 2009 | 153.7 | 340 | 45.2% |
| 2010 | 189.1 | 384.2 | 49.2% |
| 2011 | 219.0 | 440.3 | 49.7% |
German IT company Bechtle AG, which seems to have a similar business model however has only 10-15% receivables compared to sales. So this is definitely something to explore further.
Stock price, shareholders etc.
Although the stock is clearly below 2007 highs, the stock has clearly outperformed the Italian index as one can see in the following chart:
Typically for Italian companies, the majority yof the company is is controlled by a family, in this case by Mario Rizzante through his Alika Srl holding. Hi daughter Tatian is CEO of the company.
Among the other shareholders, I found the “Franfurter Aktionfonds für Stiftungen” very interesting. I am not sure how succesful they are but in their portfolio are many stocks I find interesting as well. For them, the 4.83% stacke is one of the largest fund positions.
Special stuff
I overlooked almost one very interesting detail about Reply: Reply owns 78.6% of German listed “Reply Germany”, the former Syskoplan AG (ISIN DE0005501456).
Reply Germany is interestingly valued much much higher, at around 11.7x EV(EBITDA and 1.6x P/B. and a P/E of 13. A quick back of the envelope calculation shows the following
– value of the stake 37 mn EUR
– trailing 12 m earnings 0.72 cents per share or 3.5 mn EUR
If we deduct this from Reply’s 140 mn market cap and Reply’s profit, we can see that Reply’s business ex Syskoplan is actually valued at a P/E below 5.
Quick summary:
Reply SpA looks like a really interesting stock. However I do not have a lot of experience with investing in IT service companies, despite having started by professional carreer in one. So I will have some more work to do with Reply, especially a comparison with companies like Bechtle. The one thing to watch out is clearly the receivables issue.
value and opportunity 
According FTD (http://m.ftd.de/artikel/70067658.xml?v=2.0), 180 days is the average in Italy’s public administration (143 days in Spain). An Italian law stipulates
that the public administration is immune from any measure of enforcement as seizure of the debtor’s property.
hi tobias, thanks for the info. 9% PA would be surprisingly low. Also the info from the IPO looks like a rather balanced client structure.
Howver I have to dig a little bit deeper into the balance sheet. In the Italian blog they were talking about government aid money which increased profits. I have to verify that yet…
In the old IPO document there is some data on revenue concentration from major clients: the biggest 5 make up 36% of revenue. The biggest client was 9% of total revenue. Of course this is very old data. The latest AR do not contain specific data, they just mention that the concentration risk has come down.
MMI, everybody gets the readers (s)he deserves. 😉
Some more ideas on receivables:
In Italy usually the public administration pays very late (180 days late is only the minimum). Reply gets 9,2% of revenue from PA.
Reply also has some clients among big corporations, namely Italian telcos, utilities, media groups (40% of revenue). These could also be typically responsible for delayed payments. As a rule of thumb, in Italy every client who is deemed to be a safe payor will pay late – and the safer he is deemed to be, the later he will pay.
The consolidated German Reply (ex Syskoplan) which is the biggest chunk of international revenues has quite normal receivables/payables proportions, thus the huge amount of receivables should almost certainly be originated in Italy.
Hi,
I have just spent a full day looking into Reply and identified the same issues. As I speak Italian, I have also found this blog post which focusses on the cash flow issue: http://analisifondamentale.investireoggi.it/nubi-contabili-sul-reply-s-p-a-1469.html
In Italy it is quite normal to wait 90-180 days for any payment, but I don’t understand why Reply does not use any factoring services to reduce the enormous working capital, which is quite common practice in Italy as all big companies try to use the small services suppliers as financiers. Reply could immediately free 100 million Euro for other investments.
On taxes: in Italy taxes are paid in advance and tax credits get paid back only after years. (Have you ever tried to get back a withholding tax credit from Italy….? Good luck…!) Maybe this can explain some of the huge amounts of tax payments.
I have also written to the IR, but am still waiting for an answer. You know, it’s august and in Italy everybody is “al mare”…
Keep up the great work!
Tobias
Hi Tobias,
thank you for your comments. That’s why i love blogging 😉
mmi
hi oskar,
thanks, a peer group comparison defintely makes sense here as I am not an expert in this sector.
mmi
You might want to consider comparing this company to French IT-companies Micropole SA (constant growth over last five years) and the larger Groupe Steria SA (cheap based on multiples, but also with high goodwill).
The IT-sctor is definitely not getting a lot of love at the moment.
The company is as you say dirt cheap and the half year results, given the state of the Italien economy, very good.
Accounts receivable scares me too (203 days outstanding at end 2011) but it’s a characteristic of a lot of companies that mainly do business in Italy.
Perhaps a reader in Italy can post his insights which will be greatly appreciated.
Did someone find a break down of receivables regarding customers? I have only seen a regional breakdown. The receivables are mainly domestic.
http://www.handelsblatt.com/finanzen/boerse-maerkte/anlagestrategie/investment-chancen-chance-auf-schnaeppchen/6335928-2.html
Also in the Handelsblatt in March 😉 nice to see the firm again
Well, normally Handelsblatt is Note kind Of a contrary indicator. But in This case…….
You say:”Among the other shareholders, I found the “Franfurter Aktionfonds für Stiftungen” very interesting. I am not sure how succesful they are but in their portfolio are many stocks I find interesting as well. For them, the 4.83% stacke is one of the largest fund positions.” they often buy stocks which you can also find in other value funds. Look at acatis, Flossbach von storch, Tweedy and Brown and last but not least Sparta AG. I think Reply is an idea from Mr. Leber
Opti
thanks for the comment. Well, as long as they “follow” good investors … -)
mmi
@ IT Companies in generell:
– For me the first point I would clarify is if the business is local. With local I mean if the IT consultants have to be present at the customers place. In this case the main language of commuication is Italian which in turn restricts the possibility of off-shoring. Can customer actually buy the same service off-shore from e.g. Indian competitors? I suppose most of Reply’s employees are located in Italia which as a result of off-shoring would put pressure on margins at some point. I find the margins incredible.
Hi,
@ Reply Deutschland:
– The multiple of Reply Deutschland is not meaningful as the company is a “beherrschtes Unternehmen” as a consequence of the “Beherrschungs- und Gewinnabführungsvertrag with Reply”. Thus it is valued as a bond (garanteed Dividends) with an option of a higher shareprice in the upcoming Spruchverfahren.
Seb
thanks for the comment. Didn’t really look at that. The old takeover price was 8.19. EUR.
So thid is in fact not really a traded price.
mmi
hi Raphael
thanks for the comment. Prodware looks kind of interesting. usually I prefer companies with a longer history. Maybe I can include them in a “peer group” analysis. As I ahve mentioned, I don’t have a lot of experience in that sector either.
mmi
Hi, I would be interested to see what your thoughts are about this IT/consulting company. Most of them look cheap on the usual measures. I recently studied a French one with a PE of about 3, growing turnover, never a loss…Prodware. I posted some comments here (in French but that would not stop you ;)) http://www.boursorama.com/forum-questions-418910845-1?id_message=418930525 and I stayed away given all the acquisitions, goodwill, research costs…I have to say the price went up since then. But I really struggle with the sector as a whole.