AKKA SA (ISIN FR0004180537) – Finally a French- German success story ?

Akka technologies is a French company which is described in Bloomberg as follows:

Akka Technologies provides high-technology engineering consulting services. The Company specializes in scientific project management and engineering, mechanical, electronic, computing, and telecommunications project management and engineering, as well as industrial project management and engineering.

Valuation (at 22 EUR)

P/E 8.6
P/B 2.2
Div. Yield 3.0%
EV/EBITDA 5.0
EV/EBIT 6.0
Market Cap 320 mn EUR

The stockprice developed relatively well since the IPO in 2006:

This is supported by a very impressive EPS increase from 0.63 EUR in 2006 to 2.82 EUR in 2012.

Business model:

The company describes itself as „R&D outsourcing“ company. Mostly active in automobile and aviation. Main clients: EADS (22%) and Daimler Benz (28%).

I think it is a little bit more than a „high class“ temp agency. In their half year report they highlight for instance those projects:

• Daimler has just entrusted MBtech with its largest project so far, involving the design of a future vehicle.
• Renault is relying on AKKA for the industrialisation of three new vehicles in China.
• Airbus has entrusted the European coordination of one of its major contracts to AKKA.

Nevertheless, I think their business shows similar cyclical characteristics than their clients. They surely need less fixed assets, which should make results less volatile after deprecisation, but this is definetly not a super stable must-have service business. If times are getting harder for the clients, they will most likely cut first in their „outsourced“ R&D before firing their own guys. On the

I am not sure how dependent they are on the know how of the engineering companies. I guess that the clients try to avoid too much know how transfer.

Overall, this kind of business model can be quite attractive. Competitors like ALTRAN; Atkins (UK) or Bertrand (Germany) earn easily 15-20% ROICs as the business requires not much capital. This translates on average into valuation ratios which are twice as high as for AKKA (Bertrand trades at 11xEV/EBITDA, Altran at 9.6x) .

AKKA for instance showed a net Income margin of around 4.5% over the last 10 years which, due to the low capital requirements, translated into an average ROIC of around 20% which looks very attractive, especially combined with the strong growth.

Why ist he stock cheap ?

Akka used to make acquisitions in the past, but usually only smaller ones. Until 2011, the company had significant cash on hand.

In 2012 however, they made a real big acquisition: The took over a full division of Daimler called MBTech.

The acquisition as such is not unreasonable, although some issues are clearly visible:

– Akka had to take on additional 100 mn in debt to finance it
– MBTech had only one customer: Daimler
– the company is barely profitable, despite the boom in the auto industry

On the other side, Akka got the company quite cheaply (almost at book value) because no one else wanted it. As Akka was already present in Germany, the do have experience and the logic, that such a division, once it is free from ist big parent, improves a lot, does make sense.

Daimler seems to have guaranteed business for 5 years. In the meantime, Akka needs to find new clients. So far, Akka seems to proceed slower than planned with the turn around and overal profitablity is now suffering clearly. Nevertheless, from a pure business point of view this could be an interesting turn around situation ifg the plan works out.

Loking at MBTechs recruiting web site one can see that they are currently searching for 200+ engineers. Daimler, the main client of MBTech has just released surpisingly good numbers. So for the time being it doesn’t look bad.

On the other hand, the purchase of MBTech could be considered to be some kind of „spin off“. As part of the large Daimler conglomerate, this small organization was most likely „rotting“ in the backwaters. Now, within a much smaller focused organization like Akka, theoretically, a lot of improvements could be expected.

Qualitative aspects

On the plus side, the company is still majority owned by the Founder/CEO Maurice Ricci with > 50% ownership. He is 52 years old and will most likely be in the company for a while.

BUT:

Going through my quality checklist, some issues really bother me. When I look at a company, I ususally google for pictures of the CEO and board members plus I try to watch videos to get a „subjective“ impression.

When I googled Maurice Ricci, I got among others, this link http://www.racingsportscars.com/driver/photo/Maurice-Ricci-F.html

And those pictures:

So Maurice Ricci seems to enjoy race driving quite a lot. I do have a BIG problem with CEOs who have extravagant hobbies such as race driving.

There are quite a lot of examples of race driving CEOs which drove their company „against the brick wall“, among others, Ulrich Schumacher from Infineon and Eike Batista.

My theory ist hat as a race driver you have to go to the limit all the time in order to be succesful, if you fail, you just need to get a new car. However, if you are shareholder in a company run by such a CEO, you have the risk that your stocks will bet he „old car“….

This alone would be just a warning sign, but when I went through my list, some other slightly worrying issues emerged:

Akka SA behaves a little bit irrational with regard to funding, both in 2011 and 2013, they issued new shares (1 new for 10) but paid a dividend as well. For shareholders, this is clearly value destroying (costs for rights issue, taxes on dividend).

Even more worrying ist he fact, that the CEO didn’t seem to particpate in the rights offering. According to the annual report, his percantage declined more or less with the increased share count.

It looks a little bit that he needs more than the 600 k salary to finance his lifestyle and therefore still pays out the dividend although it would be better to reinvest.

Finally, I am alaways careful if a company does a big acquisition compared to ist size. In this case it seems to have been relatively cheap

Overall, Akka only scores 13 out of 28 in my qualitative check list, which is not enough for my „core value“ portion.

Interestingly, I did some „scuttlebut“ with some French investors and they had a quite high opinion of the company from the operational and technical point of view.

So what now ?

We have a stock which is quite cheap but does only score „mediocre“ with regard to quality. For me, there is one line where I would not make any compromise: Accounting and integrity . If I have the feeling that a company is „cooking“ the books or if management has been involved in shady deals in the past, I will pass.

Here however, this is not the case. But clearly the risk is higher. So what we need here is better understanding of the potential values of the investment.

In order to keep it simple, I define 3 „probable“ scenarios, all three based on a 3 year horizon

1. Status quo.
The company does how it does now. Stock price remains constant

2. Bad case
The lowest net margin for Akka since they are listed has been 3.7% in 2009. If we use this as a basis and the current P/E of 8.5 (and again sales of 900 mn) then we would end up with a earnings of 2.2 EUR per share or a fair value of 18.60 EUR.

3. Good case
In the past, Akka was able to earn a net margin of around 5%. If we assume that they can turn around Germany in 3 years time and generate an overall amount of 1 bn sales, we would have a net income of around 50 mn EUR or around 3.30 EUR per share

If we further assume that they will then trade at a p/E of around 12-15 times as most of the peers, we have a target price range of 39.6 -49.5, with the midpoint at ~45 EUR.

In the next step, I try to come up with simple probabilities and the calculate the 3 year IRR.

The simplest psoobility is always: Equal weight, 33.3% probability each. The result is calculated quickly:

3 year Horizon – Equal weight
Akka Prob
Low case 33.3% 18.6
Status quo 33.3% 22
Good case 33.3% 45

Expected value in 3 yaers 28.53
IRR p.a. 9.1%

So if we assume, all three scenarios are equally likely, weg et an IRR of 9.1% over 3 year which is not very attractive.

We could also look at the scenario where we can assume that the turnaround is basically a 50/50 gamble:

3 year Horizon – 50/50 turnaround
Akka Prob
Low case 25.0% 18.6
Status quo 25.0% 22
Good case 50.0% 45

Expected value in 3 yaers 32.65
IRR p.a. 14.1%

In that case we would get an IRR of 14.1. Not bad, but as this is clealry an above average risk stock maybe not enough.

If we assume a 75% probability of the MBTech turn around, we get the following picture:

3 year Horizon 20% IRR
Akka Prob
Low case 12.5% 18.6
Status quo 12.5% 22
Good case 75.0% 45

Expected value in 3 yaers 38.83
IRR p.a. 20.8%

So in order to come to a 20% IRR which I think would bet he right „Hurdle“, one has to be quite sure that the turn around is succesful.

If one uses the 50/50 scenario to find the „status quo“ level which would provide an expected 20% IRR, we would end up with 18 EUR.

So long story short summary:

I would buy the stock either if the price would be around 18 EUR or if I am convinced that the turnaround is happening with at least 75% probability (and the car sector is not cratering).

So for the time being, despite looking attractive from a pure valuation point of few, the risk/return for Akka is not good enough in order to qualify as core value. As it is no “special situation” neither (at least not in my definition), for the time being it will be a stock for the watch list only.

7 comments

  • When I screened the company in the past, two points mainly worried me:
    – increased competition in the future from outsourcing hubs like India or near-shore Tunisia & Co.
    – customer concentration

    Musti mentions an interesting point. I imagined a rather separate business setup. It would definitely be a much better competitive position if they are more involved and need proximity to clients.
    But the customer concentration still lets me back-off, even with potential long-term contracts.

  • Hi, funny I just looked at the company and took a small position because I have a slightly more optimistic view on this company:
    1. CEO history – I was pretty impressed with what Maurice Ricci has accomplished, he grew his small SW company to a (almost) 1bn revenue company and still has 36% of the company. If he goes on like this, he can race as much as he wants.
    with respect to not participating in the capital raise, I don’t think this is too troubling. He has more than EUR 100mn of AKKA stock and is not selling any stock. I presume his AKKA holdings make up for the vast majority of his net worth.

    2. Record of value creation: From 2007 to 2012 Akka showed the following annual growth rates
    – Revenues: 29%
    – Net Earnings: 34%
    – EPS: 25%
    – DPS: 20%
    At the same time AKKA showed average returns on invested capital in excess of 15% .

    3. Experience with acquisitions: My biggest worry is how they integrate MBTech. What gives me a bit of confidence that they will manage the integration reasonably well, is the fact that they have quite some experience with big acquisitions. In 2007 they acquired COFRAMI ( 2100 additional employees when AKKA had less than 3000 employees). In 2011 the acquired Aeroconseil with 1200 employees.

    4. Valuation: You might undervalue the company in each of the three scenarios because
    a. In your IRR calculations, the dividend yield (2,85%) should be added.
    b. Within three years AKKA will have generated another EUR 90-120m in additional cash which should be (at least partially) included in the valuation. This gives another 4-12% of IRR (depending on how much cash you generate and how much discount you apply to the cash: 0-50%)
    c. Adding a. and b. to your IRRs you end up with an IRR p.a of 16% in the 33/33/33% scenario, 25% in the 50/50 scenario and up to 35% in the 75/25% scenario which makes the company appear much more attractive.

    Looking forward to your thoughts

    • Max,
      thank you for the comment.

      Clearly , the past looks good, but in my opinion the MBtech acquisition is different than past dealsnand very risky.

      With regard to valuation: Yes, I could added dividend yield and cash generated. I could also have added a very bad scenario with another capital increase and a really bad outlook for the car industry.

      To be honest, Akka could turn out to be a great investment, the same as for instance Reply which I didn’t buy. It just does not fit my criteria as I am very careful both, with companies which do a lot of M&A and the auto industry in general.

      MMI

  • Hi, do you have any preasumptions how they will likely unlock the value out of that acquisition of MBtech?

    • no, not really to be honest. As I mentioned, maybe people feel more motivated if they work for a smaller company instead of being the 5th wheel and low budget in house department at Daimler.

      But I didn’t look that deeply into them.

  • Hallo Musti,

    ich denke mal Akka ist eine Mischung aus Zeitarbeit, Outsourcing und Beratung. Die Frage ist, wie groß das “institutionelle” know how ist.

    Das mit den Standorten ist ein wichtiger Punkt. Akka macht deswegen auch eineige Standorte in Deutschland neu auf, meistens direkt bei den jeeiligen Automobilunternhmen oder EADS…..

    MMI

  • Hallo MMI,

    Liege ich mit der Annahme falsch, dass man die Firmen wie AKKA oder. Bertrandt eigentlich mit Firmen wie Adecco, randstad oder anderen Personalleasing Firmen vergleichen sollte?
    Natürlich mit einem Abschlag bzgl. Spezialisierung.

    Letztendlich sind die Firmen doch eigentlich Personalleasing Firmen, die sich auf Ingenieure spezialisiert haben und an die Firmen ausleihen.

    Bsp. bertrandt und Audi
    Bei der Audi Ag sitzen neben den eigenen Ingenieuren , Ingenieure von. Bertrandt, die die Aufgaben erledigen. Meistens ist der Projektleiter direkt von Audi. Somit haben die Ingenieure Zugriff auf die Audi DatenBank/Info, Audi behält wichtige Infos immernoch für sich und gibt die Montrolle auch nicht aus der. Hand .Der Unterschied ist das die eigenen Audi Ingenieure neben dem besseren Gehalt auch von den ganzen anderen Leistungen profitieren (Prämie usw.) und die Leihingenieure nicht.

    Bei solchen Ingenieur Büros, sollte man eventuell auch berücksichtigen, wie ob Standorte in der Nähe des Kunden vorhanden ist oder nicht. Kannst Dir gerne mal die Standorte vieler Ingenieur Dienstleister anschauen, meistens ist eine Büro um die Ecke eines Großkunden.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s