Reply — Back to double-digit growth

Reply — Back to double-digit growth

Reply’s expertise in digital transformation stood it in good stead during FY20, with single-digit revenue growth and margin improvement compared to FY19. While demand moderated in Q220 and Q320 as customers focused on their internal challenges during the pandemic, it rebounded from Q420 and has been robust so far this year. The company continues to develop and acquire innovative technology and expertise to help corporates on their digital transformation journeys.

Katherine Thompson

Written by

Katherine Thompson

Director

Reply

Back to double-digit growth

Technology

Deutsches Eigenkapitalforum 2021

20 October 2021

Price

€165.5

Market cap

€6.2bn

Share price graph

Share details

Code

REY

Shares in issue

37.4m

Net cash at end H121

€165.4m

Business description

Reply is a leading IT services group that consists of a network of 150 highly specialised companies. Customers rely on Reply’s digital transformation expertise to optimise and integrate processes, applications and devices using new technologies. Reply is headquartered in Turin, Italy and currently employs over 9,600 staff across 16 countries.

Bull

Innovative and entrepreneurial business.

Track record spanning more than two decades.

Industry-beating revenue growth.

Bear

Wage inflation could put pressure on margins.

Scarcity of talent.

Valuation at historic high.

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Reply’s expertise in digital transformation stood it in good stead during FY20, with single-digit revenue growth and margin improvement compared to FY19. While demand moderated in Q220 and Q320 as customers focused on their internal challenges during the pandemic, it rebounded from Q420 and has been robust so far this year. The company continues to develop and acquire innovative technology and expertise to help corporates on their digital transformation journeys.

Focus on innovation

Reply is a network of independent companies operating in specialist technology and consulting areas; its structure allows group companies to function as innovative and entrepreneurial technology businesses while benefiting from the processes and stability of a larger parent company. Through a combination of in-house investment and acquisition, Reply aims to be a leader in digital transformation technologies and services, and this focus has allowed it to grow revenue at a CAGR of 12% and EPS at a CAGR of 17% over the last five years.

Reacceleration of growth in H121

Despite the pandemic, Reply managed to grow the business in 2020 (revenue +5.7% y-o-y, +4.6% organic) and even expanded operating margins by 0.5pp to 13.6%. Revenue growth slowed in Q220 (2.8% y-o-y) and Q320 (0.2% y-o-y) before recovering to 8.1% y-o-y in Q420. Growth has accelerated further in H121, with revenue up 15.9% y-o-y (Q121 11.2%, Q221 20.9%) to €712.8m, and organic growth of 9.0% y-o-y. In H121, the operating margin of 13.5% was broadly flat versus FY20. Reply made four acquisitions in H220 and a further two in H121, reflecting a confident outlook. Net cash increased to €165m at the end of H121 providing plenty of liquidity for further acquisitions.

Valuation reflects track record and opportunity

Consensus forecasts imply revenue growth of 17% in FY21 and 13% in FY22 with a gradual increase in operating margins over the period. Reply’s shares have gained 74% year-to-date, after gaining 35% in 2020, and trade at 43.2x 2021e consensus earnings. We believe that the valuation reflects Reply’s solid track record of profitable growth as well as the opportunity arising from the pandemic-driven acceleration of digital transformation within the enterprise.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/19

1,182.5

161.4

3.04

0.52

54.4

0.3

12/20

1,250.2

162.1

3.30

0.56

50.2

0.3

12/21e

1,465.2

197.7

3.83

0.67

43.2

0.4

12/22e

1,647.9

223.0

4.33

0.74

38.2

0.4

Source: Refinitiv

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Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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NSW 2000, Australia

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This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Metals & Mining

Endeavour Mining — The second five-year plan

Endeavour will announce its Q321 results on the morning of 11 November and, post quarter end, we are largely reiterating our forecasts for Q321, with the exception of a minute adjustment to the gold price (from US$1,792/oz to US$1,790/oz – see Exhibit 5). In the meantime, Endeavour has announced an ambitious five-year exploration programme to discover 15.0–20.0Moz in the indicated category of resources, while also refinancing its credit lines.

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