Reply — International expansion

Reply — International expansion

Reply is benefiting from strong demand for digital transformation projects, with growing interest in the application of artificial intelligence and automation to business processes and autonomous vehicles. The company continues to generate double-digit revenue growth and operating margins and is taking its innovative model to international markets through a process of acquisition and internal investment.

Katherine Thompson

Written by

Katherine Thompson

Director

Reply

Technology

Price

€59.1

Market cap

€2,211m

Share price graph

Share details

Code

REY

Shares in issue

37.4m

Net cash as at end H119

€18.3m

Business description

Reply offers consulting, systems integration and application management services, specialising in the creation and implementation of solutions based on new communication networks and digital media. The main regions of focus are Italy, Germany and the UK.

Bull

Innovative, entrepreneurial attitude.

Experienced management.

Strong margins.

Bear

Acquisition risk.

Challenge of finding enough sufficiently qualified staff.

Large exposure to Italian economy.

Analyst

Katherine Thompson

+44 (0)20 3077 5730

International expansion

Reply is benefiting from strong demand for digital transformation projects, with growing interest in the application of artificial intelligence and automation to business processes and autonomous vehicles. The company continues to generate double-digit revenue growth and operating margins and is taking its innovative model to international markets through a process of acquisition and internal investment.

Growing internationally

Reply is a network of independent companies operating in specialist technology and consulting areas. Management is keen to replicate the Italian breadth of expertise across its two other divisions, which broadly represent the DACH region (Region 2: 20% of FY18 revenues) and the UK and Benelux (Region 3: 12% of FY18 revenues). Developing in-house expertise, combined with the acquisition of businesses in key new areas of technology, has resulted in 13% revenue CAGR from 2013–18. Recent acquisitions have all been focused on non-Italian markets, including Reply’s first foray into the US last year with the acquisition of Valorem, and three acquisitions in Germany over the last 18 months: Modcomp (security and data protection, July 2018), Elbkind (social media, November 2018) and Neveling (content management systems, December 2018).

H119 results: Revenue growth outpaced profit growth

Reply reported revenue of €573.7m in H119, +15.2% y-o-y or +9.5% on an organic basis. EBITDA of €85.7m was 25.3% higher y-o-y or 7.8% if the positive impact of IFRS 16 adoption is excluded. EBIT of €67.6m was 8.8% higher y-o-y with a margin of 11.8% (H118: 12.5%). The company saw a large number of projects in its core areas of cloud, IoT and connected products, data platforms and digital experience. It also saw strong demand for artificial intelligence and automation applied to both autonomous vehicles and business processes.

Valuation: Reflects strong execution

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

884.4

113.9

2.08

0.35

28.4

0.6

12/18

1,035.8

132.4

2.67

0.45

22.1

0.8

12/19e

1,175.0

143.5

2.73

0.46

21.7

0.8

12/20e

1,273.3

159.4

3.02

0.50

19.6

0.9

Source: Refinitiv (as at 4 November)

The Reply share price is up 32% year to date but is down from a high of €63 in July. Consensus forecasts reflect the company’s targeted double-digit revenue growth and c 12% EBIT margins. On a P/E basis, the stock trades at a premium to peers, with revenue growth and profitability above the peer group average.

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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

1,185 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

General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 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

1,185 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: Industrials

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