Reply SpA — Profiting from digital transformation

Reply SpA — Profiting from digital transformation

Reply’s network of entrepreneurial businesses continues to generate double-digit revenue growth combined with double-digit operating margins. We expect to see further bolt-on acquisitions in the UK and Germany, and entry into the US via acquisition will be another key milestone for the business. The share price has performed well over the last year and is now more reflective of the company’s performance.

Katherine Thompson

Written by

Katherine Thompson

Director

Reply SpA

Profiting from digital transformation

Technology

QuickView

14 November 2017

Price

€42.7

Market cap

€1,597m

Share price graph

Share details

Code

REY

Listing

MI

Shares in issue

37.4m

Net cash (€m) at end H117

35.3

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

Reply’s network of entrepreneurial businesses continues to generate double-digit revenue growth combined with double-digit operating margins. We expect to see further bolt-on acquisitions in the UK and Germany, and entry into the US via acquisition will be another key milestone for the business. The share price has performed well over the last year and is now more reflective of the company’s performance.

Replicating Italian success in the UK and Germany

The Reply group 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 (Germany division: 17% of FY16 revenues) and the UK and Benelux (UK division: 13% of FY16 revenues). The growth strategy has been to develop in-house expertise supplemented with the acquisition of businesses in key new areas of technology. Reply continues to target acquisitions in the UK and Germany and to invest further in Breed Reply, its Internet of Things incubator. Reply is also keen to enter the US market, and is carefully evaluating US acquisition targets. With net cash of €35m and access to credit lines, Reply has funds available for expansion.

Strong financial performance maintained in H117

Reply has achieved a revenue CAGR of 12% from 2011-16 and maintained double-digit growth in H117 with revenue growth of 14.3% (11% organic). Over the five-year period, the group has grown EBIT margins from 10.6% to 12.8%, with a small uptick to 12.9% in H117. While Italian margins are within the company’s target range, UK and German margins still have room for expansion. Growing the scale of both businesses should help, and increasing brand awareness of Reply in both geographies should aid staff hiring and retention.

Valuation: PIR scheme boosts share price

The Reply share price is up 45% year to date. We believe that some of this upside is due to the new Italian PIR individual savings schemes, which provide tax benefits for investing in certain Italy-listed stocks. Consensus forecasts reflect the company’s targeted double-digit organic revenue growth and 12-14% EBIT margins. On a P/E basis, the stock trades at a small premium to peers, justified in our view by Reply’s ability to grow consistently at double digits while achieving operating margins in the low teens.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

705.6

88.9

1.52

0.25

28.0

0.6

12/16

780.7

97.4

1.81

0.29

23.6

0.7

12/17e

886.3

111.7

2.07

0.32

20.6

0.7

12/18e

971.3

125.7

2.35

0.36

18.2

0.8

Source: Reply, Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

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

295 Madison Avenue, 18th Floor

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US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" 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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Constantin Medien — A sporting chance

After a complex series of disputes, now effectively resolved, Constantin is a focused sports media business, with a new management team, delivering sports content over a variety of owned free- and pay-TV channels, digital and mobile platforms. Its main revenue streams are advertising and sponsorship, with strengthening commercial relationships with gambling operators. Over half of its market valuation reflects its remaining stake in Highlight Communications, itself now considering a bid for Constantin.

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