Reply New template - UBI Banca 18... · profile (20% EPS CAGR 2016-2018 compared to peers). We believe Reply will be able to maintain ... Source: UBI Banca Estimates * based on 201

Initiation of coverage

18 July 2019 – 5:30PM

IT services

Data

Shares Outstanding (m): 37.4

Market Cap. (EURm): 2,259.7

Enterprise Value (EURm): 2,234.8

Free Float (%): 48.0%

Av. Daily Trad. Vol. (m): 0.04

Main Shareholder:

Alika Srl

45.1%

Reuters/Bloomberg: REY.MI REY.MI

52-Week Range (EUR) 42.4 63.0

Source: Factset, Ubi Banca estimates

Performance

1m 3m 12m

Absolute 1.5% 5.0% 4.7%

Rel. to FTSE IT -4.8% 5.1% 5.4%

Source: Factset

Graph area Absolute/Relative 12 M

Source: Factset

Oriana Cardani , CFA Senior Analyst [email protected] Tel. +39 02 6275 3017

www.ubibanca.com/equity-research

Financials

2018 2019E

Revenues (EURm) 1,035.8 1,188.5

EBITDA (EURm) 144.8 190.0

EBITDA margin (%) 14.0% 16.0%

EBIT (EURm) 132.4 152.6

EPS (EUR) 2.67 2.98

CFPS (EUR) 3.14 3.12

DPS (EUR) 0.45 0.51 Source: Company Data, UBI Banca Estimates

REPLY Buy

MARKET PRICE: EUR60.4 TARGET PRICE:

Early adopter of technology

We initiate coverage of Reply with a Buy rating and a target price of EUR70.5 per share (17% upside potential). Reply is one of the largest IT services and software providers in Italy and has a recognised operational excellence also in Germany and the most attractive and healthiest IT market segments: IoT, cloud, cybersecurity, AI and blockchain. The Group is a network of 130 highly specialised companies, which support leading industrial groups at the forefront of trends by offering premium services. Since its foundation in 1996, Reply has been delivering outstanding doublegrowth (>21% CAGR 2000-2018) coupled with high margins (>14% on average at EBITDA level) thanks to both organic growth and an aggressive M&A campaign. position in the most innovative niches of the IT maReply’s strong organic growth to continue (our estimates reflect >10% revenues CAGR 2018-2022E). Its healthy balance sheet (80% Operating CF/EBITDA FY18, EUR66 million net cash as at end of December 2018) creates scope for going on with extgrowth, too.

> In 2019 we expect a top line increase of 14.7% and EBITDA margin up 200bp due to IFRS 16 effect; EBIT margin is

> For 2019-2022 we estimate 9% organic CAGR of EBITDA and 10.7% organic CAGR of EBIT andReply will continue to invest in innovation through investments in start-ups to address new business topics, leaving no room for further improvement of margin at EBITDA level.

> In the last 2 years, Reply has traded at an average prcompared to P/E forward 12M of its peers due to its superior growth profile (20% EPS CAGR 2016-2018 compared to peers). We believe Reply will be able to maintain path: we incorporate organic EPS CAGR 2018average of peers, large acquisitions prospects could provide further upside. Therefore, our fair price based on multiples is obtained by applying a 35% premium on median P/E 19-22.3x-20.6x compared to 26.4x-23.9x ofAccenture. Our target price of EUR70.5 per share for Reply is the average of our DCF valuation (EUR73.1, g 2%, WACC peer multiple comparison (EUR67.8).

> The main risks are: 1) global macro downturn; 2) 3) M&A disappointment.

2020E 2021E

1,301.3 1,423.7

209.2 229.1

16.1% 16.1%

171.4 190.4

3.35 3.73

3.14 3.29

0.57 0.63 Estimates

Ratios priced on

2018 * 201

P/E(x) 19.5 20.2

P/CF(x) 10.1 11.1

P/BV(x) 4.0

Dividend Yield 0.9% 0.8%

EV/EBITDA(x) 13.8 1

Debt/Equity (x) -0.1

Debt/EBITDA (x) -0.5 Source: UBI Banca Estimates * based on 201

1

TARGET PRICE: EUR70.5

Early adopter of technology We initiate coverage of Reply with a Buy rating and a target price

upside potential). Reply is one of the largest IT services and software providers in Italy and has a

also in Germany and the UK in IT market segments: big data,

AI and blockchain. The Group is a network of 130 highly specialised companies, which support

at the forefront of all major innovation trends by offering premium services. Since its foundation in 1996,

tstanding double-digit revenues 2018) coupled with high margins

(>14% on average at EBITDA level) thanks to both organic Thanks to its leading

position in the most innovative niches of the IT market, we expect Reply’s strong organic growth to continue (our estimates reflect

2E). Its healthy balance sheet (80% Operating CF/EBITDA FY18, EUR66 million net cash as at end of December 2018) creates scope for going on with external

In 2019 we expect a top line increase of 14.7% and EBITDA margin up 200bp due to IFRS 16 effect; EBIT margin is expected to be flat.

2022 we estimate 9% organic CAGR of revenues and of EBIT and net profit. We expect

Reply will continue to invest in innovation through investments in ups to address new business topics, leaving no room for further

traded at an average premium of 36% of its peers due to its superior growth 2018 compared to 10% average of its be able to maintain a higher growth

path: we incorporate organic EPS CAGR 2018-21E at 12% vs 10% average of peers, large acquisitions prospects could provide further

on multiples is obtained by -20 multiple of peers i.e.

x of the industry leader per share for Reply is the , g 2%, WACC 7.2%) and

ain risks are: 1) global macro downturn; 2) shortage of talent;

priced on 17 July 2019 2019E 2020E 2021E

20.2 18.0 16.2

11.1 11.0 10.1

3.9 3.3 2.8

0.8% 0.9% 1.1%

11.8 10.3 9.1

-0.1 -0.2 -0.2

-0.3 -0.6 -0.9 * based on 2018 average price

REPLY 18 July 2019

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Key Financials

(EURm) 2018 2019E 2020E 2021E

Revenues 1,035.8 1,188.5 1,301.3 1,423.7

EBITDA 144.8 190.0 209.2 229.1

EBIT 132.4 152.6 171.4 190.4

NOPAT 88.7 102.3 114.8 127.5

Free Cash Flow 23.3 4.4 91.4 94.6

Net Capital Employed 420.1 528.5 563.9 610.4

Shareholders’ Equity 485.3 580.1 686.6 804.9

Net Financial Position -66.6 -54.1 -126.6 -199.9

Source: Company data, UBI Banca estimates

Key Profitability Drivers

2018 2019E 2020E 2021E

Net Debt/EBITDA (x) -0.5 -0.3 -0.6 -0.9

Net Debt/Equity (x) -0.1 -0.1 -0.2 -0.2

Interest Coverage (%) 0.0 0.0 0.0 0.0

Free Cash Flow Yield (%) 1.2% 0.2% 4.0% 4.2%

ROE (%) 20.6% 19.2% 18.3% 17.4%

ROI after-tax (%) 18.5% 17.4% 17.1% 17.6%


Key Valuation Ratios

2018 * 2019E 2020E 2021E

P/E (x) 19.5 20.2 18.0 16.2

P/BV (x) 4.0 3.9 3.3 2.8

P/CF (x) 10.0 11.1 11.0 10.1

Dividend Yield (%) 0.9% 0.8% 0.9% 1.1%

EV/Sales (x) 1.9 1.9 1.7 1.5

EV/EBITDA (x) 13.8 11.8 10.3 9.1

EV/EBIT (x) 15.1 14.6 12.6 11.0

EV/CE (x) 4.7 4.2 3.8 3.4

Source: Company data, UBI Banca estimates * based on 2018 average price Key Value Drivers

(%) 2018 2019E 2020E 2021E

Payout 16.8% 17.0% 17.0% 17.0%

NWC/Sales 14.0% 14.7% 16.2% 18.0% Capex/Sales 2.9% 2.0% 2.0% 2.0%


REPLY 18 July 2019

3

Investment Case We initiate coverage of Reply with a Buy rating and a target price of EUR70.5 per share, which indicates an upside potential of 17%. Reply was founded in mid-1996 and it was listed on the Milan Stock Exchange in December 2000 at EUR18 per share raising EUR35 million fresh capital. Since the IPO the market capitalization has risen by over 15x thanks to outstanding growth made possible by an aggressive and successful M&A strategy aimed expanding into Germany (since 2006), the UK (since 2008) and the USA (since 2018) and to its recognised operational excellence in the most attractive segments of IT services: Cloud Computing, Cyber Security, Internet of Things, Mobile and Social Networking, Artificial Intelligence, Blockchain and Big Data. Reply is specialised in Consulting, Systems Integration and Digital Services with a focus on conceiving, designing and implementing solutions based on the new communication channels and digital media. It has also formed strategic partnerships with leading market vendors such as Adobe, Amazon Web Services, Google, Microsoft, Oracle, SAP e Salesforce. Figure 1. Offering map

Reply has a unique know-how in bridging the digital world and the IT space.

Source: company presentation

The Group had over 7600 employees across 12 countries generating over EUR1 billion sales in 2018. The domestic market represented 62% of total revenues in 2018; in Italy Reply is the fourth largest IT company with a market share of ca. 5% while the leaders Accenture and IBM have a market share of ca 10% both (Source: Assinform 2017). In Germany and in the UK Reply is respectively among the Top 25 and 40 players with a market share of ca. 1%. The Group operates through a network of companies that specialise in three areas of competence:

• Technologies (57% of revenues 2018): it optimises the use of innovative technologies (i.e. Big Data, Cloud Computing, Digital Communication, the IoT and Mobile and Social Networking), creating solutions that are capable of guaranteeing maximum operational efficiency and flexibility for its clients.

• Applications (33% of 2018 revenues): it designs and develops vertical application solutions aimed at meeting core business needs for specific industries. Reply implements and operates software both in-house and third-party.

• Processes (10% of 2018 revenues): it offers advisory services to optimise

Figure 2Reply offers consultancy as well as systems integration and application mana gement.

Source: c

Reply has a diverse client base and supports the main European Industrial groups operating in Telco and Media, Banking, Insurance and Financial companies, Industry and Services, Energy and Utilities and segment

Figure 3Reply addresses the main core issues of the various industrial sectors.

Source: c

Reply has four main reporting segments, areas: region 1 (Italy+USA, Brazil, Poland and Romania), region 2 (Germany+ Switzerland, Croatia and China), region 3 (UK+ Luxembourg, Belgium, Netherlandbeginning of 2019 Reply has stopped new investments by now working for highest margin (15.2% EBITDA margin 2018), followEBITDA margin 2018) and region 3 (11.3% EBITDA margin 2018)

and integrate processes through business management consulting and risk management.

2. Breakdown of consolidated revenues in 2018 by service Reply offers consultancy on strategy, communications, processes and technolo gies, as well as systems integration and application mana gement.

Source: company data

Reply has a diverse client base and supports the main European Industrial groups operating in Telco and Media, Banking, Insurance and Financial companies, Industry and Services, Energy and Utilities and the Public Administration market segment.

3. Breakdown of consolidated revenues in 2018 by sector Reply addresses the main core issues of the various industrial sectors.


Reply has four main reporting segments, which reflect the areas: region 1 (Italy+USA, Brazil, Poland and Romania), region 2 (Germany+ Switzerland, Croatia and China), region 3 (UK+ Luxembourg, Belgium, Netherlands, France and Belarus) and the IoT start-ups incubator. Since the beginning of 2019 Reply has stopped new investments by the now working for an exit strategy. In terms of profitability, region 1 has by far the highest margin (15.2% EBITDA margin 2018), followed by region 2 (12.4% EBITDA margin 2018) and region 3 (11.3% EBITDA margin 2018)

REPLY 18 July 2019

4

through business management consulting and

on strategy, communications, processes and technolo gies,

Reply has a diverse client base and supports the main European Industrial groups operating in Telco and Media, Banking, Insurance and Financial companies,

Public Administration market

Reply addresses the main core issues of the various industrial sectors.

which reflect the main geographical areas: region 1 (Italy+USA, Brazil, Poland and Romania), region 2 (Germany+ Switzerland, Croatia and China), region 3 (UK+ Luxembourg, Belgium, the

ups incubator. Since the the incubator which is

exit strategy. In terms of profitability, region 1 has by far the ed by region 2 (12.4%

EBITDA margin 2018) and region 3 (11.3% EBITDA margin 2018). In 2018, region

1 represented 68.5% of revenues and 75% of EBITDA. Italy generated 62% of total revenues, while

Figure 4. Breakdown of consolidated revenues in 2018 by segment reporting


In region 1, 50% of revenues are generated by two sectors: Financial Services (29%) and Telco&HighTech (21%). Region 2 is very exposed to Automotive&Manufacturingequally exposed to Financial Services (22%(17%), Logistic&Transportation (16%) and Health, Government&Defence (15%)Vodafone is the main customer in all regions.

Figure 6. Main clients in 2018 by segment reporting

Source: Company data

Since 2006, the Group has started an internationalisation process through M&concentrated mainly in Germany and with constant and significant growth. In April 2018, Reply made the first acquisition in the USA: Valorem, which is specialisimplementation of cloud and analytics based on Microsoft technology and earned .

1 represented 68.5% of revenues and 75% of EBITDA. Italy generated 62% of total revenues, while the USA and Brazil weighted 4.5% and 1% respectively

Figure 4. Breakdown of consolidated revenues in 2018 by Figure 5. Breakdown of consolidated EBITDA in 2018 by segment reporting


In region 1, 50% of revenues are generated by two sectors: Financial Services (29%) and Telco&HighTech (21%). Region 2 is very exposed to Automotive&Manufacturing sector (29%), followed by Retail (23%). Region 3 is equally exposed to Financial Services (22%), Retail (19%), Telco&HighTech (17%), Logistic&Transportation (16%) and Health, Government&Defence (15%)Vodafone is the main customer in all regions.

Figure 6. Main clients in 2018 by segment reporting

Since 2006, the Group has started an internationalisation process through M&concentrated mainly in Germany and the UK, achieving important financial results, with constant and significant growth. In April 2018, Reply made the first acquisition

the USA: Valorem, which is specialised in digital strategy consulting and implementation of cloud and analytics based on Microsoft technology and earned >EUR40 million revenues in 2018.

REPLY 18 July 2019

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1 represented 68.5% of revenues and 75% of EBITDA. Italy generated 62% of total respectively.

Figure 5. Breakdown of consolidated EBITDA in 2018 by

In region 1, 50% of revenues are generated by two sectors: Financial Services (29%) and Telco&HighTech (21%). Region 2 is very exposed to the

sector (29%), followed by Retail (23%). Region 3 is , Retail (19%), Telco&HighTech

(17%), Logistic&Transportation (16%) and Health, Government&Defence (15%).

Since 2006, the Group has started an internationalisation process through M&A UK, achieving important financial results,

with constant and significant growth. In April 2018, Reply made the first acquisition ed in digital strategy consulting and

implementation of cloud and analytics based on Microsoft technology and which

REPLY 18 July 2019

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Figure 7. Breakdown of revenues growth in 2006-2018 Since 2006, the average annual growth in sales has been equal to 11.6% while the average annual contribution of the new area of consolidation was 5.4%. Reply grew also in 2009 despite the Lehman crisis.


Reply has proved to be a sound firm with a solid business model. In detail, we believe that Reply is an attractive investment for the following reasons:

• outstanding double-digit revenues growth (>12% revenues CAGR in 2008-2018, which jumped to 13% in 2014-2018) with high margins (14% EBITDA margin as at 2018, 13.8% average EBITDA margin in the last 5 years).

• Good visibility on strong near-term demand for the services delivered as Reply is focused on highly developed IT segment: cloud computing represented 20% of 2018 revenues, IoT generated 10% and cybersecurity 7.5%. Blockchain Reply was founded in 2018 to follow this type of technology and earned EUR800k revenues in its first year of life. According to the 2019 Assintel report, accelerators of disruptive innovation are expected to grow significantly in Italy also in 2019 with cloud up 25%, IoT up 18%, +47% for AI and +17% for Big Data&Analytics. Digital transformation is a structural trend supporting sector growth globally. According to Gartner Market Datalook, enterprise software is expected to grow with an 8% CAGR in 2016-2021 driven by demand of security, analytics and data management areas. Therefore, in the innovative niches we estimate Reply can grow by 15-20% per year.

• Stable shareholders and highly experienced management team: the company was born in 1996 and its founder, Mr Mario Rizzante, is the current Chairman and CEO along with his daughter Mrs Tatiana Rizzante and controls 45% of the company through Alika holding.

• Flexible structure: Reply is a network of 130 specialised boutiques in specific areas of expertise. All the companies in the group enjoy a considerable degree of autonomy.

• Excellent M&A track record: Reply’s core strategy to grow via M&A allows it to add new skills and create cross-selling opportunities. Since 2006 Reply has acquired 23 companies cumulating into EUR265 million revenues. Reply has never paid double-digit EBIT multiples..

• Highly diversified customer base and long-term relationships with its clients: top 10 customers represent 35% of revenues and top 3 customers (FCA, Vodafone and Intesa San Paolo) generate around 20% of revenues. No client exceeds 10% of group revenues and diversification in

20.9%16.6% 15.0%

1.0%

11.2% 9.6% 11.2% 11.3% 9.5% 10.7%7.8%

12.2% 13.6%

38.2%

3.8%4.1%

2.0%

1.7% 5.0% 1.2% 1.9%3.4% 0.9%

2.8%

1.1%3.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Organic External

REPLY 18 July 2019

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size and industry is broad. • Healthy balance sheet: 2018 closed with a EUR66.6 million net cash

position and a cash conversion ratio (Operating FCF/EBITDA) above 80%. A 1x Net debt/EBITDA ratio would mean a potential firepower to acquisitions of EUR250million.

• Potential external growth opportunities to reinforce Germany, the UK and the USA (the Midwest) and/or enter into France to acquire missing competencies in any specific region. The Group is targeting companies with revenues in the range of EUR3-40 million or even greater in the US.

• Strong historical dividend growth (16% dividend CAGR in 2014-2018). Starting from 2004, Reply has begun to considerably outperform both the FTSE Italia All share index and the European IT sector. We believe that the strong demand for innovative IT services as well as the expectation of potential value-creative acquisitions should continue to drive up the share price in the medium-term.

Figure 8. Price performance vs. FTSE Italia All Share and EuroSTOXX Technology since floatation (6 December 2000)

Source: Factset

We estimate 2018-2022 CAGR of 10.5% for revenues, 11.8% for EBIT and 11% for net profit. In 2019 IFRS 16 (compulsory since 2019) is estimated to have a negative impact on NFP by EUR85 million due to leasing liabilities, 200bp positive effect on EBITDA margin and a negligible effect on EBIT and net profit margin. In 2020 and 2021, FCF is expected to be over EUR110 million. Our 2019-2021 our estimates are slightly above consensus (1.2% on average on revenues, 2.7% on EBIT and 6.1% on net profit 2019-2021).

Reply S.p.A. Vs FTSE Italia All-Share and EURO STOXX Technology

Reply S.p.A. - Volume

Reply S.p.A.

FTSE Italia All-Share

EURO STOXX Technology

1288.17

231.38

113.44

REPLY 18 July 2019

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Figure 9. UBI Banca vs consensus estimates

In our view, earnings momentum should remain positi ve for Reply.

(EURm) 2019E 2020E 2021E

Revenues

UBI Banca estimates 1,188 1,301 1,424

Consensus 1,179 1,291 1,396

Difference +0.8% +0.8% +2.0%

EBITDA

UBI Banca estimates 153 171 190

Consensus 150 166 186

Difference +2.0% +3.5% +2.5%

Net profit

UBI Banca estimates 112 125 140

Consensus 106 117 133

Difference +5.6% +7.2% +5.4%

Source: UBI Banca estimates and Factset consensus

In the last 2 years the stock has been trading at a premium compared to its peers (36% on average on P/E forward 12M) thanks to its superior growth profile (20% EPS CAGR 2016-2018 compared to an average 11% among its peers). Our target price of EUR70.5 per share is the average of our DCF valuation (EUR73.1) and peer multiple comparison (EUR67.8). The latter is obtained by applying a 35% premium on median P/E 19-20 multiple of peers i.e. 22.3x-20.6x compared to 26.4x-23.9x of the industry leader Accenture. Reply is currently trading at 20.2x P/E19E, which is a 23% discount compared to Accenture; in the last 2 years Reply’s average discount on P/E forward 12M has been 8%. Main risks: 1) global macro downturn; 2) increasing staff turnover; 3) M&A disappointment.

REPLY 18 July 2019

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Company profile Reply is made up of a network of 130 highly specialised companies controlled, which support leading industrial groups in defining and developing business models to optimise and integrate processes, applications and devices, using new technology and communication paradigms, such as Big Data; Cloud Computing; Digital Communication; Internet of Things; Mobile and Social Networking. Reply was founded in 1996 and it is currently one of the top five companies in Italy to provide IT services. Reply is number 22 in Germany while in the UK is among the Top 40 companies.

Figure 10. Top 10 Italian players in IT services

Reply has a market share of ca. 5% of the IT domest ic market.

IT Revenues (EURm) Accenture 1,125

IBM Italia 986

Engineering 796

Reply 531

Almaviva 489

Cedacri 304

Capgemini Italia 290

NTT Data Italia 245

HPE 232

Atos Italia 197

Source: Assinform 2017

Since floatation in 2000, thanks to both organic growth and acquisitions, consolidated revenues have increased from EUR33 million to >EUR1 billion in 2018 and EBITDA jumped from EUR7 million to EUR145 million. Since the start of its international expansion in 2006, average EBITDA margin has been 13.5% and closed at 14% in 2018.

Figure 11. 2000-2019 evolution of revenues, EBITDA and EBITDA margin (EURm,%)

In 2018 sales and EBITDA grew by 17% and 18% respec tively.


Since December 2005 until now, Reply has completed 11 acquisitions in Germany

and 7 in the UK; foreign expansion has also included the acquisition in 2013 of the Brazilian company Mind Services, which is set to work on Microsoft tools. Reply has opened several offices In Poland, Romania and the US (namely in Chicago and Detroit) to assist FCA/CHN. The only deal completed in the US was the

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0

200

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2000

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acquisition of Valorem, which is a leader in cloud design and value-added digital strategy and execution services based on Microsoft’s Cloud offerings, with major international groups such as Boeing, Intel, Red Bull among its customers. The Group aims to penetrate new markets and widen its coverage of services/technologies.

Figure 12. Acquisition campaign in 2001-2018

Syskoplan was renamed Reply Deutschland. Reply main ly paid in cash; Syskoplan was the main exception as it was partially paid in shares in 2005.

Target Country Date Price Revenues Activity

Neveling.net Germany 4Q18 n.a. EUR6m Sitecore, Microsoft

elbkind Germany 4Q18 n.a. EUR20m Social media agency

Spike Germany 3Q18 EUR12.3m EUR22m Cybersecurity

Valorem USA 2Q18 n.a. EUR45m Microsoft

Comsysto Germany 4Q16 EUR6m EUR8.7m Digital transformation

Linx Italy 3Q16 EUR9m EUR8.7m Recruiting agency

Xister Germany 3Q16 EUR4m EUR6m Digital agency

WM UK 2Q16 EUR3m EUR5.9m Microsoft

TD Germany 2Q16 n.a. EUR8.2m Marketing consulting

Protocube Italy 2Q16 EUR0.3m EUR1m Engineering 3D

Leadwise UK 1Q15 EUR3m EUR5.6m Management Consulting

Solidsoft Germany 1Q14 EUR9.8m EUR13m Microsoft

Mind Services Brazil 1Q14 EUR1.9m EUR3.1m Microsoft/Financial services

Triplesense Germany 3Q13 EUR3.4m EUR5.6m Digital agency

Avvio UK 1Q13 EUR7.4m EUR4.8m Digital agency

Arlanis Software UK 1Q13 EUR1.5m EUR1.8m Salesforce.com

Portal Technology Germany 1Q12 EUR2m EUR5.4m e-commerce

Avantage UK 1Q11 EUR1.9m EUR13.3m Risk management

Riverland UK 3Q10 EUR8.2m EUR12m Oracle

Glue Germany 3Q08 EUR4.5m EUR9m Enterprice architecture

Communication Valley Germany 2Q08 EUR8m EUR9.1m Cybersecutity

Xuccess Italy 1Q07 n.a. EUR8.8m Risk management

Syskoplan Germany 05-2Q10 EUR11.3m EUR42m SAP

Source: company data and UBI Banca estimates.

Following this aggressive acquisition campaign, Reply earned an outstanding revenues CAGR 2007-2018 of 12.8%, mainly driven by technologies (18.8% CAGR 2007-18) which moved from EUR89 million in 2007 to EUR590 million in 2018; applications broadly doubled in size to reach EUR339 million and processes rose by 3.5x to EUR107 million.

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Figure 13. 2007-2018 evolution of revenues by service

The weight of technologies on total revenues increa sed from 32% in 2007 to 57% in 2018.


In terms of geographical areas, revenues CAGR 2007-2018 of region 1 and 2 were respectively 11.2% and 12.5%. Region 3 started to be consolidated in 2008 with EUR4 million revenues which rose to EUR118 million in 2018. In 2015, Reply launched an incubator (Breed Reply) specialised in financing start-ups in the IoT market. The incubator was to secure access to IoT technologies by accepting minority stakes in start-ups. Reply invested in 25 companies for a cumulative amount of EUR47.5 million AUM as at the end of 2018. The IoT incubator closed 2018 with EUR1.7 million consolidated revenues and an operating loss of EUR3 million. Since the beginning of 2019 Reply has decided to stop new investments and to change book gains into real profits.

Figure 14. 2007-2018 evolution of revenues by segment reporting

The weight of region 1 shrank from 80% in 2007 to 6 9% in 2018.


Regarding profitability, as an effect of the economy of scale due to its increasing size, region 1 reduced its weight from 78% in 2007 to 75% in 2018. EBITDA of region 2 rose 3x to EUR26 million in 2018. The IoT incubator closed with a negative EBITDA of EUR3 million.

89 122 120 148 188 211 248 295 330 386469

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Figure 15. 2007-2018 evolution of EBITDA by segment reporting

EBITDA CAGR 2007-2018 was 32% with region 2 reachin g a brilliant 38%.


Since 2014, the recovery of profitability of region 2 and 3 has had the same trend and they are both approaching region 1 level..

Figure 16. 2007-2018 evolution of EBITDA margin by segment reporting

Regional 1 profitability has got a linear progress while margins of region 2 and 3 have been more volatile.


The average revenues per employee increased from 131k in 2007 to 147k in 2018.

32 38 38 43 43 51 54

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Figure 17. 2007-2018 evolution of revenues and revenues/employees

The number of employees increased from 2270 in 2007 to 7600 in 2018.

Source: UBI Banca elaboration of company data

Shareholder structure

The company is controlled and managed by the founders Mr. Mario Rizzante (Chairman and CEO) through the SPV Alika which controls 45.1% of the Group. In 2004 a shareholders’ pact was signed to lock-up the shareholders of Alika. In October 2017 Alika completed an ABB of 7.7% of the capital at EUR47.5 per share (EUR190 per share pre-split of 4:1 occurred on 10 October 2017). Total outstanding ordinary shares are 37.411.428; the treasury stock currently amounts to 4.028 (0.01% of total capital) at an average price of EUR6.01 per share. On 21 May 2018, a new 3-year pact was agreed among shareholders of Alika thus binding the following stakes: 5.6% by Mario Rizzante, 11.4% by his son Filippo Rizzante and his daughter Tatiana Rizzante and 16.7% by Graziella Paglia. On 21 February 2018, Alika applied to transform its 45% stake of ordinary shares into loyalty shares with consequently increasing voting rights of Reply. As a result, voting rights were attributed up to two votes for each loyalty share owned by the same subject for an uninterrupted period of no less than 24 months starting from the date of registration in the relevant list.

Figure 18. Shareholding structure

Reply has been listed on the Italia market in Decem ber 2000.

Number of shares (m) % of capital

Alika Srl 16.87 45.1%

Caceis Bank 1.39 3.7%

Eleval Capital SAS 1.20 3.2%

Treasury shares 0.004 0.01%

Market 17.95 48.0%

Source: company data as at June 2019

The board of directors is composed of seven members of whom three are independent. The total remuneration of the board in 2018 was EUR36.5 million. By stripping out this remuneration, EBITDA would have reached EUR181 million with a 17.5% margin.

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The IT service market

The main technological trends that are currently sustaining demand of IT services are aimed at exploiting the potentials deriving from the collection of Big Data through Artificial Intelligence (AI), as well as blockchain applications, which are picking up on the wave of institutional capital flows that are moving into cryptocurrency. Quite significantly, in 2018, Industry 4.0 has also come on the scene. As manufactures start to retrofit factories with smart robotics, they are leaning on consultants for their expertise. Cybersecurity continues to be an important topic with victims of cybersecurity continuing to rise and 54% of people more concerned with protecting their personal data after the Cambridge Analytical scandal. Regarding the SaaS offering, tech players are expanding their offerings and startups are entering partnerships with cloud providers to scale up their existing marketing channels.

Figure 19. Global trend of Digital Enabler

Blockchain and AI are expected to be the digital en abler with the highest potential growth.

Source: NetConsulting cube, 2018

Globally, enterprise software represents the most dynamic area of the global ICT

market (over 8% CAGR in 2016-2021) driven by demand for security, analytics and data management areas.

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Figure 20. Evolution of global ICT market in 2011-2021 (USbn)

Global spending on security is expected to accelera te over the next years achieving a 4.8% CAGR in 2015-21 period with total revenues of nearly USD105 billion.

Source: Gartner Market Databook

Regarding the broad Italian ICT and software market, a 2.6% growth is expected in 2019 and further improvement is expected in 2020 and 2021. Cloud computing is forecast to grow by over 20% in 2019-2021 and management services is estimated to rise by an average 8% in 2019-2021 (Source: Sirmi, March 2019).

Figure 21. Evolution of Italian IT market in 2013-2021 (EURm)

After a 2013-2015 declining period, the Italian IT market recovered in the wake of the SaaS take-off.

Source: Sirmi, March 2019

More specifically, if we look at emerging technologies, in 2019 IoT and cloud could broadly replicate the performance of 2018 while AI growth could be 1.5x higher than the 2018 rise.

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Figure 22. Emerging technologies in Italy 2017-2019E

The AI market is (just) at the beginning of its rap id expansion.

(EURm) 2017 2018 2019E % change 18 % change 19

IoT 13,603 16,054 18,866 18.0% 17.5%

Connectivity 935 1,104 1,283 18.1% 16.2%

Hardware 4,942 5,841 6,899 18.2% 18.1%

Software 3,054 3,628 4,300 18.8% 18.5%

Service 4,672 5,481 6,384 17.3% 16.5%

AI/Cognitive 13 17 25 30.8% 47.1%

Public Cloud 1,171 1,499 1,881 28.0% 25.5%

Big Data&Analytics 276 348 406 26.1% 16.7%

Source: Assintel report 2019

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17

SWOT Analysis

Figure 23. SWOT Analysis

Strengths Weaknesses

Leading Italian consulting IT company Dependence on key talents

High profitability (14% EBITDA margin 2018 vs 10.6% EU IT sector average)

Low exposure to the US.

High experienced management team Low market share in Germany and the UK

Solid client base: Tier-1 companies in different industries and countries

Margins already optimized

Full range of services Excellent M&A track record Large cash flow generation Impressive partnership (SAP, Oracle, Microsoft)

Opportunities Threats

Further expansion outside Italy to reinforce position in Germany and UK or break into France

Difficulty hiring of talented personnel

Potential expansion in the US market Increasing competition

Expansion into partner ecosystem M&A execution risk

Source: UBI Banca estimates

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Recent developments

2018 and 1Q19 results

Reply closed FY18 with consolidated revenues at EUR1,036 million (+17.1% YoY rise) driven by significant growth in both region 2 and region 1 (respectively +28% to EUR208 million and +16% YoY to EUR716 million). Total Value of Production reached EUR1,054 million, up EUR154 million or 17% YoY. Consolidated EBITDA rose by 17.5% to EUR145 million, equal to an EBITDA margin at 14%, while EBIT grew by +16% YoY to EUR132 million. Net profit increased by EUR22 million to EUR100 million. Dividend was set at EUR0.45 per share (17% pay-out). The 2018 net cash position was equal to EUR66.6 million after EUR30 million CAPEX and EUR14 million dividend cash-out.

Figure 24. FY17-18 results

In 2018 external growth accounted to 3.5% YoY. Oper ating FCF was EUR120 million.

(EURm) FY17A FY18A % change

Revenues 884.4 1,035.8 17.1%

Region 1 618.3 716.1 15.8%

Region 2 162.1 207.5 28.0%

Region 3 124.7 120.7 -3.3%

IoT 1.7 1.7 -0.5%

Intercompany -22.3 -10.2 -54.5%

VoP 900.0 1,053.7 17.1%

EBITDA 123.2 144.8 17.5%

EBITDA margin 13.9% 14.0% 0.0%

EBIT 113.9 132.4 16.3%

EBIT margin 12.9% 12.8% -0.1%

Net Profit/loss 77.9 99.9 28.3%

Net profit margin 8.8% 9.6% 0.8%

Net debt/(Cash) -57.0 -66.6

EBITDA margin 13.9% 14.0% 0.0%

EBIT margin 12.9% 12.8% -0.1%

Net profit margin 8.8% 9.6% 0.8%


In the first quarter of 2019, Reply posted a 18.7% increase in revenues; +34% of sales recorded in region 2 was inflated by the consolidation of Neveling.net acquired in 4Q18. The UK (-11.6% YoY) was hurt by the termination of a huge ecommerce project in the logistics sector. Consolidated EBITDA amounted to EUR42.3 million after incorporating a EUR5.8 million positive impact due to IFRS16 which boosted EBITDA margin by 200bp to 14.9%. EBIT was up 17.2% YoY to EUR33.6 million (EUR33.3 million without IFRS16 effect). Net cash was EUR50 million as an effect of EUR84.3 million leasing liabilities due to IFRS16.

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Figure 25. 1Q18-19 results

IFRS16 had negligible impact on EBIT but hurt net c ash by EUR84.3 million.

(EURm) 1Q18A 1Q19A % change

Revenues 238.9 283.5 18.7%

Region 1 166.3 195.2 17.4%

Region 2 47.7 63.9 34.0%

Region 3 30.9 27.3 -11.6%

IoT 0.4 0.3 -27.0%

Intercompany 0.0 0.0

VoP 239.0 283.8 18.8%

EBITDA 32.2 42.3 31.5%

EBITDA margin 13.5% 14.9%

EBIT 28.7 33.6 17.2%

EBIT margin 12.0% 11.8%

Net debt/(Cash) -124.0 -50.0


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Financial projections

1H19 expected net profit at EUR53 million

On 1 August, Reply will release the 2Q19 results. We estimate consolidated revenues to grow by 17.7% YoY to EUR305 million despite a still negative trend by region 3. EBIT margin is expected to be broadly flat. The net profit in the first half of 2019 is expected at EUR53 million (+16% YoY) while we forecast net cash to stay at EUR50 million (flat QoQ). Figure 26. 2Q18-2Q19E results

2Q19 results are expected to reflect 1Q19 trend .

(EURm) 2Q18 2Q19E % change 1H18 1H19E % change

Revenues 259.2 305.1 17.7% 498.1 588.6 18.2%

Region 1 185.6 215.6 16.2% 347.8 408.7 17.5%

Region 2 46.8 61.8 32.0% 93.2 125.1 34.2%

Region 3 31.2 27.0 -13.4% 61.3 53.9 -12.0%

IoT 0.7 0.7 0.0% 0.9 1.0 4.7%

Intercompany -5.1 -5.0 -2.0%

VoP 259.5 305.2 17.6% 498.4 589.0 18.2%

EBITDA 36.1 47.7 31.9% 68.3 90.0 31.7%

EBITDA margin 13.9% 15.6% +1.7% 13.7% 15.3% 1.6%

EBIT 33.4 38.5 15.1% 62.1 72.1 16.0%

EBIT margin 12.9% 12.6% -0.3% 12.5% 12.2% -0.2%

Net Profit/loss 45.9 53.2 15.9%

Net profit margin 9.2% 9.0% -0.2%

Net debt/(Cash) -50.0 -50.0


Organic EBITDA margin 2022E above 16%

Regarding 2019, we are still expecting double-digit growth in all business lines, with the exception of region 3. Revenues CAGR 18-22E is estimated at 10.5% (all organic growth). Since 2019 the Breed incubator has stopped investing to start the disposal of its portfolio. Therefore, management fees are expected to disappear in 2020.

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Figure 27. Revenues breakdown by reporting segments in 2017-2022E.

The weight of region 1 will decrease from 70% in 20 17 to 66% in 2022.

(EURm) 2017 2018 2019E 2020E 2021E 2022E

Total Revenues 884.4 1,035.8 1,188.5 1,301.3 1,423.7 1,544.3

Region 1 618.3 716.1 816.4 883.3 954.0 1,020.7

Region 2 162.1 207.5 269.8 308.1 351.2 396.9

Region 3 124.7 120.7 113.4 122.7 132.5 141.8

IoT Incubator 1.7 1.7 0.6 0.0 0.0 0.0

Intercompany -22.3 -10.2 -11.7 -12.8 -14.0 -15.2

Growth in % 13.3% 17.1% 14.7% 9.5% 9.4% 8.5%

Region 1 9.5% 15.8% 14.0% 8.2% 8.0% 7.0%

Region 2 23.2% 28.0% 30.0% 14.2% 14.0% 13.0%

Region 3 26.9% -3.3% -6.0% 8.2% 8.0% 7.0%

IoT Incubator -36.6% -0.5% -64.3% 0.0% 0.0% 0.0%

Intercompany 35.7% -54.5% 14.7% 9.5% 9.4% 8.5%

Weight in %

Region 1 69.9% 69.1% 68.7% 67.9% 67.0% 66.1%

Region 2 18.3% 20.0% 22.7% 23.7% 24.7% 25.7%

Region 3 14.1% 11.6% 9.5% 9.4% 9.3% 9.2%

IoT Incubator 0.2% 0.2% 0.1% 0.0% 0.0% 0.0%

Intercompany -2.5% -1.0% -1.0% -1.0% -1.0% -1.0%


We forecast that the weight of labour costs will increase from 48.8% in 2017 to 51.1% in 2022 while other variable costs could remain flat at 25% of total revenues. Total cost of production CAGR 18-22E is forecast at 9.8%

Figure 28. Operating costs breakdown in 2017-2022E.

We forecast a physiological increase in G&A but dec reasing weight on total sales.

(EURm) 2017 2018 2019E 2020E 2021E 2022E

Variable Costs of Production 216.2 247.6 298.3 325.3 355.9 386.1

% total revenues 24.4% 23.9% 25.1% 25.0% 25.0% 25.0%

General and administrative costs 129.0 152.7 135.5 145.7 150.9 148.2

% total revenues 14.6% 14.7% 11.4% 11.2% 10.6% 9.6%

Labour cost 431.6 508.7 586.1 643.9 712.1 787.2 % total revenues

48.8% 49.1% 49.3% 49.5% 50.0% 51.0%

Total Costs

776.7 908.9 1,019.9 1,114.9 1,218.9 1,321.5


In 2019 we expect EBITDA margin up 200bp due to IFRS16 effect; we forecast it to remain at 16% afterwards.

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Figure 29. Evolution of operating results 2017-2022E.

We do not see any room for margin improvement in th e medium-long term because Reply intends to enlarge its footprint by continuin g to invest in new start-up companies .

(EURm) 2017 2018 2019E 2020E 2021E 2022E

Revenues 884.4 1,035.8 1,188.5 1,301.3 1,423.7 1,544.3

yoy growth 13.3% 17.1% 14.7% 9.5% 9.4% 8.5%

Other revenues 15.6 17.9 21.4 22.8 24.2 25.8

% on sales 1.8% 1.7% 1.8% 1.8% 1.7% 1.7%

Value of Production 900.0 1,053.7 1,209.9 1,324.1 1,447.9 1,570.1

Industrial costs 216.2 247.6 298.3 325.3 355.9 386.1

% on sales 24.4% 23.9% 25.1% 25.0% 25.0% 25.0%

Industrial Value Added (IAV) 683.8 806.2 911.6 998.8 1,092.0 1,184.0

% on sales 77.3% 77.8% 76.7% 76.8% 76.7% 76.7%

Other operating costs 129.0 152.7 135.5 145.7 150.9 148.2

% on sales 14.6% 14.7% 11.4% 11.2% 10.6% 9.6%

Value added 554.8 653.5 776.1 853.0 941.1 1,035.7

% on sales 62.7% 63.1% 65.3% 65.6% 66.1% 67.1%

Labour costs 431.6 508.7 586.1 643.9 712.1 787.2

% on sales 48.8% 49.1% 49.3% 49.5% 50.0% 51.0%

EBITDA 123.2 144.8 190.0 209.2 229.1 248.5

% on sales 13.9% 14.0% 16.0% 16.1% 16.1% 16.1%

Source: Company data and UBI Banca estimates.

In terms of segment reporting, we expect profitability of region 1 to reach the pick in 2019, region 2 to improve margin year after year and region 3 to suffer in 2019 due to the still loss-making e-commerce company. We expect the exit strategy of the incubator to last 3 years though its structure is expected to be streamlined.

Figure 30. Revenues and EBITDA breakdown by reporting segments in 2017-2022E.

We believe that the recovery of margin in region 3 could be slower than in region 2 considering the higher personnel turnover.

(EURm) 2017 2018 2019E 2020E 2021E 2022E

Total Revenues 884.4 1,035.8 1,188.5 1,301.3 1,423.7 1,544.3

Region 1 618.3 716.1 816.4 883.3 954.0 1,020.7

Region 2 162.1 207.5 269.8 308.1 351.2 396.9

Region 3 124.7 120.7 113.4 122.7 132.5 141.8

IoT Incubator 1.7 1.7 0.6 0.0 0.0 0.0

Intercompany -22.3 -10.2 -11.7 -12.8 -14.0 -15.2

EBITDA 123.2 144.8 190.0 209.2 229.1 248.5

Region 1 94.5 109.0 142.9 152.8 163.1 172.5

Region 2 17.9 25.7 38.3 44.1 50.9 58.3

Region 3 13.8 13.6 12.6 15.3 17.5 19.2

IoT Incubator -3.0 -3.5 -3.8 -3.0 -2.5 -1.5

EBITDA margin % 13.9% 14.0% 16.0% 16.1% 16.1% 16.1%

Region 1 15.3% 15.2% 17.5% 17.3% 17.1% 16.9%

Region 2 11.1% 12.4% 14.2% 14.3% 14.5% 14.7%

Region 3 11.1% 11.3% 11.1% 12.5% 13.2% 13.5%

IoT Incubator -174.3% -207.2% -633.3% na na na


D&A costs are expected to move from EUR13.8 million in 2018 to EUR39 million in

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2019 following an expected one-off increase of EUR22 million due to the IFRS16 effect.

Figure 31. Revenues, EBITDA and EBIT margin trend 2017-2022E


Tax rate is forecast to remain at 27.5% in 2019 and move to 27% in 2021 as a consequence of improving results in the UK where the tax rate is 20%.

Figure 32. EBITDA and EBIT and net profit margin trend 2017-2022E


CAPEX are forecast at 2.3% of sales in 2019 and 2% onwards.

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Figure 33. Net debt evolution 2017-2022E

In the next five years, assuming a 17% pay-out and no acquisitions, we expect net cash to reach EUR280 million by 2022.

(EURm) 2017 2018 2019E 2020E 2021E 2022E

NWC/Sales 19.0% 14.0% 14.7% 16.2% 18.0% 19.4%

Op CF 72.6 117.5 116.8 117.4 123.1 134.8

Capex/Sales 1.7% 2.9% 2.3% 2.0% 2.0% 2.0%

Net Debt/(Cash) -57.0 -66.6 -54.1 -126.6 -199.9 -280.0

Source: Company data and UBI Bavca estimates.

We believe that the ROACE should remain healthy; 2019 will be hurt by IFRS16 (200bp forecast effect).

Figure 34. ROACE, ROS and Capital Turnover

Profitability should improve in the medium term tha nks to better capital turnover and EBIT margin.

(EURm) 2017 2018E 2019E 2020E 2021E 2022E

ROACE 27.3% 28.4% 26.3% 25.3% 26.0% 25.9%

ROS 12.9% 12.8% 12.8% 13.2% 13.4% 13.4%

Cap. Turn 2.94 3.06 2.82 2.64 2.66 2.65

Source: Company data and UBI Banca estimates.

Figure 35. ROACE tree


COGS/Sales22.2%

Selling&Distr/SalesEBIT/Sales 0.0%

12.8% A&P/SalesPre-tax ROACE 50.3%

39.1% G&A/SalesROCE tree (2018) ROACE 14.7%

28.4%Cash tax rate on EBIT NWC/Sales

27.5% 15.1%Sales/CE Net f ixed assets/Sales

3.06 24.4%Other/Sales

-6.8%

COGS/Sales23.3%

EBIT/Sales Selling&Distr/Sales12.8% 0.0%

Pre-tax ROACE A&P/Sales36.2% 52.5%

ROCE tree (2019E) ROACE G&A/Sales

26.3% 11.4%Cash tax rate on EBIT NWC/Sales

27.5% 13.5%Sales/CE Net f ixed assets/Sales

2.82 29.3%Other/Sales

-7.3%

COGS/Sales23.3%

EBIT/Sales Selling&Distr/Sales13.2% 0.0%

Pre-tax ROACE A&P/Sales34.7% 52.4%

ROCE tree (2020E) ROACE G&A/Sales

25.3% 11.2%Cash tax rate on EBIT NWC/Sales

27.3% 14.8%

Sales/CE Net f ixed assets/Sales2.64 30.7%

Other/Sales-7.6%

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Valuation

Our target price of EUR70.5 per share for Reply is obtained from the average of

our DCF and a peers’ multiple comparison. The stock is trading at a 23% premium on P/E 19E multiples of IT services peers vs 36% average premium of the last 2 years. The historical premium incorporates higher EPS growth (20% EPS CAGR 16-18 vs 11% average of peers) which we expect to be maintained (12% organic CAGR 18-20 vs 10% average of peers). Therefore, our fair value based on P/E comparison is obtained by incorporating a 35% premium on current P/E 19E-20E average peers multiples. At our EUR70.5 per share target price, Reply would trade at 23.6x 2019 P/E, which would imply an 11% discount to industry leader Accenture.

Figure 36 - Implicit multiples based on our EUR target price

(x) 2019E 2020E 2021E

P/E 23.6 x 21.0 x 18.9 x

EV/EBITDA 14.0 x 12.4 x 11.0 x

EV/EBIT 17.5 x 15.1 x 13.2 x

EV/Sales 2.24 x 1.99 x 1.77 x

P/BV 4.5 x 3.8 x 3.3 x

EV/ Capital employed 5.0 x 4.6 x 4.1 x


DCF To calculate the company’s WACC, we used the following assumptions:

> a risk-free rate of 2.5%, which is the 10Y interest rate on Italian bonds;

> a market risk premium of 4.5%;

> a beta of 1.05 based on the average beta of Information Services and Software System&Application by Damodaran (source: damodaran.com Jan-19 Western Europe);

> a terminal growth rate of 2% and an operating margin of 13.5% at terminal value;

> A debt/equity ratio of 0.

Figure 37. WACC and embedded DCF assumptions

WACC assumptions Embedded DCF assumptions

Risk-free rate 2.5% Revenue CAGR 2017-2022 (%) 11.2%

Debt spread (%) Target EBIT margin 2022 (%) 13.4%

Cost of debt [net] (%) D&A. on sales (avg. 2018-2022) (%) 3.0%

Market risk premium (%) 4.5% Capex on sales (avg. 2018-2022) (%) 2.1%

Beta (x) 1.05 Revenue CAGR 2023-2026 (%) 6.6%

Cost of equity (%) 7.2% Target EBIT margin 2026 (%) 13.5%

Weight of Debt 0% D&A. on sales (avg. 2023-2026) (%) 2.7%

Weight of Equity 100% Capex on sales (avg. 2023-2026) (%) 2.0%

WACC 7.2%


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We estimate a WACC of 7.2%, obtaining a theoretical value of EUR73.1 per share. Our valuation incorporates debt with minority shareholders and earn-out owned on 31 December 2018 which amount to EUR45 million, EUR37 million employee provisions and EUR85 million leasing liabilities.

Figure 38. DCF Valuation

Our DCF valuation implies an EV/EBIT 2019E of 17.5x

Valuation (EURm) % Weight Per share (EUR)

Sum of PV 2018-22 FCF 423 15% 11.3

Sum of PV 2023-26 FCF 409 15% 10.9

Terminal Value 1,960 70% 52.4

Total Enterprise value 2,792 100% 74.6

Net cash as at 31/12/17 67 1.8

Debt with minority shareholders -45 -1.2

IFRS 16 impact -85 -2.3

Financial assets 53 1.4

Employees provisions -37 -1.0

Total Equity value 2,734 73.1

Number of shares outstanding (m) 37.41

Fair value per share (EUR) 73.1


We have also carried out a sensitivity analysis which shows the changes to our fair value according to changes in the WACC and to cumulative changes ranging between -4% and +4% to our EBITDA estimates.

Figure 39. Sensitivity analysis of WACC and 2018E-2021E CAGR on EBITDA

A Rfr of 3.5% increases WACC to 8.2% and decreases TP to EUR60.85 (-17%).

WACC EBITDA CAGR 2019-22

-4.0% -2.0% 0.00% +2.0% +4.0%

8.2% 54.3 57.5 60.9 64.2 67.7

7.7% 59.2 62.8 66.4 70.1 73.9

7.2% 65.2 69.1 73.1 77.2 81.3

6.7% 72.4 76.8 81.2 85.7 90.3

6.2% 81.4 86.3 91.2 96.3 101.5


Relative valuation

Figure 40. Average 18-20E EBIT margin vs 2018-20E revenues CAGR in IT sector

Reply combines one of the highest revenues growth w ith high margin

Source: Factset, UBI Banca estimates

Reply

Devoteam

Sopra Steria

TietoIndraEVRY

Bouvet

HiQEconocom

Capgemini

Bechtle

Accenture

Cognizant

DXT

CGI

TataInfosys

Wipro

-5%

0%

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20%

0% 5% 10% 15% 20% 25% 30% 35%

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0E r

even

ues

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R

Avg EBIT margin 18-20E

REPLY 18 July 2019

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Figure 41. Peer comparison Reply’s profitability and growth is slightly above the median of the IT worldwide sector. Compared to Accenture Reply has got lower p rofitability but higher growth prospects.

Company Market Cap

Ebitda margin Ebit margin Net margin EPS

CAGR

(EURm) 2019E 2020E 2019E 2020E 2019E 18-20E

Devoteam 882 12.0% 12.1% 11.3% 11.4% 5.8% 5.9%

Sopra Steria Group 2,124 9.8% 10.7% 7.4% 8.3% 3.8% 5.0%

Tieto 1,805 15.1% 16.5% 10.7% 11.2% 7.0% 7.7%

Indra 1,534 10.9% 11.3% 7.5% 7.9% 4.3% 4.9%

EVRY 1,263 15.1% 15.6% 11.8% 12.4% 6.5% 7.7%

Bouvet 325 12.9% 12.9% 10.8% 10.8% 8.4% 8.4%

HiQ International 274 14.0% 13.7% 11.5% 11.7% 9.5% 9.1%

Econocom 797 5.1% 5.4% 4.2% 4.5% 2.5% 2.7%

Capgemini 19,046 14.4% 14.6% 12.0% 12.2% 7.7% 8.1%

Atos 8,519 12.9% 13.3% 10.1% 10.2% 7.6% 8.1%

Bechtle 4,326 5.7% 5.7% 4.6% 4.7% 3.2% 3.3%

IBM 112,834 24.2% 24.2% 17.9% 18.5% 15.9% 15.8%

Accenture 110,501 16.7% 16.9% 14.6% 14.9% 11.1% 11.1%

Cognizant 33,271 19.9% 20.3% 16.6% 17.6% 13.0% 13.7%

DXC Technology 13,478 22.9% 23.5% 15.6% 16.7% 10.5% 11.6%

CGI 19,180 18.3% 18.5% 15.1% 15.4% 10.8% 11.1%

Tata Consultancy 104,272 27.1% 27.3% 25.3% 25.6% 21.3% 21.3%

Infosys 43,366 24.7% 25.1% 21.7% 22.1% 18.2% 18.4%

Wipro 20,315 20.7% 20.7% 17.5% 17.5% 15.9% 16.0%

Median 15.1% 15.6% 11.8% 12.2% 8.4% 8.4%

Reply 2,260 16.0% 16.1% 12.8% 13.2% 9.4% 9.6%


If we look at Accenture, at our target price Reply would be traded at a 7% discount to Accenture on P/E 19E; based on average P/E 19-20E of Accenture, Reply would be valued EUR79-81 per share.

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Figure 42. Peer comparison and valuation based on multiples priced on 22 June 2019 Reply is trading at premium compared to worldwide m edian sector due to its superior growth rate.

Company Market Cap EV/Sales EV/EBIT P/E

(EURm) 2019E 2020E 2019E 2020E 2019E 2020E

EVRY 1,233 1.3 1.2 10.6 9.6 11.4 10.4

Bouvet 329 1.3 1.2 12.4 11.5 18.1 16.9

Tieto 1,793 1.2 1.2 11.3 10.4 13.3 12.4

HiQ 266 1.4 1.4 12.5 11.8 16.5 15.8

Nordic IT peers average 1.3 1.2 11.9x 10.9x 14.9x 14.1x

Devoteam SA 885 1.0 0.9 9.3 7.9 19.0 16.8

Sopra Steria Group SA 2,109 0.6 0.5 8.2 6.5 10.7 8.7

Indra Sistemas, S.A. Class A 1,502 0.6 0.6 8.1 6.9 10.9 9.6

Econocom Group SE Class D 767 0.4 0.3 8.7 7.4 10.0 8.6

EU Mid Cap peers average 0.6 0.5 8.4 7.2 10.8 9.2

Capgemini SE 18,963 1.4 1.3 11.5 10.4 17.7 16.0

Atos SE 8,445 0.9 0.9 9.2 8.5 9.3 8.7

Bechtle AG 4,297 0.9 0.8 19.3 17.1 26.6 24.0

EU Large Cap peers average 0.9 0.9 11.5 10.4 17.7 16.0

European peers average 1.0 0.9 10.8 9.7 13.3 12.5

IBM 113,003 2.1 2.0 11.5 10.7 10.3 10.2

Accenture 110,003 2.7 2.5 18.8 17.2 26.6 24.4

Cognizant Technology Solutions 33,085 2.0 1.8 12.3 10.7 16.9 15.4

DXC Technology 13,296 0.9 0.8 5.9 4.9 7.0 5.9

CGI 19,264 2.5 2.3 16.4 15.0 22.3 20.4

American peers average 2.1 2.0 12.3 10.7 16.9 15.4

Tata 102,827 4.8 4.3 19.1 16.9 23.6 21.3

Infosys 44,157 3.5 3.2 15.9 14.1 20.4 18.4

Wipro 20,287 2.1 1.9 12.0 10.8 15.6 14.3

Indian peers average 3.5 3.2 15.9 14.1 20.4 18.4

Worldwide peers average 1.3 1.2 11.5 10.7 16.9 15.4

Reply 2,260 4.8 4.3 14.7x 12.6x 20.3x 18.0x

Premium/(Discount) to EU average 79% 85% 36% 30% 52% 45% Premium/(Discount) to worldwide average 40% 34% 27% 18% 20% 17%

Reply at target 2.2x 2.0x 17.5x 15.1x 23.6x 21.0x

Premium/(Discount to average) 138% 128% 52% 46% 34% 32%

Premium/(Discount to Accenture) -18% -21% -7% -11% -10% -13%


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SRI Criteria

Does the company publish a separated Sustainability report? Yes

Does the company have a Chief SRI/CSR officer (or a committee)? No

Does the Chief SRI/CSR officer votes in any of the company’s committee? No

Is the Investor Relation officer a different person from the CFO (or other officers)? Yes

Is the ESG strategy integrated in the Business Plan or in the group strategy? No

Corporate Governance Checklist

Does the company have a combined Chair/CEO? No

Percentage of independent directors? 33%

Do shareholders have the right to convene an EGM with 10% or less of the shares? No

Do all common/ordinary shares have one-share/one-vote system? No

Do major shareholders (if any) have a “shareholders pact” in place? Yes

Has the company adopted a “poison pill” or “change of control” clause? No

Potential dilution from stock options outstanding not yet granted? No

Chair+CEO remuneration detail (fixed salary)? EUR1.332 million (EUR0.73m Chair, EUR0.6m CEO)

Is the share price included in the MBO criteria? No

Percentage of treasury shares? 0.01%

Climate related risk Checklist

Has the company defined GHG-emissions targets? No.

How does the company assess climate-related risk?

(1) The Group has defined and communicated its Environmental Policy;

(2) Reply is engaged in the carbon Disclosure project for its supply chain;

(3) Reply’s electrical and electronic waste is entrusted to external authorized companies for correct disposal;

(4) Reply recycles any unused fully functioning computers and donates them to schools.

Social Responsibilities Checklist

Does the company have an ethical code? Yes, for both employees and independent contractors

Percentage of female directors? 33%

Percentage of female employees? 27%

How is the cybersecurity issue managed? The Group wrote the “ICT security incident management policy” in 2018, which has been in force since January 2019 and which identifies 3 phases (identification, response and lessons learned) and the roles and responsibilities for every phase.

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Income Statement

(EURm) 2018 2019E 2020E 2021E

Net Revenues 1,035.8 1,188.5 1,301.3 1,423.7

EBITDA 144.8 190.0 209.2 229.1

EBITDA margin 14.0% 16.0% 16.1% 16.1%

EBIT 132.4 152.6 171.4 190.4

EBIT margin 12.8% 12.8% 13.2% 13.4%

Net financial income /expense -0.1 -2.0 -2.0 -2.0

Associates & Others 6.9 5.0 5.0 5.0

Profit before taxes 139.2 155.6 174.4 193.4

Taxes -38.2 -42.8 -47.6 -52.2

Minorities & discontinuing ops -1.1 -1.2 -1.3 -1.5

Net Income 99.9 111.6 125.4 139.7


Balance Sheet

(EURm) 2018 2019E 2020E 2021E

Net working capital 145.3 174.7 210.7 256.4

Net Fixed assets 381.9 474.0 485.2 498.5

M/L term funds -107.2 -120.3 -132.0 -144.5

Capital employed 420.1 528.5 563.9 610.4

Shareholders' equity 485.3 580.1 686.6 804.9

Minorities 1.3 2.5 3.9 5.4

Shareholders' funds 486.6 582.6 690.4 810.2

Net financial debt/(cash) -66.6 -54.1 -126.6 -199.9


Cash Flow Statement

(EURm) 2018 2019E 2020E 2021E

NFP Beginning of Period -57.0 -66.5 -54.1 -126.5

Group Net Profit 99.9 111.6 125.4 139.7

Minorities 1.1 1.2 1.3 1.5

D&A 13.8 39.0 39.3 40.4

Change in Funds & TFR 78.3 51.7 38.5 41.5

Gross Cash Flow 193.2 203.5 204.6 223.0

Change In Working Capital -37.5 -68.0 -62.7 -74.7

Other -38.2 -18.7 -24.5 -25.2

Operating Cash Flow 117.5 116.8 117.4 123.1

Net Capex -30.0 -112.3 -26.0 -28.5

Other Investments -64.1 0.0 0.0 0.0

Free Cash Flow 23.3 4.4 91.4 94.6

Dividends Paid -13.8 -16.8 -19.0 -21.3

Other & Chg in Consolid. Area 0.0 0.0 0.0 0.0

Chg in Net Worth & Capital Incr. 0.0 0.0 0.0 -0.0

Change in NFP 9.5 -12.4 72.4 73.3

NFP End of Period -66.6 -54.1 -126.5 -199.9


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Financial Ratios

(%) 2018 2019E 2020E 2021E

ROE 20.6% 19.2% 18.3% 17.4%

ROI pre-tax 27.6% 26.0% 25.5% 26.2%

Net Fin. Debt/Equity (x) -0.1 -0.1 -0.2 -0.2

Net Fin. Debt/EBITDA (x) -0.5 -0.3 -0.6 -0.9

Interest Coverage 0.0 0.0 0.0 0.0

NWC/Sales 14.0% 14.7% 16.2% 18.0%

Capex/Sales -2.9% 2.0% -2.0% -2.0%

Pay Out Ratio 16.8% 17.0% 17.0% 17.0%


Per Share Data

(EUR) 2018 2019E 2020E 2021E

EPS 2.67 2.98 3.35 3.73

DPS 0.45 0.51 0.57 0.63

Op. CFPS 3.14 3.12 3.14 3.30

Free CFPS 0.62 0.12 2.44 2.53

BVPS 13.0 15.5 18.4 21.5


Stock Market Ratios

(x) 2018 * 2019E 2020E 2021E

P/E 19.5 20.3 18.0 16.2

P/OpCFPS 19.4 19.4 19.3 18.4

P/BV 4.0 3.9 3.3 2.8

Dividend Yield (%) 0.9% 0.8% 0.9% 1.0%

Free Cash Flow Yield (%) 1.2% 0.2% 4.0% 4.2%

EV (EURm) 1992.3 2,334.8 2,258.3 2,197.7

EV/Sales 1.9 1.9 1.9 1.7

EV/EBITDA 13.8 11.8 10.3 9.1

EV/EBIT 15.1 14.6 12.6 11.0

EV/Capital Employed 4.7 4.2 3.8 3.4

Source: Company data, UBI Banca estimates * Based on 2018 average price

Growth Rates

(%) 2018 2019E 2020E 2021E

Growth Group Net Sales 17.1% 14.7% 9.5% 9.4%

Growth EBITDA 17.5% 31.2% 10.1% 9.5%

Growth EBIT 16.3% 15.3% 12.3% 11.1%

Growth Net Profit 28.3% 11.7% 12.4% 11.3%


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Disclaimer Analyst Declaration

This research report (the “Report”) has been prepared by Oriana Cardani on behalf of UBI

Banca S.p.A. (“UBI Banca”) in the context of the ancillary service provided by UBI Banca

named “Investment research and financial analysis or other forms of recommendation

relating to transactions in financial instruments” under Paragraph 5), Section B, Annex I of

the Directive 2014/65/EU (“MiFID II”). UBI Banca is an Italian bank under art. 4 (1)(27) of

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investment services pursuant to Article 1, Paragraph 5, letter a), b), c), c-bis), e) and f) of

the Legislative Decree 24 February 1998, n° 58 under the supervision of the Italian

Authority for the financial markets (Consob). UBI Banca has its head office at Piazza

Vittorio Veneto 8, 24122 Bergamo.

The analyst who prepared the Report, and whose name and role appear on the front page,

certifies that:

a. The views expressed on the company, mentioned herein (the “Company”)

accurately reflect his personal views, but do not represent the views or opinions

of UBI Banca, its management or any other company which is part of or

affiliated with UBI Banca group (the “UBI Banca Group”). It may be possible that

some UBI Banca Group officers may disagree with the views expressed in this

Report;

b. He has not received, and will not receive any direct or indirect compensation in

exchange for any views expressed in this Report;

c. The analyst does not own any securities and/or any other financial instruments

issued by the Company or any financial instrument which the price depends on,

or is linked to any securities and/or any financial instruments issued by the

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d. Neither the analyst nor any member of the analyst’s household serves as an

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e. The remuneration of the analyst is not directly tied to transactions for services

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the same group performs, or to trading fees it or any legal person that is part of

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This Report is for information purposes only. This Report (i) is not, nor may it be construed,

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REPLY 18 July 2019

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connection with this Report.

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REPLY 18 July 2019

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The analysts use the above valuation methods alternatively and/or jointly at their

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The explanation of the rating system is listed below:

Buy: if the target price is 15% higher than the market price, over the next 12 months.

Hold: if the target price is 15% below or 15% above the market price, over the next 12

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DIRECTED ONLY AT PERSONS WHO (A) ARE (I) PERSONS FALLING WITHIN ARTICLE 19 OR

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Distribution of ratings

Equity rating dispersion in the past 12 months

Buy Hold Sell No Rating

89.8% 6.1% 0.0% 4.1%

Proportion on issuers to which UBI Banca has supplied investment banking services

relating to the last 12 months

Buy Hold Sell No Rating

100% 100% - 100%

For further information regarding yearly and quarterly rating statistics and descriptions,

please refer to www.ubibanca.com/equity-research.

Documents

Reply New template - UBI Banca 18... · profile (20% EPS CAGR 2016-2018 compared to peers). We believe Reply will be able to maintain ... Source: UBI Banca Estimates * based on 201