EUR 850.00 For Business Accounts Only

Morningstar | ATO Updated Forecasts and Estimates from 09 Oct 2018

Atos reported first-half earnings two days ahead of schedule and surprised the market by announcing a definitive merger agreement with North American-focused IT-services provider Syntel for a cash consideration of approximately $3.4 billion, or $41 per share. We think the strategic rationale for the deal is sound, as Syntel has attractive features for Atos, such as 90% of its revenue is generated in North America; banking, financial services, and insurance, or BFSI, is its largest industry; and around 40% of its revenue is associated with digital transformation work. On a forward fiscal 2018 basis, Atos will be paying about 3.6 times revenue and roughly 21 times adjusted earnings, according to consensus for Syntel. We think the 14% premium to the last 30 trading days volume weighted average is reasonable given the leverage Atos can gain in the U.S. market and its ability to use Syntel’s automation platform, which should help drive operating margin expansion over the next few years. The transaction requires over 50% approval from Syntel’s outstanding share capital. However, we expect the deal to close by the end of the calendar year, with Syntel’s founders and affiliates (that collectively own 51.07% of the company’s shares) already pledging their approval for the deal. After incorporating Syntel’s expected financial performance into our model and with management reiterating its full-year goals, we maintain our EUR 95 fair value estimate and narrow economic moat rating. Shares are trading at a premium, and we’d seek a wider margin of safety before investing.

For the first half of the year and after accounting for IFRS 15, statutory revenue was flat at EUR 6.0 billion year over year (constant-currency revenue was up 3.4% and organic revenue was up 1.7%). Infrastructure and data management, or IDM, revenue disappointed, falling 1.7% organically as management-related issues in North America hindered the group. Business and platform solutions, or B&PS, revenue rose 4% organically as demand for digital projects related to SAP HANA, Codex, and hybrid cloud solutions fueled growth. With Syntel entering the fray with Atos next year, we expect the combination to notably bolster the B&PS segment. Finally, Big Data and cybersecurity continued its recent strong run, with organic revenue growth of 13.1%. Within the segment, cybersecurity and high-performance computing saw healthy demand. We forecast organic revenue growth around 2% to 3% for the coming year and believe Atos remains a pivotal IT services player in the European market.

In terms of margin, Atos’ first-half operating margin rose 20 basis points year over year to 9.1%. Higher-value digital offerings in the B&PS business helped lessen the impact from the IDM business where weakness in North America weighed on the firm’s overall margin performance. Over the midterm, we expect moderate operating margin expansion with the firm incorporating Syntel, focusing on digital end-to-end services, and using offshore leverage and automation.