EUR 850.00 For Business Accounts Only

Morningstar | ATO Updated Star Rating from 22 Feb 2019

Atos reported 2018 annual results that were all in line with our expectations after the company foreshadowed the performance at its recently held analyst day. The year was characterized by many moving parts, whereby the firm is looking to rotate out of declining to stagnating business lines, while pivoting to higher growth services through organic and inorganic investments in order to kickstart moderate long-term organic revenue growth. We think fiscal 2019 will be equally eventful as fiscal 2018. We expect a large reshuffling of the firm’s portfolio and strategic focus in 2019, with the firm digesting the acquisitions of Syntel and Six Payment Services, while reducing its holding in its payments business Worldline. Even so, we still foresee the Infrastructure & Data Management, or IDM, business as a significant hindrance to Atos’ overall growth rate and don’t believe we’ll see a quick growth turnaround for this business any time soon. On a consolidated Atos basis (includes Worldline), prior fiscal 2019 guidance remains unchanged and the firm continues to expect organic revenue growth of 2%-3%, an operating margin of 11.5%-12.0%, and free cash flow generation of EUR 900 million–EUR 1.0 billion. We remain confident in the firm’s narrow economic moat especially as it remains entrenched within the European market. With our long-term view unchanged, we reiterate our EUR 90 fair value estimate. With shares up notably in the last month we only see the firm as modestly undervalued and entering toward 3-star territory.

For the year, organic revenue rose 1.2% year over year to EUR 12.26 billion (increased 4.2% in constant currency). Organic IDM revenue dipped 2.8% over the year with the firm absorbing the impact of two large contracts not renewing their business in North America (Marriott International and Standard & Poor’s), while there was a contractual issue with a German telecom operator. With management highlighting contract specific and commercial execution issues, we remain cautious of the IDM business and Atos’ ability to quickly reinvigorate the legacy nature of this operation.

On a positive note, the Business & Platform Solutions and Big Data & Cybersecurity divisions performed decently. Both businesses continue to reap the benefits of clients’ ongoing demand for advanced digital transformation services, which we expect to counterbalance the laggard IDM business.

Full-year operating margin declined 50 basis points year over year to 10.3% (fell 30 basis points if counting for one-off pension adjustments in fiscal 2017). A 170-basis-point decline in IDM operating margin was the primary drag, which was attributed the contract and execution issues cited earlier. We do expect a gradual improvement in the firm’s operating margin though and see accretive acquisitions such as Syntel, cost-cutting, and automation as drivers for this assumption.