CS Group held back in its tracks

What future for the IT services sector? In this time of crisis, the question is far from trivial. The whole profession is in the grip of doubt, given the multiplication of postponements of projects, the cancellation of some others and the organizational difficulties imposed by the fight against the coronavirus. Even before the health episode, signs of slowdown were multiplying for players in this world with, at the same time, tensions over resources in certain regions, in particular in Ile-de-France. In these conditions, should we massively turn away from the stock market sector? We do not think so. The profiles of listed IT services companies are much more varied than in the past with also some basic trends (digitalization of processes within companies) which are likely to persist, economic or not. In the case of CS Group (formerly Communication & Systems), positioning on cybersecurity, applications and critical systems, which is more in fields as varied as defense, security, space, aeronautics and energy helps mitigate the impact of the crisis. The projects managed by the teams of this IT services company are crucial for the clients and, for the most part, cannot be stopped overnight.

During confinement, despite forced teleworking, continuity of service was ensured. However, the management of the company quickly clarified that the loss of a certain level of activity cannot be avoided. A Scottish shower for investors who quickly departed from the title. Back under 4 euros, a drop of around twenty percent over three rolling months, CS Group is once again posting attractive multiples if we take as hypothesis the return to a favorable dynamic of activity in 2021. The group capitalizes 0.4 times its estimated sales, knowing that the size of the order book at the end of 2019 (17.5 months of activity) offers good visibility despite the inevitable adjustments that will be made by customers, at least those belonging to private sector.

2020, a transition exercise

What about profitability? It is very likely that the current disturbances are accompanied by a deterioration in the occupation rate of engineers. In the recovery story that has been written for the past few years, 2020 could be a year of transition. As a reminder, CS Group posted an operating margin of 6.1% last year, based on overall sales growth of 14.1% (+ 4.6% organically) to 230 million ‘euros. This honorable performance is the result of efforts to structure and control the costs incurred. With regard to the “Ambition 2021” strategic plan, management is unable to confirm the objective of a turnover of 300 million next year (with an 8% margin). In the worst case, this ambition could be postponed by a year, in our opinion, without calling into question the underlying trajectory linked to the ramp-up of services in the Defense, Space & Security branch, thanks to major projects (systems communication for the benefit of NATO countries, for example), and the rise of international outlets (21% of revenues today). Last but not least, CS Group could ultimately be backed by a more powerful group. In ambush with 9.8% of the shares, Sopra Steria appears to be the best placed candidate …

Our advice: despite the lack of liquidity of the title, we can place on CS Group on a speculative basis. Buy at 3.75 euros to aim for a return to 4.50 euros within 12-18 months. Isin code: FR0007317813.

The article CS Group slowed in its momentum appeared first on The Stock Exchange Letter.

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