With the divestiture of the France activities, finalized at the end of September, the share of turnover generated in the United Kingdom by this small IT and software services company is now almost 40%, compared to 28% previously. But while the outcome of the negotiations between Brussels and the British government remains uncertain, the management of Sword is reassuring and considers “the impact of Brexit limited at this stage”. The group operates across the Channel in local currency, there should be no impact on its profitability.
Sword therefore left the French territory retaining only a small activity of selling software. He sold to Argos Wityu the service activities managed by the French subsidiaries, the international software activities with the National Trademark and Patent Offices, software for the French market in the fields of health, intelligence and CRM. . That is to say an amount of turnover for a full year of 60 million euros. Due to the capital gain generated (not communicated), the Board of Directors has decided to pay an interim dividend of 2.40 euros per share. It was released for payment on September 14. It is true that the group has a healthy financial structure. As of June 30, it had net cash of 58 million euros and available credit lines of 130 million. This will allow it to pursue its targeted acquisitions, particularly in the United Kingdom and in the field of GRC (Risk Management and Compliance) around the world.
A well-stocked order book
Sword also has good visibility on its business. With the contract won with the Court of Justice of the European Union for an amount of 28 million euros, and the renewal of another 32 million with the European Parliament, its order book represents around two years of activity. The IT services company / publisher, which has strong positions with European institutions, has shown itself to be almost immune to the health crisis, with solid results for the first half of the year. Revenue amounted to 112.1 million euros, up 7.7% and 6% at constant scope, while gross operating profit reached 14.7 million, up by 6%. This brings out a gross operating margin of 13.1% against 13.4% a year earlier. This slight decline can be explained by a slowdown in the rate of growth in turnover in the second quarter offset by the use of short-time working and the introduction of teleworking. The net result reached 4.3 million against 6.8 million a year earlier.
For the full year, the group expects organic growth of 5% (compared to 12% previously) and a gross operating margin of 13%, a forecast unchanged.
Admittedly, at 21 times the estimated profits for 2021 (14 million euros), the title may already seem well valued. However, this valuation does not take into account Sword’s ability to deliver sustained organic growth, combined with good profitability, in all circumstances. It also does not take into account its ability to make profitable acquisitions, and its cash flow which represents more than 20% of market capitalization.
Our advice: We advised to buy the Sword share at the beginning of June at 29.5 euros, a threshold it has reached, to aim for 35 euros in the medium term. We now recommend strengthening its positions to 31.5 euros with a price target raised to 38 euros. ISIN code / FR0004180578.