Analysis Neurones SA (NRO) - French IT

Hi all,

I would like to present a company that has been on my radar for the last few months and that I believe would be interesting to have on T212: Neurones SA, from the Paris Exchange (Euronext Paris). Ticker: NRO.

I have written up an analysis which I would like to share with you to see what you think, also it is the first time that I write up and share my assessments, so any feedback will be very welcome.

Overview:

Founded in 1985 and listed since 2000, Neurones is a company that offers Consulting and IT Services, primarily in France where most (88%) of its 5400 employees are located. The Financial Times explains its services as “consulting, integration of technological solutions and outsourcing of information systems.”

The way I see it is that it offers services to aid with making client processes more efficient, improving service lines (eg. digitalising client processes or offerings), making the most of their data as well as other digital services such as advising and implementing processes/services relating to cyber-security, Internet of Things and cloud. For example last year they announced that they were partnering with an AI firm to enhance their offerings, however they list of partners who´s services/products they implement or advise is very long and includes large companies such as Microsoft, Cisco, IBM, Kaspersky, SAP, Amazon, McAfee, Oracle and Autodesk, as well as other smaller companies including the likes of Crowdstrike and Datadog.

An important factor to consider is that they are effectively a consultant and implementer of different services/products that enable the digital transformation of their clients and therefore are not affected by which is the best product or provider at a particular time.

Markets and Services

A good summary of its 3 business areas including revenue % can be found below:


They offer a wide range of services to a wide range of clients, which limits their exposure to the risk of a sector going into deep recession and dramatically reducing its revenue (See the 2 figures below).

Financials:

Revenue has been growing at a steady rate of around 9% over the last 10 years from 216.4 million Euros in 2009 to 510 million Euros in 2019. Not incredible, but it is a solid sustained growth showing strength.

4 - Consolidated Revenues

The revenues in 2018 were reduced by around 10 million Euros due to the implementation of a new accounting standard, IFRS 15/16.

5 - Net Profit Variation

6 - Net Profit per Share

It has had at least 10 consecutive years of stable and consistent gross profit margin between 8.9% (2012) and 10.5% (2019).

With an Earnings per Share of 1.27 EUR (2019) and current share price of 19.75 its P/E stands around 15.5 which to me seems fair (according to SimplyWall.st the IT average is 16.1) based on its historic organic growth and earnings.

The cash generation is strong, with an increase in 43.8 million euros, more than double the increase from the previous year.

So it all looks good until here… anything special though?

Well, let’s not forget the balance sheet :wink:. The debt as a percentage of total assets is 35.8% which starts to look good, but I believe the surprising part is on the bottom left: It has 218.6M of Cash and Equivalent, which represents 43% of its assets and a similar proportion of its yearly revenue. Things start to look even more interesting…

Note: I did not find the exact amount of cash, it only refers to “Cash and cash equivalents”.

In times of uncertainty, cash is king! :crown: Not only can it face any uncertainty with confidence, but also it has a strong balance sheet in case it decides to engage in an acquisition.

Who does not love companies with lots of cash when things look grim? :sunglasses:

Covid19 Impact:

In the short term, the pandemic is expected to have a negative impact and the operating profit is expected to fall from the 10.5% it achieved in 2019, but it is expected to be at least 6%. This will reduce the net profit which in 2019 was 35.2M, 6.9% of the total revenue of 510.1M. Nonetheless revenues increased by 5.2% in the first quarter of 2020 compared to 2019, despite it including 2 weeks of lockdown in France.

In the medium term the pandemic will accelerate digitalisation of companies as it will encourage working from home, also during times of economic downturn and uncertainty Neurones’ clients will need to drive their digitalisation to improve efficiencies and reduce costs, as lower demand in markets worldwide will probably require companies in many industries to become more competitive.

They also have a large number of activities (23%) subcontracted, mainly to freelancers which can be positive if revenues start falling, as these type of employees tend to earn more but unfortunately tend to have less job security, at least in the UK. I really hope that it does not come to that as it would be terrible for those employees.

Ownership / Equity:

Most of the equity (72%) is in the hands of the founders, management and employees which gives the share price stability and the company a stable direction, also it means that the founder has a lot of “skin in the game” and will be driving an increase in value for shareholders in the form of share price.

The dividend based on 2019’s results is 0.20 Euros per share, an increase from 0.06 Euros the previous year. This represents a yield of around 1% and a payout of about 16% of the net profit. The Ex-date for the dividend was earlier this month (10/06/2020).
There is significant margin for payout growth, also, as it is a mid-cap company it makes sense to re-invest a large portion of the profits with the view of growing by means of an acquisition.

There has been a limited increase in the number of shares since 2010, but the total dilution in the last 10 years is about 3% which is not significant.

Competition:

The market is very competitive and the table below produced by Neurones can illustrate how fractioned it is, with Neurones accounting for 1.5% of the total and the top 10 companies only accounting for 45% of the market share.

So an average 9% organic growth as mentioned before, but what about inorganic growth and a possible acquisition?

I view the large number of competitors as an opportunity for growth. Their strong balance sheet including large reserves could allow them to acquire a competitor, particularly if there is another market “crash” in the coming months.

Other identified issues:

  • High staff turnover, currently at 16% (20% in 2020) however this is quite common in the IT sector compared to other sectors. My computer science / programming acquantainces seem to change company every year or 2.
  • Surprisingly complex group structure with many entities particularly for a mid-cap, makes it harder to interpret information. I must admit that I mainly looked at group-wide data.
  • Obviously they predict Covid19 impact on profit, however the price is only about 15% from its maximum, whereas the possible fall in profits could be greater.
  • 9% of their revenue comes from their top client and 33% of their revenue is generated from 5 clients, this to be seems quite concentrated and worth considering as a risk, however I believe it is quite common in consultancy companies, both in IT and other consultancy industries.
  • Not a very liquid stock, the spreads tend to be large due to it being a mid-cap with only 3% of the shares in the hands of private investors (neither institutional, nor company insiders) and the usual number of shares traded daily is quite low at around 7500 shares (around 150 000 Euros).

Analyst recommendations:

I was unable to find any analyst coverage by googling so I used the sources that @jcksmith850 uses:

According to Genuineimpact.io all analysts recommend buying.

Also according to wallmine.com the 1 year target price is 26 euros, over 30% higher than the current price of 19.75 Euros.

I was unable to query the data any more to get the number of analysts or individual price, maybe @jcksmith850 can kindly explain how to do it :smiley:, it would be something useful for me. If anyone has additional ways of seeing analyst coverage and predictions for stock please let me know, I tend to use Hargreaves Lansdown but they did not provide it for this stock.

Overall assessment / Key messages:

I am usually quite interested in interesting Mid-Caps as they can sometimes be a bit “off the radar” from large investors and analysts and on occasion, be undervalued. I think that might be the case with Neurones. The main points are:

  • Consistent 9% annual growth may increase in medium term as the digital transformation that it enables is gaining unstoppable momentum both in society and at a corporate level.

  • Neurones and the IT Consultancy sector does not rely on a particular provider/partner or software, it can implement anything for their clients which is very important as technology changes and better products or services become available.

  • Low stock liquidity as only 3% of the shares are in the hands of retail investors, but also less attractive stock for analysts and market sentiment which makes it a bit undervalued.

  • 25% of available 28% of shares in institutional investors hands shows strength.

  • Strong balance sheet with cash :euro: (43% of assets) to withstand this crisis and low debt (36% of assets) that could enable it to come out stronger by growing inorganically and acquiring a good competitor at a lower price than usual. Cash is king :crown:.

Note: I am fairly inexperienced so please do not take my judgements on specific values, as I may be completely wrong - I am also not very familiar with the industry. Please feel free to give me feedback on the sector also if you are acquainted with it, I have just included my fairly un-informed opinion. Please comment on whether you think this would be a good investment. I tend to focus on the numbers of a company, looking for growth and a strong balance sheet which is the case of Neurones, although I do allocate a small percentage of my portfolio to riskier investments.

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Sources

FT company profile: https://markets.ft.com/data/equities/tearsheet/profile?s=NRO:PAR

Company information and all figures except analysts: https://www.neurones.net/sites/default/files/documents/NEURONES-annual-report-universal-registration-document-2019.pdf

2020 Q1 Results and forecast Covid-19 impact: https://www.neurones.net/sites/default/files/documents/neurones-press-2020-first-quarter-revenues-financial-investors-it-digital-services-outsourcing.pdf.pdf

Dividend Ex Date: https://www.marketscreener.com/NEURONES-5213/news/Yearly-payment-30530245/

Analysts graph: Genuineimpact.io - Accessed through App

Target price: https://wallmine.com/euronext/nro

1 Like

Absolutely fantastic analysis!

I rarely look at French listed companies so this was a real treat. The consultancy sector is an interesting one, many are suffering heavily due to COVID-19 but as you say, the IT aspect is still going strong, with some firms seeing this as a chance to increase spending.

I’ve seen reports of companies reporting higher profits since furloughing staff in the UK, a sign they were hiring too many people that weren’t adding value. Prime time for digitisation of processes.

It seems they report slightly differently, as the cost of revenue is extremely low and everything is bundled into general admin costs. For a consultancy and IT firm, I was surprised at the low profit margin and dividend. With low debt and little physical assets (as you would expect) it seems their biggest cost must be people. Either they are giving their long term clients a great deal to keep them, or they are been squeezed pricing wise by competitors.

In terms of cash on hand, about 50% of their current cash like current assets is cash or cash investments, the remaining amount looks like money owed to them by clients. This owed money should be highly likely to get paid, unless they say delay payments due to COVID-19, which with tech they shouldn’t.

Even if no client paid they would have just over half a year of runway left (assuming their costs all remained the same.)

As you’ve said, if times get tough they can save money on staff, and a high turnover isn’t that strange (assuming it’s not management or at a senior level.)

All in all, a super interesting company!

With the sell-side recommentations it’s always a pain to get figures for non-US, including UK sometimes, listed firms.

They have two analysts covering them at the moment, one buy rating one outperform rating. 25eur and 22eur target prices respectively.

Yahoo Finance also has some estimates but they look painfully out of date. Most of the sites I use for the deeper sell-side info didn’t return anything for NRO :frowning_face:

Thank you for your reply, I am glad that you liked it :smiley:.

I guess NRO is not sufficiently big to attract the assessment of many analysts. Thanks for the information/sources.

I’m not that familiar with IT consultancies so I could not really comment, but other consultancy sectors tend to have low profit margins of around 5-10% (probably not lawyers :wink: ).

It seems like you may be more familiar with the sector, are there any similar companies in the UK?

By similar I mean, IT consultancies that offer advise or services regardless of what software or provider there client uses. I would like to look into a similar UK company :smiley:, I already have an Italian and an Austrian one (S&T - available on T212) on my radar, to evaluate whether they are worthwhile investments.

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In terms of UK based (and focused) IT Consultancies I found these.

CCC - Computacenter PLC
One of the big names, though profit is very tight. Almost recovered to pre-COVID levels.

SCT - Softcat PLC
Better profitability but still only 6.9%, does have a growing dividend but the yield is only 1.41%

KNOS - Kainos Group PLC
Over 10% profitability margin, recovered to pre-COVID levels and then took a nose dive (would need to check why that is) another growing but very small dividend.

FDM - FDM Group (Holdings) PLC
Best profit margin just shy of 15%, stronger 3.7% dividend yield but not a cheap buy (26x P/E.) Low debt to assets which isn’t always the case with these firms.

NCC - NCC Group PLC
Very small compared to the others, bit of a middle of the road firm compared to the rest but nothing too notable really.

Taking a very quick look FDM seems interesting and CCC is worth a look to understand more. The US has the big consulting names but you would have to checkout their geographic revenue breakdown to figure out where you are really investing!

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