ESI Group: Wait for better times

Paris stock exchange listed ESI Group’s (EPA:ESI) third quarter results, announced at the end of November, did little to stem the freefall in its share price. The virtual prototyping software provider’s share prices have been declining since August this year, reaching sub €30 levels in December. This is almost 30% below the past one-year average.

While this trend has certainly to do with the fact that broader markets have been declining as well, a look at ESI Group’s results themselves also reflects why investor stance towards the stock has remained unchanged. On the positive side, the company’s sales continued to grow in the first 9 months of 2018. At €81.2m, the company’s revenues are up by 3.2%, but currency fluctuations have resulted in downplaying the extent of top-line increases.

On a constant currency basis, revenue growth is at 5.3%, compared to the €78.7m levels in for the first 9 months of 2017. Even though the growth rates are fairly muted, they are significantly improved from the numbers clocked up to 31 July, when they saw a small decline.

However, there is no information yet on the earnings numbers, which have been the downside for ESI’s financials in the year so far. The company recorded an €7.9m net loss for the 1 February – 31 July period, representing increased losses from the corresponding period of the previous year. With no new information on earnings and disappointing numbers so far, it is little surprise that investors responded little to the latest results.

It does not mean, however, that the next months would not be better. A look at the annual numbers on profits shows that the ESI Group has consistently been profit making in the past years, though the absolute level of profits declined in the past year, portending the continued squeeze that has been witnessed so far in 2018. More clarity on the company’s bottom-line will be evident when details of its financial results are announced.

ESI Group also carries currency risk on account of its widely spread international operations. In 2017, 47% of the company’s revenues were from Europe, Middle East and Africa; 37% were from the Asia Pacific region and 16% were accounted for by the Americas. This factor is a double edged sword, in that geographical dispersion of revenues is a hedge against economic slowdown or policy driven sectoral impacts in any one country. However, it makes the company more vulnerable to currency fluctuations, which can either swing in favour of or against the country of origin.

Conclusion: With the ESI group’s share price on the decline, combined with uncertainty around its earnings and currency risk, the company is not a certain buy. But with revenue increases, and a past record of profits, it might be worth keeping on the radar.